Mortgage fraud rising most in low-downpayment loans

CoreLogic: Today's fraud takes "a lot of time" to uncover

Mortgage fraud is slightly on the rise right now, so it’s an area industry experts say needs a close watch. 

In an interview with HousingWire, Bridget Berg, senior director of Fraud Solutions Strategy for CoreLogic, expanded on latest Mortgage Fraud Report from the data provider. As high LTV loans start to gain popularity, Berg is keen to warn the industry and how it can best prevented fraud in this growing segment.

As it stands, the report showed a 3.9% year-over-year increase in fraud risk, as of the end of the second quarter of 2016.

CoreLogic’s Mortgage Fraud Report analyzes the collective level of loan application fraud risk the mortgage industry is experiencing each quarter.

However, even with the small increase in fraud, the report added that an estimated 12,718 mortgage applications, which is less than 1% (0.7%) of all mortgage applications, contained indications of fraud. This is compared with the reported 12,814, or 0.67% in the second quarter of 2015.

What’s most noteworthy about this report is the loan type that’s showing the greatest fraud risk increase is high-LTV purchase loans.

Fannie Mae and Freddie Mac introduced 3% down mortgages nearly two years ago, and the product has slowly made its way into both big and small lender offerings since then, with some even diving into 1% down offerings recently.

The new low down payment programs launched as a way to loosen up the credit box for first time homeowners since the credit box tightened significantly after the financial crisis.

But as the credit box loosens, the risk of mortgage fraud heightens, as seen in the report. There needs to be a balance.

If current trends of higher LTV purchases and increased credit availability continue, mortgage fraud will likely rise over the next few years, Berg said.

The current data on mortgage fraud still includes a lot of refinances, which might be dampening the overall picture, she explained, adding that she “believes the fraud risk in the higher LTV purchases is somewhat the overall fraud picture.”

While risk is relatively low right now, especially compared to the financial crisis, Berg said one key factor to keep in mind is that “fraud takes a lot time to discover.”

“A lot of the bigger fraud schemes don’t get uncovered through traditional quality control,” she explained. “It is possible they are using traditional quality control as their sole method of monitoring, so they are getting false sense of security.”

“One thing that I think is critical is that at the same time companies are expanding, they’re pulling back on some of the controls,” she said. “It’s important to have controls that are consistent over time so you can really measure fraud.”

Companies typically either catch fraud early in the applications process or right after closing.

After those two options, companies look at a sample of loans that go into early payment default, she explained.

Although, “if you are really smart schemer, you will make sure your loan doesn’t fall into this,” Berg said. And that’s what you get into major cases like Taylor, Bean & Whitaker.

Ultimately, Berg said that the best way companies can protect against fraud is layers of monitoring.  “We are watching overall characteristics,” she noted.  “Make sure you are monitoring using multiple sources to gauge your risk.”

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