Mortgage Fraud Hits Lowest Level In A Decade

Mortgage Fraud Hits Lowest Level In A Decade

Things could change quickly depending on the economy

Mortgage fraud is at its lowest levels in almost 10 years. That doesn’t mean more of the same lies ahead. The CoreLogic National Mortgage Application Fraud Risk Index decreased by 8.7% in the second quarter of 2020. The year-over-year trend is down 22.6% from the second quarter of 2019. The risk level is similar to the third quarter of 2010, when national fraud risk levels were first measured.

The share and volume of refinances continued to increase in Q2 as recordlow interest rates swell the pool of loans that benefit from refinancing. Refinances accounted for 61.4% of all applications, up from 59.9% last quarter. “We continue to see slightly increased risk in conventional purchases and much greater risk in the investment purchase segment this quarter, but the lower risks in refinances and high refinance volumes keep the national index low,” CoreLogic said in its report (registration https://www.corelogic. com/insights/mortgage-fraud-trendsreport.aspx required to read).

While investment purchases have been increasing in risk, they have been decreasing in relative volume. Many lenders are tightening credit parameters due to the uncertain economy. This seems evident in the decrease we have seen in volumes of investment purchase applications, the report said, adding they are at their lowest level since the inception of the index: currently at 0.9% compared to 1.9% one year ago.

CHANGING DYNAMICS

Bridget Berg, principal, industry solutions, property intelligence at CoreLogic, told National Mortgage Press in an interview that it is likely fraud risk levels will increase if purchases become a larger share of the financing activity. “Fraud risk is definitely a function of the health and stability of the real estate market. Volatile prices, supply and demand that are far out of balance, and people or properties in distress all create upward pressure on fraud risk,” she said.

Berg added, “What lies ahead is hard to predict. There are conflicting signs: buyer bidding wars are being reported in some areas; delinquencies are at their highest levels in years; and interest rates are at all-time lows. Many lenders CoreLogic works with are planning for increased fraud activity by tightening credit parameters and increasing controls.”

She said the majority of real estate investors are conducting business in an honest way. “However, investment purchasers have a profit motive whereas other borrowers want a place to call home, so the dynamics change,” she said to explain why more fraud potentially exists among investors.

Berg further clarified, “The more an investor can leverage the cash put into a property, the more money they can make. When building a portfolio of properties, they often purchase multiple properties in a short period of time. Some may hide their activity from the lender in order to qualify and/ or avoid limits on numbers of loans. Some collude with the seller to show an inflated sales price to maximize the financed amount, or falsely claim a property will be owner-occupied to get better terms.”

The core base stastical areas, or CBSAs, with the highest rates of investment purchase applications include Memphis, Oklahoma City Syracuse, Buffalo, Provo, Cleveland, Springfield (Massachusetts), and Dayton.

Most areas of the country are reflecting the risk decrease seen at the national level. However, the Springfield CBSA shows a 37% increase. This is driven by a higher share of purchases overall, a higher level of investor purchases, and an increase in income red flags in the second quarter. It’s a smaller CBSA, which makes it more subject to volatility in the index.

Of course, the investor is sometimes a victim and not the perpetrator. “Some investors fall victim to investment property schemes, where they unknowingly pay more than the property is worth, are duped about the rents they can collect, or are sold many properties at once,” she explained.

Fraud might increase among non-investors if employment numbers don’t change. Berg said, “The immediate and direct impact of spiking unemployment is seen in one of the more common frauds today. It is the situation where a borrower loses a job during the refinance process and doesn’t tell the lender. The borrower signs the final loan application at closing attesting they are still employed. While we are all sympathetic to the borrower’s position, it creates a problem for the new lender, who now has a defective loan.”

If employment consists long-term, the fraud becomes a different beast. Berg said, “Longer-term, high levels of unemployment impact housing markets and heighten certain types of fraud. Credit cleaning, synthetic identities, straw buyers, and illegal flips are more likely after a market area becomes distressed with delinquencies and foreclosures. If the economic impacts are severe, as we saw after the financial crisis, high delinquencies and foreclosures could fuel fraud in loan modifications, short sales, property preservation, and REO sales.”

Source: CoreLogic National Mortgage Application Fraud Risk Index