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Mortgage fraud rises alongside the housing market

Higher lending standards create new areas of risk

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Mortgage application fraud subsided a bit in the second quarter, but a new area of concern popped up with more lenders worried about origination fraud as homeowners struggled to acquire homes in a tighter, more stringent origination environment.

Loan applications overall increased with home sales, as metros across the nation realized home price gains in the first half of the year, real estate analytics firm CoreLogic said in a new mortgage fraud report.

Consequently, an estimated $5.3 billion in fraudulent mortgage applications were submitted to lenders in the second quarter as applications grew. 

Yet, the mortgage application fraud risk index actually fell 5.6% in the second quarter when compared to year ago levels.

"As third- and fourth-quarter mortgage fraud loan application trends become apparent, it is quite possible that the total estimated dollar value of fraudulent applications will have decreased relative to the second quarter as a result of refinance application volumes experiencing a large drop-off," explained CoreLogic chief economist Mark Fleming.

For the past several years, Freddie Mac mortgage fraud analysts have focused on short sales and real-estate owned properties, given that housing continues to crawl back from market lows.

But now that property values and loans are improving, the enterprise is witnessing more instances of reported origination fraud, Freddie Mac director of financial instrument fraud investigation Robb Hagberg said.

"We’re moving into a purchase market and that means that the opportunity for fraud increases because it’s the nature of the environment," he said. "We are not witnessing astronomical numbers of origination fraud, but it’s a modest increase."

Housing dynamics continue to have a role in shifting what type of mortgage fraud is more common at any given time.

The increase in home prices earlier this year, combined with new demands for originators to ensure borrowers have an "ability-to-repay" the loans switched around the type of fraud that is more prevalent in today's market.

With the implementation of the Consumer Financial Protection Bureau’s ability-to-repay standards for the Qualified Mortgage rule and a focus by underwriters on ensuring the proper income is available to support mortgage payments, falsely claiming the required income to support the loan application could become a bigger problem in the future, CoreLogic said.

"Expressing it in slighter starker terms, times have changed from past periods when underwriters didn’t see income as a reason for declining the loan application in the first place," Fleming argued.

He continued, "Now underwriters do care, and they care greatly, about the borrower’s ability to pay back the loan." Because of this, that is one area where applicants are more likely to exaggerate or lie.

Of the largest 25 metropolitan markets, the highest propensity for mortgage application fraud occurred in Atlanta, Ga.; Miami, Fla.; and Riverside, Calif.

While the overall risk of fraud continues to persist, the amount of fraud continues to decline from peak levels reached in 2012.

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