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Despite Stable Mortgage Application Fraud Levels, HELOC Fraud Risk Appears To Be Rising

Equity Unlocks Latest Trend in Mortgage Application Fraud

Xiaolin Tan    |    Mortgage Performance

By and large, across the twelve loan segments the CoreLogic Mortgage Application Fraud Index monitors, the sources and frequency of mortgage fraud have transitioned post-crisis to their current state of continued recovery. An exception is HELOC (Home Equity Line of Credit) fraud risk which has been on the rise in parallel with the growth in home equity lending levels over the past eighteen months. This trend is in spite of the recent decline in the total number of mortgage loan applications.
When interest rates troughed and then began to rise in late 2012 and early 2013, many of the best-qualified borrowers exited the refinance market. At the same time, increasing home values gave rise to higher levels of home equity, enabling many homeowners who had been locked out of the market to purchase a different property, refinance, or obtain a home equity loan or HELOC. While this dynamic has been a positive one for many households, the increase in HELOC activity has brought with it a higher level of fraud.

One example of a type of HELOC fraud is multi-lien fraud, which is an extremely profitable scam that takes advantage of the lag between closing and recording a loan to solicit multiple loans on a single property. As property values have risen and home equity loan volume has increased, more HELOC closing schemes have come to light in recent months. According to findings from the CoreLogic Multi-Closing Alert Program (MCAP), designed to detect multi-lien fraud schemes, lenders participating in the program were able to identify and save $25 million in potential losses in 2014 alone.

Multi-Closing Alert Program Yearly Save Totals

Multi-Closing Alert Program Yearly Save Totals

Contrary to the increase in HELOC fraud cases, the incidence of other types of mortgage application fraud, as measured by the CoreLogic Mortgage Application Fraud Index, has remained relatively stable. This performance is somewhat varied across loan segments though. For example, since 2010, the fraud risk for both purchase and refinance mortgages with LTVs between 80-100 percent (mostly FHA-insured mortgages) showed a consistent increase, while the fraud risk of several other large segments was flat or even decreased. Overall, the CoreLogic Mortgage Application Fraud Index has remained relatively stable since CoreLogic started tracking mortgage fraud trends in 2010.

It’s important to keep in mind that in housing, there is no national trend, as housing markets are highly local. As such, we find that application fraud varies significantly across different local markets. At the state level, Florida ranked the highest in mortgage application fraud risk in the third quarter of 2014. The other top four states in terms of mortgage application fraud risk were: Nevada, New York, New Jersey and Hawaii. During the third quarter of 2014, mortgage application fraud risk reached its highest level since 2010 in Delaware and New York. All state-level fraud risk indices in the third quarter of 2014 are shown in the U.S. Mortgage Fraud Risk Heat Map.

U.S. Mortgage Fraud Risk Heat Map

U.S. Mortgage Fraud Risk Heat Map

At a more granular level, of the largest 25 Core Based Statistical Areas (CBSAs) based on population, Miami-Fort Lauderdale-West Palm Beach, Fla. had the highest mortgage fraud risk as of the third quarter of 2014, followed by Tampa-St. Petersburg-Clearwater, Fla., New York-Newark-Jersey City, N.Y.-N.J.-Pa., Chicago-Naperville-Elgin, Ill.-Ind.-Wis. and Atlanta-Sandy Springs-Roswell, Ga.

It is critical for mortgage originators and servicers to understand where the mortgage fraud risk “hot spots” are at any given time and to leverage this information in their risk management. Mortgage fraud schemes continue to change from one type to another and move across geographies, making it imperative for participants in the real estate industry to monitor the dynamics of fraud and rely on the most up-to-date information.

The report analyzes the collective level of loan-application fraud risk the mortgage industry is experiencing as measured quarterly by the CoreLogic Mortgage Application Fraud Risk Index, which is based on residential mortgage loan applications processed by CoreLogic LoanSafe Fraud Manager™.

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