While mortgage fraud decreased in Q2 2022, home equity loans present a loophole for exploitation
CoreLogic estimates that one in 131 mortgage applications had indications of fraud in the second quarter of 2022, and HELOC loans seem to be an increasing concern.
Despite the obvious legal fact that fraud is wrong, there are a notable number of people in the United States who participate in fraudulent schemes, since fraud can appear to be a victimless crime and is rarely punished. However, institutions making loans on false information risk higher default levels, unsalable loans or repurchase risk for the life of the loan. While mortgage fraud is nowhere near the levels it reached prior to the financial crisis 15 years ago, detecting its presence remains a top concern for lenders.
Not all Schemes Are Created Equal
The term “mortgage fraud” is a broad umbrella, which CoreLogic categorizes into six subtypes to study fraud risk:
- Income Fraud
- Property Fraud
- Identity Fraud
- Transaction Fraud
- Occupancy Fraud
- Undisclosed Real Estate Debt
Out of these six categories, only one – undisclosed real estate debt – declined year-over-year per Corelogic’s Q2 2022 data. Other areas of fraud risk, including income fraud and property fraud risk, increased dramatically, reversing the trend of prior years. This reversal correlates with the reduction of refinance applications and the increase of purchase loan applications.
“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. “CoreLogic data backs up those concerns, as our most predictive flags for both income and property frauds increased in the last year more than 20%.”
HELOC Loans Are at Risk for Fraud
When the Federal Reserve began raising interest rates at the beginning of the year, the mortgage refinancing activity that defined 2021 declined by 69%. Simultaneously, the overall volume of loans shrank dramatically in the 12 months ending in June 2022.
This notable shift in loan-processing volume coincided with the reality that it is harder for new buyers to qualify for mortgages now that interest rates have quickly increased. However, the stringent regulations that banks typically apply to buyers seeking to take out a traditional first mortgage do not typically apply to those taking out Home Equity Lines of Credit (HELOCs), a second-loan type that allows owners to borrow against their home value to access cash.
“Home equity loans don’t have the same strong process that traditional first mortgages do,” explained Berg. “These loans do not require title insurance, have less arduous underwriting processes and do not always require the applicant to be physically present at a closing table to gain access to cash. The result is that those looking to defraud banks can apply for multiple HELOC loans simultaneously while escaping detection.”
The result is a perfect storm that leaves certain populations, like the elderly who own their homes outright, vulnerable to scammers looking to access cash present in homes that have seen an unprecedented boost in equity over the past several years.
While seasoned professionals can spot many discrepancies in loan applications, adding CoreLogic’s LoanSafe solutions provides additional information and insights to assist lenders and avoid the risks of closing a fraudulent loan. Proprietary insights drawn from a consortium of lenders and powered by CoreLogic data and analytics identify issues within loan transactions, including occupancy, property or identity risk. Another consortium-based solution, the Multi-Close Alert Program, identifies shotgunning risk, which is when a borrower takes out simultaneous HELOCs with different lenders.
Affordable Targets Are Four Times More Susceptible to Fraud
Properties come in many shapes and sizes, from single-family to multi-family. Much as homebuyers search for the perfect fit for their lifestyles, mortgage fraudsters are finding the perfect way to pull the wool over the eyes of lenders.
Last year, CoreLogic data alerted lenders to an increased risk of fraud associated with two- and four-unit properties, as the White House announced efforts to expand financing for owner-occupied multifamily properties. This year, CoreLogic data demonstrated that the risk associated with mortgages for these properties is four times higher than the risk associated with single-family homes.
“The most common risk of fraud on two- to four-unit properties is occupancy misrepresentation. Investors claim to be owner-occupants to get better financing such as larger loans, lower interest and lower fees,” Berg said. “Less common, but much more costly, are ‘fraud for profit’ schemes where a property is bought and flipped to a straw buyer at an inflated price. Since multi-family homes are more expensive and the rent can be used to help the straw buyer qualify, these are attractive targets for the scheme.”
Playing by the Rules
As mortgage transactions continue to shift from refinances toward purchase loans, the susceptibility of the home loan market to fraud will continue to be a concern.
While “fraud for profit” is an undertaking that involves professional homebuyers stealing cash and equity by swindling lenders and homeowners, “fraud for housing” is a scenario when an individual falsifies an application to obtain a loan for a home that is out of budget. When borrowers deceive other parties on a mortgage application to influence an appraiser and manipulate the value of a property, they also affect the property market at large.
Mortgage fraud can also have secondary impacts such as reductions in public school revenues, which are dependent on property taxes. One memorable example of the effects of fraud is the housing crash of the Great Recession in 2009 – a catastrophe that resulted in the creation of the Financial Fraud Enforcement Task Force by President Obama.
Despite heightened scrutiny of schemes like straw buyers or fraud for housing, incidences of fraud continue to trouble lenders.
Rising property values have been seen across the U.S. in recent years with markets like Miami, Phoenix, Los Angeles and Houston rising by 27.1%, 22.1%, 12.9% and 16.4%, respectively. Several of these metros, including Miami, Houston and Los Angeles also make the list of the top 15 CBSAs with the highest application fraud risk, according to CoreLogic’s Mortgage Fraud Report.
Recently, there have been signs of a broader slowdown in the housing market, as home price growth decelerated for the fourth consecutive month in August. However, for homes that remain attractively priced, the market is still competitive.
For both lenders and the security of the overall market, understanding and identifying fraud is crucial. CoreLogic can help make that process more efficient by providing insights on where to look, as well as connecting lenders together to help identify discrepancies before questionable loan applications even make it to the closing table.
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