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30-70%? -- Probably Not the Real Rate of Mortgage Fraud

posted by Bob Lawless

I've been catching up on some reading and again found the statistic that 30% to 70% of early payment defaults on home mortgages can be linked to significant misrepresentations borrowers made on their loan applications. This most recent time I saw the statistic cited as coming from the U.S. Federal Bureau of Investigation. Enough! Can we stop this?

This statistic is misleading and when presented as a fact makes it seem like there is an easy solution to the mortgage crisis, which would be to let the fraudfeasors get the fate they deserve. If those numbers seem too high to you, it's because they likely are.

Instead of focusing on the borrowers, let's flip the issue around. What kind of idiot do you have to be to run a financial institution that incurs such a high fraud rate? Don't you wish there could be some system in place to prevent this much fraud? As it turns out, BasePoint Analytics will be happy to sell you software and services to prevent this sort of fraud. By a happy and not so much of a coincidence, it was BasePoint that did the study that come up with the 30-70% fraud rate statistic. Conveniently, their own study just happens to show how pervasive mortgage fraud is and why financial institutions should purchase BasePoint's services. It would be great to be able to read the study for myself, but BasePoint Analytics won't hand it out without giving them a bunch of information I don't want to give them, including my stated intention of why I want the study.

What has BasePoint Analytics done wrong? Nothing. They have legitimate and, by all accounts, useful services to sell. The 30-70% fraud rate makes for eye-popping headlines, and they did a great job of attracting attention to their company. My guess is the 30-70% fraud rate is an aggressive interpretation of the data, but without the paper and access to the underlying data, we can't know for sure. Also, BasePoint's statistic is only about the extent of fraud in "early payment defaults," and it's likely very important how one defines that term.

Rather, I blame the media (including bloggers) and the government for mindlessly repeating the statistic. In its 2006 Mortgage Fraud Report, the FBI gave the statistic some legs but did not do any serious analysis of its validity. Of course, the FBI benefits by convincing Congress that there is a lot of mortgage fraud and hence needs a bigger budget itself. The FBI is not about to go around shooting down reports that we need its protection. Tyler Cowen of the New York Times did better than most by talking about the source of the statistic but went on to accept the statistic's validity. Google will reveal other uncritical citations to the BasePoint report.

Was there mortgage fraud occurring that contributed to the current mess? Probably, but continued acceptance of this statistic on blind faith is not helping us get at the truth.


I divulged my personal info and read BasePoint's reports (academic curiosity was an acceptable purpose for the request, apparently), and they seemed much less scandalous than the headlines describing them. The major upshot seems to be that mortgage BROKER fraud (perpetrated mostly by a few brokers) was the big story, not intentional or inadvertent BORROWER misstatements. BasePoint's advertising pitch is the same--buy our product to root out rampant fraud--but the takeaway on WHO committed the fraud seems very different in the reports themselves. Sensationalist journalism and a willingness to base policy prescriptions on shocking (but empirically unsupported) headlines seem to be the biggest problems in this and lots of other bankruptcy related debates.

Bob, let me see if I have your logic straight.

You have not seen the BasePoint study or its data. You do not know whether they define EPD in the usual way (it is a technical industry term, after all, even if it's new to you) or not. You point out that BasePoint has software to sell, although you acknowledge that there isn't anything wrong with that and the fact itself doesn't necessarily impeach their findings.

You also have no data of your own to disprove the claim. You just do not like the rhetorical or journalistic uses to which the BasePoint figures are put.
You therefore claim that 30-70% is "probably not the real rate" and you "guess" that is is an "aggressive interpretation."

On what grounds do you base that? How much loan level due diligence on EPDs have you ever done? I personally dislike a great deal of journalistic use of certain facts myself, but that doesn't incline me to try to impeach the facts without facts of my own.

It seems likely to me, sight unseen, that there's going to be a problem with any study giving a range of 30-70%. That suggests a problematic confidence level right off the bat; the range is just too large. I certainly wouldn't quote the statistic without seeing the study, myself.

But I wouldn't go ahead and claim it's probably wrong without seeing it, either. I ended up concluding that you are so invested in defending borrowers that you are willing to simply argue away the data with insinuations about BasePoint's motives and general smoke about how the media might misuse the data. I therefore am inclined to think that anything I read on this blog will be filtered through your need to excuse borrowers and demonize lenders, and that any inconvenient facts that muddy that picture up will be denied or minimized or obfuscated. You gave me nothing else to conclude.

I don't come here because I want to think that, but I recognize tendentiousness when I see it.

Perhaps I would end up with a better impression of your ability to weigh evidence if I were on your e-mail list, but I do not have the credentials you require--I am not a lawyer, accountant, academic or judge, just an anonymous blogger, so you won't hand it out unless I give you a bunch of information I don't want to give you, including my stated intention of why I want to be on your mailing list.

Perhaps some other firm marketing its solution can do a study and tell us that 5 to 95% of mortgages are fraudulent because of behavior of one or more of the parties......

Then, perhaps someone either famous or connected to the media/journalists can get that figure planted in a story and, hopefully, we'll be able to correct the 30 to 70% meme with this much more powerful and, one guesses, accurate 'statistic'

Watch out Bob! Deputy Tanta is OYA.

Depends on what you mean by fraud. I am inclined to believe the statistic, with Jason's important caveat: fraud can be committed by either originators (brokers and retail loan officers) or borrowers, or both. At the tail end of the subprime boom (06/07), more than half of new non-GSE mortgage loans were made without full income documentation, an open invitation to fraud. If mortgage fraud includes not only false income information, but fraudulent appraisals of home values, the number is even more plausible. Then there is the fraud on borrowers, particularly unsophisticated homeowners, of telling them they can afford an exploding ARM that consumes 50% of their gross income, because home values always go up and they will always be able to refinance. When the borrower has an inkling that the loan app. is flimsy, you can have some active fraud by a broker and some acquiescence by the borrower. Finally, if fraud requires not only a false statement, but reasonable reliance by the lender or investor, perhaps there was no fraud at all. The prospectus supplements for subprime mortgage-backed securities I have read spell out the unreliability of loan application information, especially for no-docs, for anyone who cares to read them (a small group of which I am a member). I have pondered how one might measure mortgage fraud in an empirically valid way, but have not yet gotten past the definitional problems. As far as the policy debate regarding who is to blame for the crisis, both sides tend to oversimplify greatly.

Although I have no data to support my opinion, I strenuously object to the baseless criticisms of bloggers who attempt to discredit those who are using no facts to debunk the speculative conclusions of commercial interests that have promoted potentially self-serving and imprecise statistics.

Caveat: I could be wrong.

There, I hope this settles this kerfuffle!

And according to conversations that I've had with agents, combined with accounts of conversations that other Mortgage Servicing Fraud victims have had, the Federal Bureau of Investigation is only interested in ORIGINATION fraud. They have no interest in any fraud occurring at any level of SECURITIZATION. That's extremely disturbing to me because origination fraud, i.e. "predatory lending", broker fraud, borrower fraud, etc. only happens once during the life of a loan - right at the time of origination. After that it's done. Add to that that origination fraud affects a relatively small demographic.

Securitization fraud, Mortgage Servicing Fraud being among the set, potentially affects roughly 80% of all loans originated from figures I've read. That is due to the fact that roughly 80% of all loans written are securitized in one form or another. THAT is a much larger demographic than origination fraud could ever be. And no one of any regulatory status is bothering to examine it. At any level. And people are losing their homes because of it.

as a bond trader closely involved with mortgage loan level credit analysis, i would say there is no way 30% is even close to high enough, and the 30-70% is misleadingly low. early payment defaults (EPDs) are a small percentage of the total projected defaults, but it is now commonly accepted in the industry that EPDs are almost always the result of fraud or misrepresentation either by the broker/borrower combination. for this reason, mortgage servicers have had to buy back a lot of their EPD loans, which is a large reason why so many went out of business last year.

Sean's point is the essential one: this study wasn't looking at all defaults, only at those that occurred within the first year -- that is, before any ARM reset, etc. Think about what this means: these are people who, within a few months of taking out a mortgage, suddenly realized they wouldn't be able to pay it. How likely is it that these defaults were typically the result of miscalculation or bad luck (a lost job, etc.)? Not very. How likely is it that these early-payment defaults were typically the result of people lying about their income and gambling that housing prices were going to continue to rise, allowing them to flip their properties for a fast buck? Very. Like Sean, the 30% number seems very low to me rather than very high.

"Think about what this means: these are people who, within a few months of taking out a mortgage, suddenly realized they wouldn't be able to pay it."

This is an extremely bold assumption and I say that from personal experience. The servicing rights to my loan were sold six months after the loan originated. Literally Day 1 of Fairbanks Capital beginning servicing they had my account in default despite the fact that I was current in my payments.

This is a perfect example of what is wrong with the current thinking towards the mortgage industry and borrowers. The industry is more often than not assumed to be the victim and the borrower the deadbeat. In many cases, nothing could be further from the truth. How many cases you ask? Try 281,100 cases that were certified by the Federal Trade Commission in 2004 during the civil prosecution of USA/Curry v. Fairbanks. And how many victims were there in the $395 million settlement of Ameriquest? How many are there going to be because of Countrywide? Or Litton Loan, or Ocwen, EMC, Saxon, ASC, etc ad nauseum...

Origination fraud happens on both sides of the fence. Securitization fraud, of which Mortgage Servicing Fraud is a sub class, simply cannot be perpetrated by the borrower. Which leaves only the industry to fabricate evidence.

There is a small empirical study (45 loan files) done by Fitch, that found evidence of fraud in nearly 100% of subprime mortgages that later experienced early payment defaults: http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=356624.

It's been so great to have got the knowledge provided by this blog. Certainly govt should take some serious steps to prohibit anyone cheating others and can prevent the people getting fraud.So the crisis is real for people who are losing their homes, lenders who have an increasingly large inventory of homes to resell and to investors who lost money. It is a little hard to feel sorry for anyone involved in the crisis except for the homeowners or former homeowners who were mislead by the mortgages originators and did not have the proper advice or foresight to understand what their loans were going to do.

mortgages fraud is a crime used by mortgage brokers and loan officers to help land a loan application with their company. The most common way to do this is to lie or intentionally misrepresent the items written on the independent mortgage advice application thus charging the consumer less than they should for the loan, and robbing the lender of their income. Mortgage broker fraud is also designed to add fees to the loan for the mortgage broker.

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