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As they pivot from refinancing existing homeowners to serving homebuyers, mortgage lenders face heightened risk from fraudulent schemes that pump up a homebuyer’s income and assets or misrepresent the value of the property being sold.

That’s according to the latest Mortgage Fraud Report released Monday by analytics firm CoreLogic, which found the risk of income fraud was up 27.3 percent during the second quarter when compared to a year ago.

Purchase loans are more susceptible to fraud and now account for more mortgage transactions than refinances, the report noted. When homeowners refinance, there’s no transfer of ownership, no sales commissions paid to real estate agents, and most of the proceeds go to a lender. In purchase transactions, borrowers may not have a strong financial history, and there are more parties involved — including real estate agents and a seller who’s receiving the loan proceeds.

“Most industry experts and risk managers state that income fraud is their number one concern right now,” the CoreLogic report said. “Fannie Mae reports income and employment fraud as more than half of their Investigative Findings in the last year.”

Tactics employed in fraud schemes range “from low-tech doctored paystubs and W-2s to schemes involving outside parties that pose as employers, working with insiders such as loan officers or mortgage brokers,” the report said. “The most diligent falsifications cross-reference and season the fake information with bank statements that show the deposits over several months.”

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All told, CoreLogic estimated that 1 in 131 mortgage applications filed during the second quarter contained fraud. At 0.76 percent of all applications, the share of fraudulent applications was down from 0.83 percent a year ago, when CoreLogic estimated that 1 in 120 applications showed evidence of fraud.

However, the second quarter decline was partly due to a recalibration of CoreLogic’s scoring model in the first quarter of 2022, the company said. Since the update, “higher risks were recorded during months in the second quarter, particularly for certain types of mortgage fraud.”

FHA purchase mortgages had the greatest increase in risk, with fraud suspected in 1 in 96 transactions, up from 1 in 172 a year ago.

Multi-unit properties showed the highest risk overall, with an estimated 1 in 34 transactions involving two- to four-unit properties flagged as having indications of fraud.

Last year CoreLogic ranked purchase loans as 87 percent riskier than refinances. It now estimates that purchase loans are only 37 percent riskier than refinancing, because more borrowers are taking cash out when refinancing, increasing the risk of fraud.

Mortgage fraud risk heat map for 100 largest metro areas

Source: CoreLogic, September 2022 Mortgage Fraud Report.

The top five states with the highest mortgage application fraud risk were New York, Florida, Rhode Island, Nevada and Connecticut.

Rhode Island’s mortgage fraud risk index climbed 60 percent from a year ago, due to the popularity of FHA and VA purchase loans.

At the metro level, the top 10 Core Based Statistical Areas (CBSAs) with the highest mortgage application fraud risk were:

  1. Miami-Fort Lauderdale-Pompano Beach, Florida
  2. Poughkeepsie-Newburgh-Middletown, New York
  3. New York-Newark-Jersey City, New York-New Jersey-Pennsylvania
  4. Stockton, California
  5. New Orleans-Metairie, Louisiana
  6. McAllen-Edinburg-Mission, Texas
  7. New Haven-Milford, Connecticut
  8. Las Vegas-Henderson-Paradise, Nevada
  9. Los Angeles-Long Beach-Anaheim, California
  10. Bridgeport-Stamford-Norwalk, Connecticut

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Email Matt Carter

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