Mortgage Fraud on the Rise, Purchase Applications Vulnerable
Oct 28 2021, 12:51PM
There was a big jump in the incidence of mortgage fraud over the course of the last year. CoreLogic's annual report for the second quarter of 2021 reports that one in 120 mortgage applications (0.83 percent) submitted during that period showed indications of at least one of six types of fraud. This is up 37.2 percent from the prior 12-month period.
Fraud was most prevalent in purchase mortgage applications, one occurrence in every 90 applications, and a 40 percent year-over-year increase. Fraud was indicated in one in every 169 refinance applications, up 19.4 percent on an annual basis.
The company said that the increase in incidents, while appearing drastic, occurred against the second quarter of 2020 which was the lowest index point in the 11 years CoreLogic has collected the data. At that point, the company estimated an 0.61 percent incidence of fraud risk, one in 164 applications. The information presented in the current report is similar to that for the second quarter of 2019. CoreLogic's Mortgage Fraud Index for the second quarter was at 132. The company adds, however, that the fraud index is currently rising instead of falling.
The highest risk applications for both purchase and refinancing were for investment properties (one in 23 applications). The lowest risk were for VA-backed programs.
Four of the six fraud risk categories saw growth, with the largest by far, an increase of 34.2 percent, occuring in transaction fraud risk. This occurs when the nature of the transaction is misrepresented, such as undisclosed agreements between parties or falsified down payments. The category also includes non-arm's length transactions and the use of straw buyers. This risk was assessed only for purchase transactions and was significantly more pronounced in the wholesale channel than in retail or correspondent lending.
The second greatest increase was in identity fraud, which was also assessed only for purchase transactions. This risk is where an application uses a stolen or synthetic identity or an altered credit history. Applications with this risk increased 7.4 percent year-over-year.
Occupancy fraud risk rose 5.6 percent. This is when mortgage applicants deliberately misrepresent their intended use of a property, for example, saying they intend to occupy an investment property or second home as their principal dwelling. Intended use impacts programs, pricing, and underwriting guidelines.
Undisclosed real estate debt, which occurs when an applicate intentionally omits additional debt or doesn't disclose past foreclosures rose 4.6 percent from the prior report.
Income Fraud Risk declined 2.0 percent. CoreLogic said this category, misrepresentation of the existence, continuance, source, or amount of qualifying income, was down largely because of the high utilization of streamlined refinancing. When considering only purchase applications, the risk increased 1.5 percent.
The last category, property fraud risk, occurs when information about the property or its value is intentionally misrepresented. This risk declined 5.4 percent from the second quarter of 2020.
Nevada was the most fraud-prone state, with a 45 percent annual increase to an index of 225. New York, Hawaii, Florida, and California round out the top five.
The company says it is important to manage future risks and it sees two areas of concern; remote worker trends and affordable housing policies . Worker migration was up significantly over the past year as people purchased new primary residences in states where they have never lived before and typically buying a new property that is much less expensive than their previous residence. This type of purchase represents about 2 percent of the total, double the percentage in early 2020. Additional in-state migration has been observed, with homeowners moving to suburban or rural locations within a state.
The freedom to work remotely has triggered most of this activity, with homeowners moving to obtain cheaper housing and more space. California, Texas, and Florida have seen the most migration with Texas and Florida being the most common destinations. CoreLogic says some of these destination communities may be vulnerable to home price declines if the remote work migration does not continue, especially if those communities don't have alternative employment opportunities. There are also concerns about salary adjustments for employees who move from high cost to low-cost areas. If the remote work trend continues, the departure communities may also be at risk. "From a fraud risk standpoint," the report says, "distressed areas are generally more susceptible to fraud schemes.
Changes in affordable housing policies may also lead to increased risk. At this point the potential changes include greater owner-occupant access to 2 to 4 unit properties sold by FHA and HUD and to mortgages for these properties and manufactured housing through Freddie Mac. Two-to-four unit properties have a high risk profile, one in 50 applications, due to their larger conforming balance and the ability to use income from the property to qualify for the loan.
Experience has also shown that opportunists may exploit policy changes which, in this case, could take the form of using straw buyers to take advantage of greater financing options or falsified qualifications (sometimes with the assistance of insiders) for first-time homebuyers.