When the real estate market goes low, mortgage fraud goes high!
Nationally, property fraud risk — misrepresentations made about property or its value — has surged 23% in 2022 from the year prior. Additionally, as of September 2022, California is ranked seventh for the highest mortgage application fraud risk nationwide, according to CoreLogic.
Property fraud risk is rising mainly due to the falling share of refinances — which are less susceptible to fraud risk — dropping into the basement with 2022’s interest rate hike making refinancing ill-advisable.
Mortgage applications for multi-family residences are four times more likely to be fraudulent than single-family residence (SFRs) applications. In fact, the California metros with the highest application fraud have increased from the prior quarter with:
- San Francisco-Oakland-Berkeley up 15%;
- Stockton up 8%;
- San Jose-Sunnyvale-Santa Clara up 6%; and
- Los Angeles-Long Beach-Anaheim up 2%, according to CoreLogic.
As cascading home prices continue in the months ahead, mortgage loan originators (MLOs) and mortgage loan brokers (MLBs) need to be especially cautious about property fraud. During a declining market, mortgage defaults and foreclosures are more likely to occur as recently originated mortgages fall underwater. Therefore, ensuring the property is represented correctly on paper is more important now than ever.
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Protect yourself and your client
With the increase of fraud, there is a higher risk for you and your client to reap unnecessary consequences, both financially and judicially.
Besides property fraud, four additional fraud types have increased over the past year, including:
- income fraud, when the homebuyer lies about their income, which increased 27%;
- identity fraud, when the homebuyer uses a stolen or altered identity to gain a mortgage, which increased 5%;
- transaction fraud, when there are undisclosed agreements between the homebuyer and seller or when down payments are misrepresented, which increased 2%; and
- occupancy fraud, when the homebuyer lies about their intent to occupy the property, which increased 1%, according to CoreLogic.
Though California has dropped two spots from being ranked fifth for overall highest mortgage risk in 2021, the escalation of all fraud types is a clear indicator of homebuyers still applying for mortgages under false pretenses.
To avoid clients committing fraud — even accidentally — it’s important for real estate agents to advise their clients to read all mortgage documents thoroughly and respond truthfully, even when it means a higher interest rate or worse terms.
Further, when MLOs suspect mortgage fraud, they are to file a suspicious activity report (SAR) with the U.S. Treasury Department.
When MLOs or lenders knowingly turn a blind eye to suspicious mortgage applications, they are at risk of:
- fines;
- loss of license or endorsement; and
- jail time for involvement in large-scale operations.
The 2023 recession is upon us and there are likely to be several downfalls and mistakes made as real estate professionals adjust to the first declining market in over a decade — don’t let mortgage fraud be one of them.
Report suspicious activity, take steps to ensure your clients are not committing fraud, and while you’re at it, subscribe to our newsletter, Quilix, to keep up with the real estate market!
