CoreLogic: Mortgage fraud risk continues to decline

Lenders must strike balance between future regulations, risks

While the risk of fraud on mortgage applications has declined since last year, the volume of applications is rising quarterly — increasing the total amount of fraudulent mortgage activity nationwide.

Nonetheless, fraud risk on mortgage applications declined 5.6% year-over-year in the second quarter of 2013, according to a new mortgage fraud report by research and analytics firm CoreLogic.

Additionally, fraudulent residential mortgage applications totaled an estimated $5.3 billion nationally in the second quarter, up slightly from $5.2 billion in the first quarter, but down from $5.5 billion a year earlier.

An estimated 19,700 applications, or 0.8% of 2.4 million mortgage applications in the second quarter, contained high risk levels, slightly down from 20,900 applications a year earlier.

Since the beginning of 2012 mortgage application fraud risk has totaled more than $30 billion nationally, pointed out CoreLogic chief economist Mark Fleming.

"As the housing market and economy have healed over the 18 months, a transition way from property-related to identity-related application fraud has occurred," Fleming stated.

He added, "Rising prices and a healing housing market make property-related mortgage application fraud less likely, but a higher level of scrutiny on an applicant’s ability to pay increase the propensity to attempt income-related fraud."

Property application fraud decreased by 7.1% quarter-over-quarter, and is also down 20.8% from last year.

Meanwhile, the total amount of fraudulent mortgage loan applications increased in 27 states in the second quarter of 2013 compared to last quarter, but is down 5.6% nationally on a year-over-year basis, according to CoreLogic.

The five states with the highest year-over-year growth in application fraud risk include Ohio, Hawaii and Kentucky, up 30.1%, 19.6% and 16.6%, respectively.

On the other hand, the five states with the largest year-over-year declines in application fraud risk include D.C., Nevada and Idaho, dropping 29% 23.1% and 22.3%, respectively.

During the second quarter, states with the highest risk of mortgage applications with fraudulent information included California, New York and Florida, CoreLogic noted.

"In dollar terms, fraud risk in mortgage applications is rising fastest in states like Ohio and Rhode Island," pointed out CoreLogic senior fraud and risk strategist Ed Gerding.

He continued, "Of the two, only Ohio had a large positive year-over-year increase in the application fraud index, so rising risk in dollar terms in Rhode Island is more attributable to the combination of increasing application volumes and appreciating house prices."

The goal of providing a break down of state fraud activity is to provide lenders insight into where the risk is happening and what factors are driving such a reduction or hike in activity.

"It will arm the lending community to take a microscope on those areas to find out why that’s occurring in those states," Gerding explained.

Among the top metropolitan areas by population, the top five cities accounted for 50% of all fraudulent loan applications filed in the second quarter.

The five metros with the highest estimated totals for fraudulent mortgage applications was led by New York-Northern New Jersey and the Long Island, NY-NJ-Pa., area.

"This significant concentration of fraudulent risk dollars is being driven by an increase in application activity and appreciation in values in many major markets across the country," Gerding stated.

Going forward, banking institutions and lenders are focused on the regulatory compliance changes and challenges beginning at the start of 2014.

The obstacle ahead will be striking the proper balance of keeping compliance issues in line while maintaining a decline in fraud risk activity.

"The goal is to sustain the gains while we prepare for the compliance challenges we have in 2014," Gerding said.

He concluded, "I would advise the industry to be weary that we apply the appropriate due diligence and fraud strategies going forward."