Ensuring quality loans requires trusted borrower verification and real-time application monitoring
In the property industry, transactions happen quickly. While fast and efficient property transfers can be ideal, it is precisely the speed at which transactions occur that makes it critical for lenders to exercise vigilance through application monitoring to avoid the financial consequences of processing and underwriting a loan that never closes.
Ensuring that a loan application is approved and closed is a process that takes an average of 50 days, according to the 2021 Origination Insight Report by ICE Mortgage Technology. For lenders, that means that there are dozens, if not hundreds, of applications to process simultaneously, leaving the door open for oversight — or worse, fraud. To avoid the potential pitfalls of human error, qualifying a large number of buyers requires automated application monitoring assistance, especially when one in 131 mortgage applications had indications of fraud in the second quarter of 2022.
While fraud rates have declined in recent quarters, the state of the U.S. economy, coupled with the highest interest rates in decades, concerns industry experts.
“Income fraud risk remains a top concern for lenders, but there is a rising focus on property value risk as home prices slow their growth and homes are taking longer to sell,” said Bridget Berg, a principal in Fraud Solutions at CoreLogic.
Undisclosed Debt Is Preventable When Identified Early With Application Monitoring
Slower market growth means that lenders can pay more attention to the details in each individual application, which is an important consideration for borrowers since approving loans requires lenders to check dozens of boxes. While verification of income and employment is critical, another concern is a potential borrower’s outstanding debt. Accounting for debt is one box every lender should be sure to check on an application. Otherwise, a lender may find themselves buying back a loan, something no lender wants.
While undisclosed changes happen on credit reports, it is not always the case that borrowers are intentionally misleading their lenders. However, a lack of knowledge or even something as simple as a well-meaning financial gift to a loved one can put the brakes on a loan and even result in the inability to close a transaction altogether.
Buying back a loan that was derailed, whether due to fraud or oversight, can be expensive. For example, for every $1 of fraud, it costs $5.34 to recover that money, according to LexisNexis’ True Cost of Fraud for Real Estate Study. Therefore, it is in a lender’s best interest to be able to warn a borrower if there are risks that may disqualify an application. Credit reports are only the first step in this process. A more impactful step is application monitoring.
Since it can take nearly two months from loan submission to close, there is an opportunity during what is known as the “quiet period” for prospective borrowers to accrue additional debt without a lender’s knowledge that can potentially disqualify their original application. For lenders to gain insight during this period, they need access to debt-monitoring systems that detect changes to credit profiles and new credit inquiries that are not yet reported as new debt.
Quality Borrower Verifications Are Critical for Long-Term Repayment Prospects
The challenges associated with fraud do not disappear after the initial closing of a loan. Typically, “fraud for housing” is a scenario that occurs prior to closing and involves a falsified application to obtain a loan for a home that is out of a buyer’s budget. On the other hand, “fraud for profit” is an undertaking that involves disreputable homebuyers stealing cash and equity by swindling lenders and homeowners.
In both cases, lenders want to be aware of any potential discrepancies in a loan. To facilitate holistic application monitoring, CoreLogic provides simultaneous monitoring solutions with Loan Safe Fraud Manager and Loan Safe Risk Manager, which can integrate data into a single report for easy applicant monitoring.
Maintaining oversight throughout the life of the loan will only become more critical going forward. As homeownership becomes more expensive and rising interest rates make qualifying for a loan more difficult, there are indications that repayment over the life of a loan may become more challenging. In CoreLogic’s most recent Loan Performance Insights Report, data showed that delinquencies increased slightly in October, a trend that may continue should the U.S. enter a recession.
“All stages of delinquency remained low in September. Early-stage, overall and serious delinquencies were either at or below their pre-pandemic rates,” CoreLogic Principal Economist Molly Boesel said in the November Loan Performance Insights report. “However, if the U.S. enters a recession, increases in delinquency rates can be expected.”
To prepare a defense for whatever mortgage fraud trends the market has in store, lenders should design their offensive strategies using the power of technology to provide timely updates and monitoring of the full portfolio of loans that account for the bottom line of their business.
CoreLogic provides lenders with borrower credit insights through its Loan Quality Debt Monitoring software, which was recently cited by HousingWire as a seamless solution for lenders looking to monitor credit history to share with investors post-closing.