Peter Gallagher, Princeton Mortgage Wholesale
The risk of Mortgage fraud has increased more than 12 percent this year, and that was just at the end of Q2. We still must get the reports from Q3, and we have 3 months left this year that can still influence that trend. Home values are high, the housing industry is competitive, and that’s leading some borrowers to lie and cheat to get into the market.
In the big picture, home purchases are more likely to have issues with fraud than refinancing. We know that refinance activity has slowed since the interest rate increases, therefore purchases have taken up most of the market. The largest area of fraud risk comes from income reporting. Since the housing crash in 2008, lenders have placed extra scrutiny and limits on the amount of debt a borrower can have compared to their income.
So how are borrowers juicing their incomes to quality? The internet is making it much easier. There are companies that can be found with a quick google search that will provide services such as generating fake pay stubs, income statements, and even answer phone calls to confirm income verbally. Crazy. This becomes a huge issue for Fannie Mae and Freddie Mac who either own or securitize most new mortgages.
Another issue lenders are increasingly facing occupancy fraud. Borrowers will go through the application and claim the subject property is a primary residence, rather than an investment property. Pricing for primary residences is generally more favorable than that of investment properties, and occupancy fraud is on the rise due to the surge of interest in rental properties and house flipping.
If investors of these loans catch these mistakes, lenders could be forced to buy back a bad loan. Buy backs can destroy credibility and relationships between investors and lenders. They are avoided at all costs to keep reputations clean and finances in line.
So how do we prevent fraud from occurring? The good news is this issue is nowhere near as severe as it was about 10 years ago. The subprime loan market is much smaller than it was, so risks should be more manageable. I don’t think the borrowers are going to change- people who will commit mortgage fraud have already made up their mind. They are taking their time to find shortcuts and a way around the regulations. Brokers, lenders, and loan originators need to be on high alert. Review the documents you receive with a fine-tooth comb. Those committing fraud are getting as crafty as ever, leaving us to pay the price with our reputation and our wallets. Double check each application, and when you’re verifying income, speak to the correct people!
Until next week,
Peter
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.