Ever see something suspicious on a mortgage application? The possibility of mortgage fraud is rising here in California and across the U.S., and the consequences are serious.
Fraud indications in Q2 2021 were found in:
- 1-in-90 purchase applications; and
- 1-in-169 refinance applications, according to the latest CoreLogic Mortgage Fraud Report.
The share of mortgage applications with indications of fraud was up 37% from a year earlier. Here in California, it was up 39% from a year earlier.
While this is a significant increase, it’s important to note that CoreLogic’s Mortgage Fraud Index was at an all-time low a year earlier in Q2 2020. Thus, despite the jump in fraud indicators, this Q2 2021 level of mortgage fraud is just slightly higher than the average experienced over the past decade.
The categories of fraudulent information found on mortgage applications are:
- transaction fraud, which most commonly occurs when there are undisclosed agreements between buyer and seller and when down payment sources are misrepresented;
- identity fraud, when a stolen identity is used to apply for a mortgage or when the borrower’s credit history is altered;
- occupancy fraud, when the borrower seeks to get better mortgage terms and skip extra underwriting steps by lying about their intended use of the property;
- undisclosed real estate debt, when a borrower fails to disclose past foreclosures or present real estate debt;
- income fraud, when the borrower lies about their source of income, its existence or amount; and
- property fraud, when the borrower provides false information about the property.
Transactions with the highest level of fraud risk are investment purchases — specifically multi-family, including two-to-four unit properties — while U.S. Department of Veterans Affairs (VA)-guaranteed loans continue to see the lowest level of risk.
Mortgage fraud: don’t be complicit
California is the fifth-highest state for mortgage fraud risk as of Q2 2021. For reference, nationally, CoreLogic’s mortgage fraud index rose to 132 in Q2 2021, where 100 equals the average mortgage fraud level in 2010, when the index began. In California, the index was a higher 157.
Here in California, the metro areas with the highest level of mortgage fraud risk are, in order of highest risk:
- San Jose, with an index of 189;
- Los Angeles, with an index of 176;
- San Francisco, with an index of 171;
- Stockton, with an index of 151; and
- Sacramento, with an index of 142.
High levels of mortgage fraud are worrisome because when mortgage applicants skirt around the requirements, they are usually failing to meet the terms needed to ensure they avoid default down the road.
Further, mortgage fraud can also point to more sinister practices. For example, unlike money laundering, which tends to be perpetrated directly by all-cash buyers, mortgage fraud can often originate with the lender and end up targeting borrowers.
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Real estate professionals can stave off mortgage fraud against their clients by encouraging clients to read all mortgage documents thoroughly, never relying solely on verbal explanations from lenders or agents.
Conversely, lenders can watch for signs of mortgage fraud from applicants who:
- claim to have recently accepted a new, high-paying job (as this new salary is unable to be verified with past paystubs or tax documents);
- claim to occupy the property as a primary residence, when in fact they plan to rent it out or use it as a secondary residence;
- report inconsistent facts about the property;
- fail to disclose real estate debt or past foreclosures; and
- disguise aspects of the transaction from the lender or other parties.
Lenders and mortgage loan originators (MLOs) who suspect mortgage fraud are to file a suspicious activity report (SAR) with the U.S. Treasury Department.
Mortgage applicants who have SARs filed on them may be prevented from taking out a mortgage in the future. Further, mortgage holders who discover fraud may call the mortgage due, which may ultimately lead to foreclosure.
Consequences for lenders who knowingly originate a fraudulent mortgage — even by simply turning a blind eye to suspicious borrower information in favor of originating the mortgage — may include:
- fines;
- loss of license or endorsement; or
- jail time for individuals involved in large-scale operations.
The lesson here is: mortgage fraud is on the rise. When you are unsure or something doesn’t seem right when your client is taking out a mortgage or you are reviewing borrower information for a mortgage, ask questions and double-check the details. No one wants to become unwillingly embroiled in a mortgage fraud scam.
This is 2021, banks and mortgage companies should ensure that the buyer’s income is verified by what they filed with the IRS, there should be no discrepancies, they should provide W2s and any 1099s, especially self employed persons. A title search should show any liens against a property, if the seller borrowed from a relative and there was no official record, then maybe the lender is a family member or someone close to seller. Everybody is lazy, nobody wants to do due diligence. The rates are fantastic but home prices in California are just crazy. A lot of people got away with the fraud that led to the market meltdown in the mid 2000s and we do need that kind of nonsense. Some agents and mortgage Liam officers are enablers of these unlawful behaviors and should be punished if caught and gave their licenses revoked.
I believe that this statement :
“Mortgage applicants who have SARs filed on them may be prevented from taking out a mortgage in the future. Further, mortgage holders who discover fraud may call the mortgage due, which may ultimately lead to foreclosure.”
might be a reason why mortgage brokers DON’T file SARs. They don’t want to be responsible for law enforcement actions if the action is merely “suspicious.” The purpose of SAR reporting is to allow FinCEN to identify bigger patterns, not initiate enforcement on a single action.
Furthermore, the SAR filing is not a finding of fraud. Fraud has specific law enforcement remedies. SAR reporting and fraud prosecution are two different things.
Thank you so much for writing this article. We at Americans Against Foreclosures and Evictions ( AAF ) are happy to cooperate in writing an in depth article of what is really happening behind the scenes of millions of unlawful foreclosures since 2008.