By Aaron Nawrocki, Capital M Lending
As interest rates rise slightly and price growth slows, we see the typical increase in all types of mortgage fraud. According to CoreLogic, aggregate fraud risk has risen each of the last six quarters. Outright forgery is still the most popular type of loan fraud. Occupancy fraud is next, followed by Identity theft.
Mortgage fraud typically rises in tandem with interest rates. Higher interest rates reduce the number of refinance transactions; they have a lower incidence of fraud. Purchase transactions are more likely to be fraudulent, buyers have an incentive to “push the envelope” as there’s more at stake. Higher interest rates and rising values also make qualification more difficult. Rising values bring in speculators hoping to buy and sell quickly for a profit.
This was especially true in the “boom” years of 2004-2006, when buyers wanted to buy as many properties as possible, for the largest profit. To buy more homes with less down payment, these buyers were guilty of occupancy-related mortgage fraud, using owner-occupied loans even though they had no intention of ever occupying them. These small down payment loans had higher monthly mortgage payments. When the market turned, the buyers were unable to make the payments and these speculative purchases were a high percentage of total foreclosures. Although these loans created enormous losses, there was very little enforcement. Often, it was challenging for lenders to access the data that would document the occupancy fraud and they frequently did not want to expose inadequate quality control policies that should have caught the fraud at application.
It will be interesting to see what enforcement looks like this time, when the market turns and defaults rise. Mortgage lenders, the FBI and the CFPB now have access to so much more data to document false applications. This has made identity theft and outright forgery much more difficult for fraudsters to execute. Lenders have sophisticated cross-referencing software that creates red flags when there are mismatches in identification data. However, because occupancy fraud is only committed after closing, it’s been more challenging for banks to track.
It’s now easy for banks to track and see if purchased home is occupied, referencing DMV records for change of address, utility bills, public record information for owner’s address, etc. If there are allegations of fraud or tax evasion, the IRS can share information about rental activity on Schedule E of the tax returns. This may create a different dynamic than in 2009, as a fraudulent application allows the lender to call the note due and begin foreclosure proceedings immediately, without having to follow the typical waiting periods.
Of course, when prices are rising and payments are being made, fraud is often concealed. When the market eventually turns and defaults rise, we’ll see whether lenders use anti-fraud tools to mitigate losses and collect more quickly. As Warren Buffett said, Only when the tide goes out do you discover who’s been swimming naked…
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.
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Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.