During the fourth season of the hit series “The Sopranos,” mob boss Tony Soprano enlists some of his cronies to participate in a property-flipping scam, using inflated appraisals to get big loans, only to dump the properties and keep the cash.
While the show is fictional, mortgage fraud is very real.
Losses totaled $1 billion in 2005, up from $429 million in 2004, according to the Federal Bureau of Investigation. And during the first part of 2006 alone, 16,000 suspicious activity reports involving $545 million in mortgage loans have been filed with the F.B.I.
“It takes law enforcement a long time to work these cases,” said FBI Supervisory Special Agent Rhonda Heilig. “The bad guys know where the chinks in the armor are, and they’ve found ways to get in.”
They’re not the only ones.
The fraud also has presented an opportunity for legitimate firms to help out, including Calabasas-based software firm Interthinx, which employs computer technology to ferret out fraud long before a loan is funded.
The company’s system validates, authenticates, interprets and analyzes data to evaluate not only the borrower, but also the property, the mortgage broker, and the appraisal company all of which can play a part in fraud.
And while the housing industry is widely expected to be heading into a downturn, that doesn’t mean that fraud will decline. In fact, it could increase.
“As interest rates rise, applications are going to decline. (So) whatever applications were in the drawer before that couldn’t get funded, now people will start working on. And the quality is going to suffer,” said Interthinx president Kevin Coop.
Two predecessors
Interthinx is actually a combination of two venture-backed mortgage fraud detection firms founded in the 1990s: Calabasas-based Sysdome and Weldon Spring, Mo.- based AppIntelligence.
ISO, a Jersey City, N.J., provider of risk management products to a variety of industries, acquired and merged together both firms to create Interthinx last year.
The company will move its headquarters to Agoura Hills in May when its new offices are completed, said Coop, who previously served as head of Sysdome.
In addition to accessing Interthinx’s own databases, the Web-based software checks public records database LexisNexis to search for articles on the involved parties that could raise concern. It then provides a score and full report to the lender and, when appropriate, warnings and suggestions on the next steps to take.
A report might notify the lender of the fact a borrower has used a different Social Security number before, a clear red flag. It might also include any number of less obvious warning signs. For example, the loan officer and the appraiser have the same last name, indicating a potential conflict of interest; the borrower’s employer’s address isn’t a place of business; or the appraisal price greatly exceeds the average price for that neighborhood.
Interthinx initially charges a setup fee of a few thousand dollars, depending on the size of the customer, and then charges a per-transaction fee of approximately $12 to $15. Coop said this pricing structure has played a major role in the company’s significant revenue growth last year. “Once integrated and deployed we become part of the origination process of the lender,” he said.
Interthinx, which has 1,100 clients including Washington Mutual Inc., Countrywide Financial Corp., and Wells Fargo & Co., is currently combining the AppIntelligence and Sysdome products into one flagship suite to be released in May.
In 2004, the predecessor companies had combined revenue of $18 million, a figure that ballooned to $42 million last year, amid the housing and refinancing boom. Its competitors include data aggregators and credit bureaus such as ChoicePoint Inc. and Experian that offer their own identity verification products that compete with pieces of Interthinx’s system.
In order to stand out in what can seem like a dull industry, Interthinx has focused on creative advertising and marketing strategies, taking out eye-catching full-page ads in trade magazines and producing video spoofs of popular TV shows with such names as “Desperate House Lies” and “FSI: Fraud Scheme Investigation.”
Among its customers is Saxon Mortgage, a unit of Saxon Capital Inc., a Glen Allen, Va.-based public company traded on the New York Stock Exchange.
While Julie Woodley, vice president of Saxon Mortgage’s risk management department, said the lender could try to spot warning signs on its own and investigate them by using a variety of other tools, that approach is more costly and time consuming.
“Before, we’d have to pick out something we’d think is questionable and then research it. With this, it’s an alert to the issues right away,” she said. “More than likely a fraudulent loan is going to end up in a foreclosure, and a foreclosure is going to equal a loss for a lender every time.”
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Interthinx
Year Founded:
2005
Core Business:
Provider of web-based analytic software to detect mortgage fraud
2004 Employees:
127 (predecessor companies combined)
2005 Employees:
124
Goal:
To become a data repository on loan quality for the mortgage industry
Driving Force:
Sophisticated criminals and lenders with antiquated fraud-detection tools
