Fraud risk in the national mortgage industry rose 4% in Q110 from Q409, and 11% from the year-ago period, according to the latest report from mortgage software developer Interthinx. The index is at highs last seen in 2004, with the yearly jump led primarily by significantly higher property valuation fraud risk. On a state level, Arizona surpassed California as the riskiest state for mortgage fraud. This trend is possibly due to a migration of fraud risk from neighboring Nevada, similar to a migration trend seen in 2004-2006, Interthinx said. Nevada took its rank as the second-riskiest state, while California, Florida and Michigan rounded out the top five riskiest states for mortgage fraud: The national index comprises several types of mortgage fraud. The risk of property valuation fraud is up 4.3% from Q409 and 45.9% from the year-ago period, contributing significantly to the yearly jump in the national index. This type of fraud involves manipulating property value to create artificial levels of equity that can then be drawn out from loan proceeds. California metropolitan areas dominate the top five riskiest locations for property valuation fraud. The risk of employment or income fraud swelled 10.9% over Q409, but actually dropped 4.5% from the same time last year. This type of fraud occurs when an applicant's income is misrepresented in order to qualify for the mortgage. "Though this 11% [quarterly] increase seems to confirm the change in trend that was hinted at by the much smaller increase recorded between Q3 and Q4 2009, it is still unclear whether this uptick portends a rebound in employment/income fraud risk or whether it reflects a temporary 'blip' associated with schemes involving the federal first-time homebuyer tax credit program that expired on April 30, 2010," Interthinx said. Four Californian metropolitan areas and the Baton Rouge, LA metro area filled the top five spots for riskiest employment/income fraud ares. The risk of identity fraud is up 9.5% from Q409 and 15% from the same time last year. This type of fraud involves supplying false data to obtain a favorable credit profile for home purchases. Two Floridian metropolitan areas took the top slots for riskiest identity fraud areas. Additionally, the risk of occupancy fraud fell 10.7% since Q409 and 17% from the same time last year. This type of fraud is used by investors who falsely claim occupancy of the purchased property in order to obtain a mortgage with a low down-payment or interest rate. "These large fluctuations in the index suggest that investors are uncertain about rejoining the market," Interthinx said in the report. "However, it is likely that stoked by plentiful inventories and the expected release of 'shadow' foreclosure inventory, this index will trend upwards in the near future." Write to Diana Golobay.