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HELOC Segment Fraud Risk Peaked in 2014 But Remains High

Latest National Mortgage Application Fraud Trend

Xiaolin Tan    |    Mortgage Performance

Home prices across most of the nation have risen briskly, up about 6 percent in the national CoreLogic Home Price Index (HPI) through the year ending December 2015[1]. In the most recent CoreLogic report on home equity data revealed that the equity of all homeowners with a mortgage in the U.S. grew by $741 billion over the year through Q3 2015[2]. Many homeowners may want to tap into this accumulated home equity in order to make home improvements or for other purposes.  Yet, since most homeowners have taken out a mortgage at a very low interest rate over the past few years, it is unlikely that they will choose to apply for a cash-out refinance, especially if mortgage rates rise soon.  Home-equity lines of credit (HELOCs) may be a cost-effective way for homeowners to tap into their equity, and the volume of new HELOCs has risen over the past year. But are the new HELOCs being underwritten prudently?

Natl Mortgage Application Fraud Index

Natl Mortgage Application Fraud Index

CoreLogic research shows that fraud risk in the HELOC segment increased from early 2013 through early 2014, and then stayed elevated but stable risk from early 2014 through early 2015 (Figure 1, red line). The increase was in parallel with the growth in home equity levels2 (Figure 1, blue line) until recently. Since the HELOC fraud risk index peaked in Q2 2014, it has been declining in the past three quarters of 2015. Despite the decline, HELOC fraud risk remains at a relatively high level compared to 2013 and is still at a level that requires scrutiny.

Including the HELOC segment, the CoreLogic Mortgage Application Fraud Index tracks changes of fraud risk in multiple loan segments[3], and the national trend is a weighted aggregation from those segments. Although the national trend has been upward in recent quarters (Fig. 2 blue line), the index varied across loan segments, with the purchase market gaining more attention right now.  For example, since 2010, the fraud risk for purchase mortgages with high LTV –mostly FHA-insured mortgages – (Figure 2, red line) showed a consistent increase while the fraud risk of several other large segments was flat or even decreased, including the conforming residence purchase segment with LTV less than 80 percent.

Examining each state and the District of Columbia, we observe that application fraud varies significantly by local market.  At the state level, Florida still ranked the highest for mortgage application fraud risk in Q4 2015. The other areas in the top five in terms of mortgage application fraud risk were New York, New Jersey, Nevada and Washington D.C.

U.S. mortgage fraud risk heat map

U.S. mortgage fraud risk heat map

At a more granular level, of the 75 most populated Core Based Statistical Areas (CBSAs), the top five CBSAs that had the highest mortgage fraud risk as of the fourth quarter of 2015 were:

  • Miami-Fort Lauderdale-West Palm Beach, Fla.
  • Tampa-St. Petersburg-Clearwater, Fla.
  • New York-Newark-Jersey City, N.Y.-N.J.-Pa.
  • Orlando-Kissimmee-Sanford, Fla.
  • North Port-Sarasota-Bradenton, Fla.

It is very important for the real estate industry to monitor the dynamics of fraud risk in these “hot spots” areas and stay up-to-date with latest trends.   

© 2016 CoreLogic, Inc. All rights reserved.

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™.

1Full report on Corelogic HPI can be found here.

2Home equity is calculated based on all the homeowners with a mortgage. Full report can be found here.

3Mortgage Application Fraud index and report can be found here.