Study: 70 Percent of EPDs Linked to Fraud

More than 70 percent of early payment defaults can be linked to a significant misrepresentation on the original loan application, according to a new study released today by BasePoint Analytics.

The study concluded that loans containing egregious misrepresentations were up to five times more likely to default in the first six months than loans that did not; more importantly, the study concluded that predictive models could be deployed early in the loan process to help lenders predict which loans were likely to default within the first six months, enabling the loans to be rejected pre-funding.

“Many lenders are facing increases in repurchase requests and early payment defaults. In an effort to help lenders deal with these challenges, BasePoint has rigorously studied the issue and found a direct correlation between EPDs and mortgage fraud,� said Tim Grace, president and CEO of BasePoint.

“We can demonstrate for lenders and investment banks how they can substantially reduce their EPD losses, and often within a short period of time. The cost of mortgage fraud is borne by every person or family who buys or sells a home. That’s why BasePoint continues to focus on developing advanced software solutions to put a stop to mortgage fraud before it happens.�

BasePoint analyzed over 16,000 loans that were confirmed to contain egregious misrepresentations in the loan file that later led to a default. These misrepresentations included fraud such as: income inflated by as much as 500 percent, appraisals that overvalued the property by 50 percent or more, fictitious employers and falsified tax returns.

Traditionally, mortgage lenders have relied on credit scores to assess the risk of a borrower. Credit scores only effectively predict risk when the facts on the application are true, Grace said. However, when a borrower or broker misrepresents fundamental characteristics such as income, employment, debt or the value of the property, the credit score risk assessment isn’t as effective.

Specific models such as the company’s FraudMark suite, built to detect the risk when fraud is present, act as a proxy for risk when misrepresentation is involved. In fact, FraudMark outperforms traditional credit scores by over 200 percent in determining early payment default when fraudulent misrepresentations are present in the application, according to Grace.

Over the past year, BasePoint says that FraudMark has helped lenders prevent nearly $1 billion in suspicious loans from funding. For more information, visit http://www.basepointanalytics.com.