Growing Purchase Share Driving Increased Mortgage Fraud

CoreLogic reports it saw the incidence of mortgage fraud soar 37 percent last year. The fraud risk had declined through most of 2019 and 2020 but is now back near pre-pandemic levels.

Molly Boesel, CoreLogic’s principal economist, said the increase was principally driven by the increasing numbers of purchase applications relative to those for refinancing. Purchase transactions have higher fraud risk than refinances because there are “more parties involved, more commissions, and more motives to make the deal work,” she said.

In the case of a purchase, mortgage proceeds aren’t just moving from one bank to another to lower an interest rate as is the case with most refinances. A greater share of purchase mortgages means increases in transaction fraud risk. The report said this includes situations like straw borrowers and falsified down payments.

The current rate of application fraud is estimated at about 1 in 120 loans. However, with purchase loans the fraud risk is estimated at one case in 90 applications. “It becomes a more concerning 1 in 23 if we only look at investment purchases,” Boesel said.

Transaction fraud risk, which CoreLogic measures for purchases, had the largest increase at 34 percent. The wholesale channels showed much more risk than did those for retail or correspondent lending. Property fraud risk had the largest decline, at 5 percent overall. The company said this makes sense given the strong price gains and high demand of the last year.

There was an increase of 6 percent in indicators of occupancy fraud risk. This was already one of the most common types of fraud given the higher pricing of non-primary residence loans. Then last year the Federal Housing Finance Agency (FHFA), which regulates the GSEs Fannie Mae and Freddie Mac, instituted a limit on GSE funding of loans for investment properties and second homes, making the qualifications for non-primary residences more restrictive. The funding cap was recently lifted, ant this may temper the rise in occupancy fraud in the near term. 

CoreLogic said that this year they will be monitoring how return-to-office mandates may affect lower cost areas that received a large influx of pandemic migration. We will also be watching impacts of the possible expansion of financing for owner-occupied 2- to 4-unit properties which have historically shown a higher level of risk, estimated at 1 in 50 loan applications. These loan amounts are larger and offer the ability to qualify using future income from the property.