Fraud risk for mortgages declined 7.5% in the second quarter for this year compared to 12 months ago, but income and property fraud incidents are likely to rise, CoreLogic forecasts.
In the second quarter of 2022, about 1 in 131 mortgage applications contained fraud while 1 in 120 applications were fraudulent in the same period last year. The decline is partially due to a different scoring model in the first quarter of 2022 but higher risks were recorded for income and property frauds, according to a mortgage fraud report published by CoreLogic.
Risks of income fraud rose 27.3% and property fraud climbed 22.6%, posting the largest year over year increase in the second quarter of 2022.
The trend is not surprising, considering that purchase loans, which account for more mortgage transactions than refinances these days, are more susceptible to fraudulent activity, the report said.
“Income fraud risk remains a top concern for lenders, but there is a rising focus on property value risk as home prices slow their growth and homes are taking longer to sell,” said Bridget Berg, principal at industry & fraud solutions at CoreLogic. “Our most predictive flags for both income and property frauds increased more than 20% in the last year more than 20%.”
According to the report, income fraud can come from a variety of areas such as doctored paystubs or W-2s to longer term falsification schemes involving using false information with “seasoned” bank account information. Nationally, five of the six mortgage fraud types, except undisclosed real estate debt, showed increased risks since the second quarter of 2021.
According to a Q2 analysis by FundingShield, there was a 40.69% increase in wire-related issues compared to Q1 2022. Among today’s lower volumes, the need to keep costs down while still managing risks has never been greater.
Presented by: FundingShield
The Department of Justice’s press releases show the extent of mortgage fraud problems and its national reach.
Former executives of mortgage lender Vanguard Funding were each sentenced to prison to more than 18 months for pocketing millions more than $8.9 million of warehouse loans from lenders by claiming that the loan proceeds would fund home mortgages and refis. According to federal authorities, the three executives used the funds to pay personal expenses and compensation to pay off loans they obtained through false loan applications.
In a separate incident, a real estate investor was convicted for inflating a debt amount of $915,000 in a $1.3 million refinance mortgage loan secured by a former city official in San Francisco. A federal jury convicted the investor of making false statements and bank fraud, which could put the investor in 30 years of maximum imprisonment and a $2 million fine for the two counts the jury convicted.
Another indicator of mortgage fraud are Suspicious Activity Reports (SARs) that financial institutions must file with federal regulators to comply with the Bank Secrecy Act when they suspect criminal activity might be occurring. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) tracks those filings and publishes the aggregate findings on its website.
A tally of FinCEN’s SARs data collected between 2014 and 2021 shows that total filings have generally trended upward since 2014 across depository institutions (banks); finance companies, which includes nonbank mortgage lenders; and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
In the specific area of mortgage fraud, however, SARs filings have trended downward at depository institutions, from a high of 35,528 filings in 2014 to 8,805 filings in 2021. The decrease in filings coincides with the rise of nonbanks as a major source of originations in the country.