At the end of 2016, the CoreLogic National Mortgage Application Fraud Risk Index matched its previous high level of 122. CoreLogic has been gauging fraud risk on this Index since Q3 2010, with a starting benchmark of 100. We anticipate the Q1 2017 Index, due out April 20, will record the highest level to date, likely breaking through the 130 mark.
As we’ve noted in the past, the shifting mix of purchase versus refinance loans is a main reason for increased risk. That’s because fraud tends to thrive in a purchase environment. To better understand the drivers behind the changing Index, we analyzed the top 25% riskiest purchase loan applications over the last year. Some growing trends we found with these applications were:
- Applicant income is high relative to neighborhood.
- Debt-to-income ratios are in the higher range.
- Applicants had a foreclosure in the past seven years.
In addition to what our Index is measuring, members of our Fraud Consortium noted an increased risk in mortgage applications. The most often cited: false disputes of derogatory credit, falsified assets, large increases in income, and reverse occupancy misrepresentation.
Prospective home buyers with a foreclosure may attempt to have it removed from their credit reports. Consumers have the right to dispute inaccurate information on credit reports. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information, usually within 30 days. However, disreputable credit repair providers or industry insiders exploit this protection. They advise future loan applicants to dispute accurate foreclosures, hoping creditors are unable to respond in time.
Asset verification demonstrates available funds for down payments, closing costs, and reserves. It also shows the ability to manage finances. “Doctored docs” are easy to create using readily-available software programs. Temporarily adding a borrower to someone else’s asset account, or creating a fictitious “gift” are also common. A falsified down payment source may be an indicator that the sales price is inflated to increase the loan amount. It may also signal a straw buyer situation.
Recent Income Increase
The improving economy and employment picture could provide “cover” for borrowers trying to show stronger earnings. Lenders verify current income and may validate directly with the IRS for past tax returns. When a borrower has a new job with a much higher income, IRS data is too aged to validate the increase. Small employers, family-owned companies, and shell companies may be used to corroborate an inflated income.
A reverse occupancy scheme is one where the borrower falsely states they intend to generate income by renting out the property they are buying. Instead, the borrower uses it as their home. The future rents needed to qualify never materialize.
While some of these scams are new, many of them are the same ones that have worked in the past. The question then becomes: have today’s underwriters and fraud specialists seen them before? In many cases, the answer is yes, but not always. There has been significant turnover since the mortgage crisis. Cautious lending policies of the past several years have kept mortgage application fraud risk under control, and lessened the focus on fraud risk. There are also a growing number of new entrants, particularly FinTech companies that weren’t around 10 years ago. Many of these companies have focused more on the customer experience and the strength of big data and analytics vs. on fraud prevention per se.
As we enter 2017 expecting a riskier environment for mortgage fraud, might newer lenders be adversely selected? Perhaps. Interestingly, some of the innovations that FinTech has pioneered, like getting financial statements directly from institutions rather than hassling the customer for them, have the potential to reduce the risk of fraud.
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