Bankruptcy

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

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.

Full post as published by Credit Slips on February 23, 2008 (boomark / email).