Mortgage Fraud Protection

Over the previous year, there has been a significant increase in the number of mortgage fraud cases. According to CoreLogic’s annual report for the second quarter of 2021, one out of every 120 mortgage applications (0.83 per cent) submitted during that period exhibited signs of one of six types of fraud. This represents a 37.2 per cent increase over the previous 12-month period.

Fraud was most common in purchase mortgage applications, with one instance in every 90 applications, a 40% rise year over year. Fraud was reported in one out of every 169 refinance applications, up 19.4% year over year.

While the spike in events appears to be dramatic, the business claims that it occurred in the second quarter of 2020, which was the lowest index point in the 11 years CoreLogic has been collecting data. At the time, the corporation projected a fraud risk of 0.61 per cent or one in every 164 applications. The data in this report are comparable to what was reported in the second quarter of 2019. According to CoreLogic, the Mortgage Fraud Index for the second quarter was 132. However, the company points out that the fraud index is rising rather than falling.

Investment properties posed the greatest risk for both buy and refinancing applications (one in 23 applications). The VA-backed programs have the lowest risk.

Four of the six fraud risk categories witnessed increases, with transaction fraud risk seeing the greatest increase of 34.2 per cent. This happens when the substance of the deal is misrepresented, such as when parties’ agreements aren’t disclosed or when down payments are fabricated. Non-arm’s-length transactions and the employment of straw buyers are also included in this category. Only purchase transactions were examined for this risk, which was much higher in the wholesale channel than in retail or correspondent lending.

Likewise, identity fraud was assessed just for purchase transactions and saw the second-largest increase. There is a risk when an application involves a stolen or synthetic identity or a fictitious credit history. The number of applications with this risk grew by 7.4% year over year.

The likelihood of occupancy fraud has increased by 5.6 per cent. This occurs when mortgage applicants knowingly misrepresent their intended use of a property, such as claiming that they intend to live in an investment property or a second home as their primary residence. Programs, pricing, and underwriting guidelines are all influenced by the intended use.

Undisclosed real estate debt increased by 4.6 per cent from the previous report, which occurs when an applicant omits additional debt or fails to disclose previous foreclosures.

Income Fraud Risk has decreased by 2.0%. According to CoreLogic, this category misrepresentation of the existence, continuation, source, or amount of eligible income went down due to the increasing use of streamlined refinancing. When just purchase applications were taken into account, the risk increased by 1.5 per cent.

Property fraud risk is the fourth category, and it occurs when information about the property or its value is purposefully falsified. From the second quarter of 2020, this risk has decreased by 5.4 per cent.

Nevada was the state with the highest fraud rate, with a 45 per cent annual increase to a score of 225. The top five are New York, Hawaii, Florida, and California.

The corporation believes it is critical to managing future risks, and it sees two areas of concern: remote worker trends and housing policies that are cheap. Over the last year, worker migration has increased significantly. People purchased new primary residences in states where they had never lived before, typically at a lower cost than their previous residence. This type of purchase accounts for about 2% of all purchases, up from 1% in early 2020. There have been more in-state migration, with homeowners moving to suburban or rural areas inside a state.

PREVENTION OF FRAUD
Mortgage fraud is defined as a material misstatement, misrepresentation, or omission in connection with a mortgage loan that is then relied upon by a lender. Mortgage fraud is a criminal offence investigated and prosecuted by law enforcement. Civil and criminal penalties for mortgage fraud at the state and federal levels can be severe, including convictions and prison time, restitution payments, state fines, and probation.

The Federal Housing Finance Agency is committed to detecting and preventing mortgage fraud in the secondary mortgage market. To that end, it has promulgated a fraud rule requiring Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (regulated entities) to establish and maintain fraud detection and reporting programs and report suspicious activity, including fraud, to regulatory and law enforcement authorities.

The Federal Housing Finance Agency (FHFA) participates in working groups with other regulatory and law enforcement authorities to promote open communication and collaboration to prevent and prosecute mortgage and other financial instrument fraud.

Mortgage fraud schemes are perpetrated in connection with home loan origination and throughout the life of a mortgage, and potential homebuyers, homeowners, distressed homeowners, and individuals employed in the mortgage industry, in particular, should be aware of them. Education is key to identifying, detecting and preventing mortgage fraud, and the information below can assist mortgage market participants in recognizing common mortgage fraud schemes.

The following are examples of borrowers and mortgage industry experts defrauding each other:

• Falsifying information about one’s job status, salary level, or employer;
• Misrepresenting the source of funds for a borrower’s down payment;
• Falsifying a borrower’s credit score and outstanding debts and liabilities;
• A borrower’s intent to occupy the property is misrepresented.
• Providing false information about the identity of a borrower;
• Using false appraisal statistics to misrepresent the genuine value of a property;
• Multiple loans on a single property based on fraudulent information;
• Falsifying property information to get or alter a loan; and

To avoid foreclosure or influence a short-sale decision, people lie about their income, difficulty, or other relevant information.

While legitimate assistance programs are available to borrowers, there are many schemes to defraud borrowers experiencing financial hardship. Borrowers should carefully review mortgage or foreclosure relief, loan modification, or debt elimination offers, especially those that require up-front payments.