Mortgage fraud risk rises as jumbos attract more attention

Borrowers providing inaccurate income data is the greatest risk

As more homebuyers lean towards jumbo loans given their competitive rates in today's market, the mortgage-fraud risk for this particular product type is on the rise.

Data provider Interthinx made this conclusion in its latest mortgage fraud risk report. The company's risk index for jumbo loans reached 164, up substantially when compared to the mortgage fraud index score for conventional loans, which came in at a more mild 102 score.

It seems the popularity of the jumbo is driving some of the fraud concerns.

"Jumbo rates have become more competitive with conforming rates given the recent rise in interest rates, the large amount of excess liquidity for banks and the increase in guarantee fees on conforming loans," research firm Compass Point Research & Trading said in an article HousingWire previously covered in October.

But a side effect of the rise may be the potential for more fraud, especially in the employment/income fraud index, where the jumbo maintains a risk score of 146, compared to 69 for non-jumbo loans.

"With the rise in popularity of jumbo loans, lenders must be aware of both the credit risk and fraud risk those loans carry," said Ashley Woodworth, Interthinx vice president of business development and corporate strategy.

"While the most significant fraud risk gap occurred in the area of employment/income, it certainly wasn’t the only area where risk was present. Occupancy fraud risk for jumbos, for example, was extremely high — more than 200 by our index versus 150 for non-jumbo loans. The risk is out there, and lenders need to be aware," Woodworth added.

Looking at the data as a whole, the national mortgage fraud risk index came in at an index score of 108 this quarter, a 4% increase from last quarter and a 10% increase from year ago levels.

Individually, California moved up on the list of top 10 MSA’s for mortgage fraud, rising 16% to an index score of 151.  

Meanwhile, Washington D.C., entered the top two for the first time with a mortgage-fraud risk value of 146, a 14% climb from last quarter. 

Delaware and Montana made the list for the first time, claiming spots three and four, respectively. The list also includes Hawaii, Florida, Alaska, Utah, Connecticut and Nevada.

However, earlier this year, HousingWire noted that the number of suspicious activity reports from banks citing possible loan fraud in May decreased by 29% in the past year, making it the first drop in 16 years. 

But that drop could disapear as the market becomes more purchase-dominated in 2014. 

"The numbers don’t lie," said Jeff Moyer, president of Interthinx. "As we predicted last quarter, the shift toward a purchase-driven mortgage market increases the risk of fraud. Our goal in issuing this report is to make lenders aware of the fraud risk trends we’ve observed in the market so that they can remain vigilant in preventing those trends from becoming widespread issues within their own organizations."

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