When homeowners suspect they might be victims of mortgage fraud, legal resources could be available to help.
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After steadily increasing since late 2016, mortgage fraud risk plummeted by the end of the second quarter of 2019 thanks to lower interest rates that ushered in an influx of low-risk refinance transactions, according to a new report by data and analytics provider CoreLogic. The market also benefited from homes being bought by iBuyers.
The report shows an 11.4% year-over-year decrease in fraud risk at the end of the second quarter, as measured by the CoreLogic Mortgage Application Fraud Risk Index, which is the first decrease since the third quarter of 2016.
The analysis found that during the second quarter of 2019, an estimated one in 123 mortgage applications, or 0.81% of all applications, contained indications of fraud, compared with the reported one in 109, or 0.91% in the second quarter of 2018.
CoreLogic notes that iBuyers, companies that use technology to instantly make an offer on a home, are a contributing factor in the overall decline of fraud risk. Part of the reason iBuyer transactions have lower fraud risk is because there is a high level of transparency and standardization, according to CoreLogic. Unlike with most house flipping, iBuyer price markups are modest, usually less than 10%.
In the last two years, a growing portion of properties being bought and quickly resold at a higher price are due to iBuyer activity. An iBuyer offers an instant cash sale for qualified homes and flexibility for the seller while avoiding open houses and contingencies in purchase agreements.
Bridget Berg, principal of Fraud Solutions Strategy for CoreLogic, said the decrease in fraud risk appears temporary based on unexpected interest rate drops and the resulting influx of low-risk refinance transactions.
“While CoreLogic’s mortgage fraud risk index dropped, this is primarily due to the increased volume of lower-risk rate/term refinance activity, not necessarily fewer applications with fraud,” she said.
Berg warned that as lenders deal with added workload, they should boost fraud prevention efforts and ensure they are not distracted by the volume. She said false employment, occupancy misrepresentation and undisclosed real estate activity are the top concerns of most fraud risk managers.
Mortgage fraud red flags are inconsistencies in the information presented in an application or a loan file that would cause someone to take a second look or identify misrepresentations.
Fannie Mae’s mortgage fraud prevention program has identified several entities listed on loan applications as places of employment that appear to be fictitious and fictitious employers being used on loan applications.
Some fake employers may appear legitimate and have valid phone numbers, addresses and websites, according to Fannie Mae. Others may not even have a viable address. False diplomas and college transcripts are often used to supplement the short tenure for younger borrowers. The most consistent red flag is that the time with the current employer is typically less than one year This short tenure avoids fraudulent income detection through IRS tax transcripts.
Cyber crooks have heavily targeted the real estate sector in recent years, according to the Federal Bureau of Investigation. Victims participating at all levels of a real estate transaction, including title companies, law firms, real estate agents, buyers and sellers, have reported mortgage fraud.
Victims most often report spoofed emails being sent or received on behalf of one of the real estate transaction participants with instructions directing the recipient to change the payment type and payment location to a fraudulent account.
The funds are usually directed to a fraudulent domestic account that quickly disperse through cash or check withdrawals. The funds might also be transferred to a secondary fraudulent domestic or international account. Funds sent to domestic accounts are often depleted rapidly making recovery difficult, the FBI reports.
In 2018, 11,300 victims reported real estate or rental fraud, resulting in losses of more than $149 million, according to data from the FBI’s Internet Crime Complaint Center.
New York, New Jersey and Florida remain the top three states for mortgage application fraud risk. For the first time since 2017, New Jersey outpaced Florida and moved into the second highest position. Eight of the top 10 riskiest states showed stable or decreasing risk over the past year.
States with the greatest year-over-year risk growth include Idaho, Alabama, Mississippi, New York and Delaware. States with the largest decreases include Kansas, Missouri, Massachusetts, Illinois and New Mexico.