As viewed from Frank Alpan’s cubicle, through the glare of two flat-screen monitors, the collapse of the housing market looks a lot like a crime scene. Clicking his way through electronic case files, he hunts for clues: a strange font on a pay stub, numbers on a W-2 form that don’t add up. He is continually amazed at just how sloppy some suspects can be.
Alpan (whose name has been changed, as his company’s policy forbids unauthorized employees to speak to the media) spends eight hours a day at this desk in Digital Risk’s office building in suburban Maitland, Florida, reconstructing the exact circumstances that led so many Americans to buy houses they couldn’t afford. The cases he has seen reveal a country gone berserk: a woman in Ann Arbor who refinanced her home five times in five years but neglected to tell her lender that she had quit her job; a concrete finisher in Las Vegas who applied for 15 mortgages in one week; pastors—dozens of them—who doctored bank statements, bought houses they couldn’t pay for, and then filed for bankruptcy. “The nice thing about pastors is that their church shares information when asked,” Alpan says. “Pastors are always an easy [fraud] claim.”
Four years after the crash, most financial institutions still aren’t equipped to find evidence of fraud in the toxic loans crippling their balance sheets. So they outsource the job to Digital Risk. The company’s CEO, Peter Kassabov, calls Digital Risk the “watchdog of the financial world.” Demand for watchdogs is high: the company, which has 1,100 employees, plans to double its workforce by the end of this year. Kassabov’s recruits tend to have underwriting experience; many are refugees of the housing bust. One such hire was George Zimmerman, the man who killed Trayvon Martin in February (Zimmerman says he acted in self-defense). At the time of the shooting, Zimmerman worked as an auditor at Digital Risk, and before that, he was a mortgage broker.
The company spends about $10,000 to train each new employee in the art of fraud prevention and detection. Credit reports are pulled; ex-spouses are contacted; Digital Risk’s proprietary software is deployed. Once problems are uncovered, clients can try to recover money. (Say Digital Risk finds evidence of fraud among mortgages that have since been sold to an investor. The investor can use that evidence to force the bank that issued the mortgages to buy them back.) The information that analysts dig up unsettles Alpan. “There’s nothing you can hide,” he says. “This is why auditors are so paranoid.”
Kassabov started Digital Risk in 2005 with seven employees. Mindful of a lesson he learned during the dot-com boom (“If something goes very fast up, it’ll go down just as quick”), he and his partners designed software to give loan underwriters access to detailed financial information about borrowers. Banks were impressed, Kassabov says, but feared the product would slow business. Why verify income when there were mortgages to be bundled and sold? That was then. Today, Digital Risk says it saves its clients a combined $5 billion a month.