The danger of mortgage fraud continues to increase in 2018.
CoreLogic’s Mortgage Application Fraud Risk Index rose 12.4% from a year earlier in the second quarter (Q2) of 2018.
This translates to an increase in the potential for mortgage fraud from 1 in 122 mortgage applications (0.82%) to 1 in 109 mortgage applications (0.92%). CoreLogic’s mortgage fraud index has increase each quarter since late-2016, currently well above any other time since the index began tracking mortgage fraud risk in 2010.
Mortgage risk is highest for jumbo mortgages with loan-to-value ratios (LTVs) lower than 80%, including both purchase and refinance mortgages.
The reason for the increase is due partly to a growing share of purchase mortgage originations, since purchasers are more likely to commit fraud than refinancers. Rising interest rates have discouraged refinancing, causing the share of purchase originations to rise from 66% in Q2 2017 to 72% of all mortgage applications in Q2 2018.
Perpetrators of mortgage fraud tend to be a mix of bona fide purchasers and wholesale lending scams.
Lenders can watch for signs of mortgage fraud, including 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 to receive a lower interest rate, when in fact they plan to rent it out or use it as a secondary residence;
- report certain facts about the property which are untrue;
- fail to disclose real estate debt or past foreclosures; and
- disguise aspects of the transaction from the lender.
Consequences for mortgage scammers
Lenders and mortgage loan originators (MLOs) who suspect mortgage fraud 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.
In some cases, lenders are complicit in mortgage fraud, as it may be easier to just originate a mortgage than to investigate suspicious information or risk losing the mortgage. Consequences for lenders or MLOs who knowingly originate a fraudulent mortgage may include fines, loss of license or endorsement or even jail time for individuals involved in large-scale operations.
Worse, the larger consequence of mortgage fraud is the harm committed on the broader housing market. Homeowners who have lied to obtain their mortgage are more likely to default down the line, as they may be unable to make payments — as is the case with income fraud — or simply less committed — as is the case with occupancy fraud. For a reminder of the last time mortgage fraud ran rampant in the housing market, recall the Millennium Boom years leading up to the 2008 recession and foreclosure crisis.
In positive news, our current housing market is not infected with the same high concentration of mortgage fraud as occurred during the Millennium Boom. Mortgage laws enacted in Dodd-Frank offer more protections. Gone are the days of “no-doc” mortgages, when homebuyers were able to purchase without verifying any of their claims to income or ability to pay.
Still, rollbacks to Dodd-Frank have experts wary of a return to reckless lending, leading to a more dangerous lending environment. Thus, much of the policing is left to lenders and other real estate professionals. Stay tuned to see how that goes.