Mortgage fraud risk migrated westward over the last year, as the states with the highest levels of foreclosure activity corresponded with higher fraud risk alerts, according to independent rating agency DBRS' analysis of a recent Interthinx's Fraud Risk Report. Interthinx’s Mortgage Fraud Index calculates fraud risk based on the frequency of mortgage fraud activity detected in applications processed by Interthinx’s FraudGUARD system. The Q209 Fraud Index dropped 4% from Q109 but jumped 7% from the year before, according to the report. Nevada holds the highest level of mortgage fraud risk, followed by California, which has eight of the 10 riskiest metropolitan statistical areas (MSAs), according to the report. Mississippi, Alabama and West Virginia are the three states showing the lowest levels of risk, according to the report. “There has been a significant geographic redistribution of the states with the highest mortgage fraud risk over the last year,” according to the report. Of the five states with the highest risk in 2008, only Ohio, which had the second highest Fraud Index last year, remains in the top five for 2009. The report shows that fraud risk is shifting from the rust-belt states, like Michigan, Illinois and New Jersey, and toward the west. The average increase in the Fraud Index for the four high-risk western states, Nevada, California, Arizona and Colorado, is 43%, while rust-belt states saw a drop of only 8%, suggesting that the redistribution of risk is caused by an increase in fraud in the west, not necessarily a decrease in the rust-belt, according to the report. The types of fraud shifted in Q209 toward schemes that exploit distressed borrowers. Fraud in property valuation rose 56% from the same period in 2008, which reflects a shift to schemes involving short sales, real estate owned (REO) inventories and refinancing, according to the report. “The Interthinx mortgage fraud report noted a shift to fraud schemes involving property valuations which will likely cause losses to rise in residential mortgage-backed securities (RMBS) due to the increased use of short sales as a loss mitigation tool and the large inventories of real estate owned (REO) properties currently being held by servicers," according to DBRS' analysts in a statement Tuesday. "For example," the analysts added, "if the values that are used to determine a fair price for a short sale or REO property are artificially deflated due to fraud, the investor holding the security will incur a higher loss because the value received for the property will be much less than the home is actually worth.” Occupancy fraud, which correlates to schemes in speculative investments, decreased 25% from 2008 as consumers faced reduced economic circumstances and a depressed market for residential investment and rental properties, according to the report. Employment and income fraud index dropped 33% as lenders use more income verification from the Internal Revenue Service and a reduced need for consumers to misrepresent income as housing affordability improves, according to the report. Interthinx projects that regions experiencing high fraud risk in 2009 will experience higher foreclosure rates in the future even if the economic conditions improve. The Fraud Index is poised to rise through 2011, reflecting a “coming wave” of adjustable-rate mortgage (ARM) interest rate resets peaking at the start of 2012, according to the report. Write to Jon Prior.