Is the mortgage market ripe for increased fraud?

Written By: Joel Palmer, Op-Ed Writer

Mortgage underwriters and processors may have to be more diligent in combatting fraud.

A mortgage market that encourages more purchases than refinances and enables higher loan-to-value (LTV) ratios will lead to higher incidence of mortgage fraud, according to industry analysts.

CoreLogic, which provides market intelligence and analytics for several industries, including real estate and mortgage finance, recently reported its expectation that mortgage fraud will increase in 2017.

The company’s Mortgage Application Fraud Risk Index is based on the percentage of loan applications with a high risk of fraud. Each point change in the index represents a 1 percent change in the share of mortgage applications having a high risk of fraud, according to the company.

Between the third and fourth quarters of 2016, the index increased from 109 to 122, the highest level in nearly three years. The increase in the index during this period occurred even though the volume of mortgage applications dropped 20 percent.

In its 2016 Mortgage Fraud Report, the company said that while the index fluctuated during the year, it’s been consistently trending upward since the third quarter of 2010. The trend, noted the report, has coincided with the loosening of lending standards following a period of tight credit policies following the financial crisis.

Specifically, the report partially attributes the rise in fraud to the increasing availability of higher-LTV loans. In the past three years, the percentage of purchase mortgage loans with LTVs above 80 has rise from 58 percent to about 63 percent. 

Higher-LTV loans are susceptible to fraud because the profit potential is greater and because the smaller down payments are easier to misrepresent. 

Another contributing factor is that Freddie Mac and Fannie have reduced restrictions placed on top of GSE guidelines, some of which served to curb mortgage fraud risk.
The shift from refinances to purchase loans will also lead to greater mortgage fraud.Between 2001 and 2014, there were more refinances than purchase mortgages. With rising interest rates, refinances are set to decline while purchase loans are forecast to account for 75 percent of the overall mortgage market in the next two years.
It’s more difficult to commit mortgage fraud during a refinance because there are fewer parties involved. Purchase transactions, on the other hand, involve multiple parties that can create more opportunities for fraud. 
In the latter, there are fewer players involved, funds generally go from one financial institution to pay off another, and it is harder to manipulate the outcome.  In a purchase transaction the process is more complex and proceeds are distributed outside of the closed loop of financial systems, going to property sellers, builders, real estate agents and so forth. This creates more opportunities and motives for fraud.

CoreLogic measured a 12.5 percent increase in income fraud between 2015 and 2016. Income fraud typically occurs when the buyer misrepresents the existence, source of amount of income used to quality for a mortgage. 

During the same period, there was also a significant increase in transaction fraud, such as undisclosed agreements between parties and falsified down payments.

Other types of mortgage fraud include:

Property flipping, which occurs when real estate is appraised at an inflated value, purchased, then quickly resold. The inflated value is often six figures. To pull off, it usually requires participation by buyers, investors, appraisers and a representative of the title company.

Nominee loans/straw buyer. The identity of the borrower is concealed through the use of a nominee (i.e., "straw buyer") who allows the borrower to use the nominee's name and good credit history to apply for a loan.

Foreclosure schemes. This fraud involves a perpetrator targeting homeowners at risk of defaulting on loans or whose houses are already in foreclosure. They convince homeowners that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator then remortgages the property or pockets fees paid by the homeowner.

About the Author

As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.