The risk of mortgage fraud tends to ebb and flow based on the economy, the real estate market, interest rates and changes in technology that make it easier or harder for fraudsters to commit the fraud itself. As we move through 2021, it is apparent that all of these factors could be in play at the same time, indicating that we could very well see an increase in fraud this year.
A Perfect Storm For Fraud
The pandemic of 2020 created a perfect storm for fraud to flourish. Heightened fear and anxiety resulting from the pandemic likely made consumers more vulnerable to scams and frauds.
The ensuing economic turmoil caused an immediate and dramatic rise in unemployment, increasing some people’s willingness to engage in loan fraud.
A flood of stimulus money and generous lender forbearance programs simultaneously increased the level of fraud perpetrated while delaying lenders’ ability to recognize it.
Income, Employment and Identity Fraud Increased
As more consumers became affected by rising rates of unemployment, the need to falsify employment history and misrepresent income to qualify for loans increased.
Lender reports of falsified proof of income increased over 100% immediately following the lockdowns and Point Predictive’s fraud analysts began to identify more fake employer schemes each month. It isn’t uncommon for our analysts to discover 300 fake employers in a week, a number that is meaningful to any portfolio.
In 2020, more activity moved online, affording fraudsters greater anonymity to submit false applications. This allowed fraudsters to rapidly test fraudulent credentials and identify vulnerabilities in the origination process without wasting time in dealerships. Lenders reported higher levels of identity theft in online applications than indirect channels as fraudsters gravitated towards the anonymity and speed to commit fraud online.
Mortgage Fraud Could Increase in 2021
While the increases in fraud impacted other industries to a greater extent, the Mortgage Industry is not immune to rising fraud. The economic fallout of 2020’s pandemic brought historic unemployment levels. We expect this will lead to an increase in mortgage fraud rates in 2021. Fraud Consultants from Point Predictive expect to see more income and employment misrepresentation, higher incidences of credit washing, and an emergence of synthetic identity schemes that could make fraud detection even harder next year.
Skyrocketing property values are a concern too. As property values increase at rates that have not been matched since 2006, the risk of property fraud could grow substantially.
There are many reasons for lenders to be on the lookout for increased fraud risk in the next 12-18 months.
Where Point Predictive Focuses
Point Predictive provides solutions such as MortgagePass which help lenders streamline applications that are low risk. This allows them to focus their efforts on applications and loans that have high rates of fraud, early payment default and repurchase.
The solution helps focus lenders on various risk issues that can impact the quality and performance of the loan including:
- Occupancy fraud. The purchase of an investment or rental property that is stated to be a primary residence.
- Reverse occupancy fraud. The purchase of a property stated to be a rental when it is owner occupied. This is done so that cash flows can be claimed as income.
- Asset fraud. Inflating assets in checking, savings, or investment accounts in order to qualify for a loan.
- Income fraud. Inflating income in order to qualify for a loan. (This type of fraud famously contributed to the 2008 mortgage market.)
- Employment fraud. Misrepresenting a job, tenure, or place of employment in order to qualify for a loan.
- Undisclosed liability. Obscuring information about debt, manipulating a debt-to-income ratio for the purpose of qualification.
- Appraisal fraud. Inflating the appraised value of a home. So the bank will increase the amount it is willing to finance a buyer.
- Straw borrower fraud. Occurs when the party who applies for financing does not intend to be the owner of the collateral.
These schemes can be perpetrated by professional fraud rings and independent career criminals. However, well-meaning but struggling consumers can also be behind these frauds. We detail this difference in our “Tale of Two Frauds” ebook.