Mortgage Fraud Risk on the Rise

Irvine, Calif.-based CoreLogic, a property information, analytics and data-enabled solutions provider, revealed a 12.4 % increase in fraud risk at the end of the second quarter, in its latest Mortgage Fraud Report.

The analysis, as measured by the CoreLogic Mortgage Application Fraud Risk Index, found during the second quarter of 2018, an estimated one in 109 applications, or 0.92% of all mortgage applications, contained indications of fraud, compared with the reported one in 122, or 0.82% in the second quarter of 2017.

The CoreLogic Mortgage Fraud Report analyzes the collective level of loan application fraud risk experienced in the mortgage industry each quarter. CoreLogic developed the index based on residential mortgage loan applications processed by CoreLogic LoanSafe Fraud Manager, a predictive scoring technology. The report included detailed data for six fraud type indicators that complement the national index: identity, income, occupancy, property, transaction and undisclosed real estate debt. The report calculated the estimated number of fraudulent applications by applying the current risk level of CoreLogic Mortgage Fraud Consortium applications to industry volumes.

“This year’s trend continues to show an increase in mortgage fraud risk year over year,” Bridget Berg, principal of fraud solutions strategy for CoreLogic said. “Because home prices are rising, and demand is strong, most mortgage fraud in this type of market is motivated by bona fide borrowers trying to qualify for a mortgage. Undisclosed real estate liabilities, credit repair, questionable down payment sources and income falsification are the most likely misrepresentations.”

Report highlights:

• New York, New Jersey and Florida remain the top three states for mortgage application fraud risk, maintaining the same positions as last year.
• States with the greatest year-over-year risk growth include New Mexico, Mississippi, Illinois, Oklahoma and Texas. Of these, New Mexico, Illinois and Oklahoma now have risk levels greater than the National Index, which grew from 133 to 149 YOY.
• Income fraud risk had the greatest increase year over year, followed by occupancy and transaction fraud. Property and undisclosed real estate debt showed declines in risk.

All loan segments showed increased risk year-over-year. Purchase transactions show higher risk levels than refinance transactions except for Jumbo loan segments.

Market factors that influenced fraud risk during the previous year include: The continued shift from a refinance-heavy market to a predominantly purchase market is a key factor in the application fraud risk increase. From the second quarter 2017 to second quarter 2018, the proportion of purchase transactions within the consortium increased from 66% to 72% of applications. The report suggested while it expects the shift from refinance to purchase to continue it may be nearing its maximum point. Purchase transactions have shown a higher risk profile than refinances due to the stronger motivations to commit fraud.

Income fraud includes misrepresentation of the existence, continuance, source, or amount of income used to qualify. From the second quarter of 2017 to the second quarter of 2018, the income fraud risk indicator increased 22.1%. The risk had a sharp increase in the first quarter of 2018. States with Largest YoY Increase: Massachusetts, Nevada, Colorado, Kansas.

Occupancy fraud occurs when mortgage applicants deliberately misrepresent their intended use of a property (primary residence, secondary residence, or investment). a property’s intended occupancy affects programs, pricing, and underwriting guidelines. From the second quarter of 2017 to the second quarter of 2018, the occupancy-fraud indicator increased 3.5%. The risk has been steady over the last year with a slight increase each quarter leading to the overall increase for the year. States with Largest YoY Increase: Vermont, Hawaii, Alaska, Mississippi, New Mexico.

Transaction fraud occurs with misrepresentation of the transaction’s nature such as undisclosed agreements between parties and falsified down payments. This risk includes third-party risk; non-arm’s length transactions, in which there is a connection or business association between the property’s seller and the buyer; and straw buyers, where an individual bid on real estate on behalf of someone else to evade legal restrictions or enable fraud. At the end of the second quarter of 2018, the transaction risk indicator increased .6% when compared to the same quarter in 2017. States with largest YoY Increase: Mississippi, Rhode Island, Massachusetts, Vermont.