Manual mortgage underwriting leads to less fraud: QMS
Mortgages that are manually underwritten by originators have less fraud than mortgages underwritten by a software program, according to data released by Quality Mortgage Services. The Franklin, Tenn.-based firm audited 20,000 loans from 2009 and 2010 post-closing for quality control issues. QMS found no fraudulent errors in loans that were manually underwritten, while loans underwritten by an automated underwriting system had a fraud rate of 2.09%. As the mortgage industry moves more predominantly into technology, QMS advises pushing for more loans to be subject to manual underwriting. "Historically, the data produced for the audits performed in Quality Mortgage Services Mortgage Analyst Review Software shows that manually underwritten loans are the best deterrent against fraud for housing," the firm said. Comparing digital underwriting methods, QMS found fraud in 3.76% of loans done by the Federal Housing Administration Total Scorecard, 1.12% done by Fannie Mae's Desktop Underwriter, 1.22% done by Freddie Mac's Loan Prospector and 2.15% done by the U.S. Department of Agriculture's Guaranteed Underwriting System. QMS argued the rates might be higher, but refinances in the sampling pool drove fraud numbers down. Results from the QMS audit found a 2.04% fraud rate in 2010 across the pool of loans sampled, up 33.5% from 2009. Almost 2% of conventional loan purchases contained fraud; however, no fraud was found in any conventional refinances. Out of loans backed by the FHA, 3.51% contained fraudulent elements in 2010, up from 2.56% in 2009. Of that, 3.76% is attributable to purchases and 1.53% is attributable to refinances. For loans where fraud was detected, the average credit score was 711, up from 658 the previous year, QMS said. Even though mortgage fraud was more prevalent in 2010 than previous years, the number of incidents of fraud decreased per loan. Incidents involving income, assets or sources of funds, the two most common types of fraud, decreased in 2010. QMS reported instances of income fraud down to 30.77% from almost 33% in 2009. Assets or source of funds incidents dropped to 19.66% from 27.6%, QMS reported. Appraisal fraud increased, along with loan analysis fraud, credit and liabilities fraud and application fraud. Both banks and nonbanks witnessed decreases in income documentation fraud, according to QMS. For banks, fraud in this area dropped to 30.77% in 2010 from 34.38% in 2009. Nonbank fraud in this area dropped to 21.69%. QMS is a mortgage quality control services firm based in Franklin, Tenn. In the fall, the firm produced data that found credit unions originate the highest quality loans. Write to Christine Ricciardi. Follow her on Twitter @HWnewbieCR.