In a recent blogpost, CoreLogic stated it estimated that one in 131 mortgage applications had indications of fraud in the second quarter of 2022. It further noted that HELOC loans seem to be an increasing concern for fraud.
It noted there are six subtypes under the mortgage fraud umbrella: income fraud, property fraud, identity fraud, transaction fraud, occupancy fraud and undisclosed real estate debt. CoreLogic said of those six categories, only undisclosed real estate debt declined year-over-year according to its Q2 2022 data. Other areas increased dramatically and correlated with the reduction of refinance applications and an 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 percent.”
The post noted that when the Federal Reserve began raising interest rates at the beginning of the year, the mortgage refinancing activity that defined 2021 declined by 69 percent. 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 post noted that this has resulted in a perfect storm that leaves certain populations vulnerable to scammers looking to access cash present in homes that have seen an unprecedented boost in equity in the past several years.
Additionally, the post noted that last year CoreLogic data alerted lenders to an increased risk of fraud associated with two- and four-unit properties. It stated that 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.”
It stated that 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. CoreLogic further noted that despite heightened scrutiny of schemes like straw buyers or fraud for housing, incidents of fraud continue to trouble lenders.
The post stated, “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 percent, 22.1 percent, 12.9 percent and 16.4 percent, 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.”