Mark Fleming--chief economist, First American CoreLogic.

As chief economist for First American CoreLogic Inc., Santa Ana, California, a provider of collateral risk-management and fraud-prevention solutions, Mark Fleming leads the company's economic and research team from the company's Vienna, Virginia, office.

Fleming is responsible for developing the collateral and credit-risk models that serve as the basis of the CoreLogic product suite through economic analysis and real estate market monitoring and analysis of market trends.

Fleming also has spent the last several years studying mortgage fraud and fraud-prevention strategies.

Prior to joining CoreLogic, Fleming was at Fannie Mae, where he developed property valuation models designed as part of collateral-assessment applications used in mortgage origination, quality control and loss mitigation. He also managed a model-development and implementation team responsible for maintenance and development of collateral model production code and data sets for mortgage origination software and automated property valuation applications.

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Fleming has published research on spatial econometrics in The American Journal of Agricultural Economics and Geographic Information Sciences. He has also presented his work at numerous conferences, and is a member of the American Real Estate and Urban Economics Association (AREUEA), Richmond, Virginia, and the Regional Science Association of America.

Fleming obtained his master of science degree and doctorate in agricultural and resource economics at the University of Maryland, College Park, Maryland, and earned his bachelor of arts degree at Swarthmore College, Swarthmore, Pennsylvania.

Mortgage Banking recently interviewed Fleming about his mortgage and economic outlook for 2008 as well as his take on how mortgage fraud is affecting the industry.

Q: How would you summarize the current state of the housing and mortgage markets? What are some key indicators you are watching to diagnose the general health of the market?

A: Clearly, in the real estate market house-price levels are correcting in many markets, coming off of the highs of recent years--creating some problems for foreclosures and [a] lack of people having equity, as well as also--taking a more positive outlook-creating affordability in some of these recently highly unaffordable markets.

The mortgage markets themselves are going through trying times, mostly because of how the secondary market has reacted to the performance of subprime loans--and their reaction has been across the board.

So they are changing the business processes that are being [used] in the mortgage market, the types of lending that's being done [and] the channels that are being used--in particular, the wholesale channel ... is being affected.

[O]ne of our big indicators [that] we monitor [is] the serious-delinquency rates of loans and the pre-foreclosure notifications in the county courthouses. Those are basically leading indicators of what is to come in terms of foreclosure and further levels of delinquency.

When those things reach their peak and begin to decline, then we'll have positive expectations for improvement in the markets.

Q: Specifically regarding subprime, what's your outlook for subprime in 2008 and into 2009?

A: Actually, when you look at what's going on in the marketplace, there is still subprime lending going on. Is it at the peaks that it was in recent years? No. But there are still subprime borrowers with the ability to [move] into more "vanilla" loan products.

Obviously the focus has returned to [originating the] subprime lending of old. [By] "of old," we're talking about three or four years ago, which was heavily focused on ensuring there was plenty of good collateral behind that subprime borrower.

So that kind of subprime lending is continuing. I think some of the subprime lending that has gone away in the last year or so may not return, and we probably may not want it, as an industry, to necessarily return.

The big issue really will be regaining investor confidence. That's across the board, particularly in the subprime space, but across the board we need as an industry to convince the ultimate mortgage securities investors that we know what we're doing and we're assessing risk appropriately.

Q: Does the current subprime meltdown and overall market correction remind you of any prior period in the industry's history, and are there lessons to be learned from it?

A: The subprime space went through a state like this in the late 1990s. So it wasn't actually that long ago that there was a rash of subprime mortgage lenders that went out of business, just like this time around. It was basically the same issue that drove them out of business, which was a liquidity crisis.

That doesn't necessarily have to be related to mortgage loan performance. When we talk about liquidity and the market's ability to basically move those loans through the liquidity pipe to the secondary market, that happened in the late 1990s as well.

There were different precipitating events for that liquidity crisis versus what happened last year, so we've seen it before in that sense. In terms of the overall market correction, real estate and mortgage markets are cyclical, and we've experienced the ups and downs of these markets before.

What's interesting here is the house-price run-up of the past few years is unprecedented relative to history. If you look all the way back to the late 1800s, we've never had an appreciation level in house prices [like what] we've seen in [the] house prices that we've just experienced.

The anomaly, I think, really was the last couple of years more so than the correction [we are going through] now. When I look at it, I see that we're returning to what's probably a little more normal because of the unprecedented events of the last few years.

Q: Can you provide a brief overview of CoreLogic's Core Mortgage Risk Monitor[TM] by explaining how the survey works, as well as talk about any trends or patterns that you've been able to divine from the data?

A: For the Core Mortgage Risk Monitor, we're looking at all of the loan transactions across our platform. We analyze and risk-score something like 40,000 or 50,000 transactions a day in our systems, so we are seeing all of these loan applications.

That's the basis for our analysis--all of this loan application activity that's going on in the marketplace. It's across all industry channels--subprime, prime, alt-A--all kinds of different loans that we see.

We basically are aggregating up that information to the CBSA [core-based statistical area] or MSA [metropolitan statistical area] level, analyzing our own information about the risk through those transactions as well as looking at economic factors like unemployment rates and wage growth, as well as trends in house prices, foreclosure rates and pre-foreclosure rates in these markets. So we're trying to analyze a variety of things.

It's similar to many of the surveys or many of the market studies that you see out there today. They generally focus on ranking markets based upon likelihood of house-price declines, or something more in the house-price arena. Our view is that house prices and what they're doing, and the risk in the marketplace as driven by house prices, is of course important, but it's not the ultimate issue. Our ultimate issue is whether or not loans are going to go delinquent.

So our risk monitor is targeted to identify markets that have a future high propensity for serious-delinquency events as a function of house-price trends, but also things like economic factors. When you combine all of those things together, we find that in many cases the markets that might have some of the largest rates of house-price decline are not necessarily [at the] top of the risk rankings overall, because they have healthy economic fundamentals.

So our risk monitor is focusing on--it's no surprise--many of the markets of the Midwest. That's economically driven as well as house-price-driven.

Q: Geographically speaking, what metro regions or sectors do you see standing out as especially worrisome, and what is particularly encouraging?

A: In terms of worrisome, it's the Detroit, Cleveland, Columbus areas. Any market in the upper Midwest that has a preponderance of auto industry [employment] directly, or ancillary service industries to the auto industry, because they are going through corrections and there are higher unemployment rates there and lack of wage growth.

There never really was house-price appreciation of any great magnitude in many of these markets, and now there are house-price declines--so we have much higher risk of negative equity for individuals there. When you look at the foreclosure statistics, you see it. Those are many of the markets that have some of the higher foreclosure rates.

The markets that are encouraging are mostly in Middle America, excluding the upper Midwest. The coastal markets are addressing issues related to the house-price appreciation rates that they've experienced, but the Middle-America markets, many of them never really experienced significant house-price appreciation.

It's the tortoise-and-the-hare story. Ultimately the tortoise wins. Now the hare takes a nap [then] goes quickly, but the slow-and-steady tortoise can represent many of these Middle-America markets. They're chugging along and not being significantly affected, especially if they have well-diversified economic bases.

Q: When do you expect the housing inventory overhang to start moving in the right direction--i.e., shrinking? What has to happen to trigger it?

A: The "when" [question] is hard, if not impossible, to answer. What triggers it, I think, is more easily understood--and I think that really [comes down to] the concept of the value investor.

Buyers on the demand side of the marketplace start looking around and say, "Wow. The prices of these homes seem really good again." So they'll jump back in and start buying. That could be first-time homebuyers who are waiting for affordability to return, it could be investors, it could be people who had chosen not to move but are now deciding to move because they see good value in some of the prices.

It really is a psychological issue, just like in the stock market. What is the level at which that value proposition kicks in and people view these prices as good deals and jump back into the market?

Q: On mortgage fraud, what was the most popular or most-reported method of mortgage fraud perpetrated against lenders in 2007? Are there any trends that are significantly different than in 2006?

A: There was a shift, and it correlates to the change in house-price trends. There was a shift away from the inflated values and from fraudulent property flipping, because when house prices are rising it's very easy to justify or hide inflated values.

It shifted to more sophisticated schemes because it became a more difficult environment in which to operate and perpetrate fraud. It shifted around to builder bail-out schemes and condo-conversion schemes--basically, Ponzi schemes that shift things around to pay one [party] at the expense of another.

That really came to the fore in late 2006 and throughout 2007. Will it be going forward into 2008? I think those sort of similar schemes will occur.

[W]e talk about fraud in terms of income fraud in the stated-income space. Well, that's always been around--whether or not there have been stated-income loans or not, people have manipulated their income documentation and things like that in the past. The stated-income loan just made perpetration of fraud easier.

So the reduction in the amount of stated-income loans that are being done, that doesn't necessarily mean that that type of income-misrepresentation-based fraud goes away; it just means it gets back to business as usual in the past, which was document falsification.

So the Wite-Out[R] industry is particularly happy about this because they're back in business.

Q: In the couple of years that mortgage fraud against lenders has become a high-profile issue, how would you rate the mortgage industry's response to fraud? Has the industry adapted or attempted to better-protect itself or do you still see many of the same mistakes being made?

A: I think absolutely the industry is responding to the issue. I think part of the reason it's become a higher-profile issue is because of the advent of models and technology for the prevention of [mortgage fraud].

It wasn't that many years ago when there really weren't fraud tools out there or automated fraud scores and models of the like. It was much more manual and labor-intensive to identify fraud, so they really go hand-in-hand.

The advent of the tools and technology in the fraud space or, in essence, the advent of the fraud-protection industry, if you will, at least from a technology and automated tool perspective, has brought this issue to light and created the high-profile situation because we now can do things to protect against it.

As an industry, there are many, many lenders out there who use these tools at various spaces in their process to help protect against fraud. So I think there's an adoption of tools and techniques to create this protection, which is good.

I think the question then becomes that we're finding more fraud, but it might have always been there and we're just finding it more with these tools versus it actually being a growing problem.

Q: Do you see this current correction producing a lasting change in the housing market, or is this just a normal, albeit harsher, correction? Are there long-term structural effects to this correction?

A: In terms of lasting changes, every time we go through one of these cycles as an industry, we learn. We learn what did and didn't work in that cycle and we usually correct it. In every cycle there is a different precipitating event--and so are we going to be better off having gone through this? Absolutely.

I think a lot more adoption of risk technologies and fraud technologies and battening down our ability to understand and measure the quality of loans is now that much more important. That will be a lasting benefit to the industry having gone through this cycle.

It means in the long run, the better we get at assessing risk and managing loans and working them through the pipelines, the more efficient we become at doing this as an industry, those gains in efficiency and risk measurement ultimately get passed on to the consumers.

So long-term potential effects of this will be better pricing or ability to maintain or even increase homeownership rates in the country.

Charles Wisniowski is a correspondent for Mortgage Banking.