Who’s Cheating and How
Interest rates are down. Many buyers have jumped in to take advantage of the situation in recent months. Heavy home-buying traffic has led the mortgage industry to shift gears from refinancing to home purchases.
Purchases now comprise over half of mortgage closings. The shift in trends is a fraud-friendly shift, says the financial research firm CoreLogic.
Fraud risk is running especially high in specific cities and their surroundings. These “hotspots” include Las Vegas; the metro areas of San Francisco and San Jose, along with Greater Los Angeles, California; the New York, Newark and Jersey City area, as well as Poughkeepsie and Middletown, New York; the Stamford, Connecticut area; Mission and McAllen, Texas; the Hawaii market; and cities in every part of Florida.
What’s the connection between the rise in home buying loans and these fraud hotspots?
There’s More Buyer Cheating Potential in Purchasing Than in Refinancing.
A mortgage can get tangled up in a variety of fraudulent acts. Applicants might fabricate their bank account statements and salary offers, to note just two common ploys.
Then there are investor owners who are not forthcoming about their intended use for the real estate. It’s easier for banks to know an owner is truly using a home as a primary residence when refinancing is in play. Lenders are less certain about how buyers will handle homes that they’re initially buying.
In other words, if the buyer claims to be purchasing a primary residence, can a lender be sure that the owner is about to move in? That question makes a big difference in the interest and terms lenders can offer. It changes the risk profile of the borrower. Banks prefer the stability and predictability that a primary residence represents. Why? Because owner occupiers want to keep the places where they live. They will generally do anything to make timely mortgage payments, even in times of financial stress.
During the mid-2020 flurry of refinancing, fraud cases went down. Refinancing loans is low-risk activity, and that’s what lenders were mainly doing. But that trend has reversed over the following year. And now, the probability of fraud seeping into a mortgage application has seen a notable year-over-year increase: about 37%.
Pro tip: Buyers should note that misrepresentation also includes misstatements or omissions. Thus, it’s essential to pay close attention to the accuracy and thoroughness of all information supplied for a mortgage application.
Falsely Claiming to Buy a Primary Residence: It’s a Key Type of Loan Application Fraud.
CoreLogic’s recent reporting focuses pointedly on applications with untrue statements about buying properties as primary or second homes. It’s called occupancy misrepresentation. It occurs when a loan applicant falsely tells the mortgage company that the house will be owner-occupied, in order to qualify for a better range of rates, lower deposit requirements, and favorable loan terms that lenders produce for owner-occupants only.
Lenders’ terms vary. In some cases, a buyer could shave off half or even a whole percentage point from the mortgage interest rate, by submitting a loan application for a primary residence.
Consider that the median existing house value is now over $350,000. That figure has risen about 13% from September 2020 to September 2021. Even though mortgage interest rates are still relatively low in 2021, the boom in valuations makes real estate, and loans, very pricey. To some investor buyers, the temptation to fib about their plans and get a better deal is irresistible.
Pretending a home will be an owner’s residence, some buyers might think, is just a white lie. After all, the buyer has every intention of paying the loan back. And a buyer can always move in and make the property a primary residence at some point, right? Or maybe they’ll even live there part-time.
But if they are not buying that property to immediately occupy, while the lender is supposed to think they are, a crime is being committed. Chances are, the borrower will be…
Caught! False Statements on Mortgage Applications Come Back to Bite Home Buyers.
Financial risk management services are offered by companies such as LexisNexis. The services include mortgage fraud detection solutions built especially for lenders.
That’s right: Lenders no longer need to send people out to properties to know who’s living where. They can retrieve information from large databases. They can ascertain where an owner is living, registering a car, paying electric bills, receiving mail-ordered packages, and so forth. Today’s risk management services run physical and digital identity checks to root out the borrowers who are likely to misrepresent their intentions.
So, what happens when someone is caught?
A lender or loan servicer who catches a misrepresentation may insist on an immediate loan payoff. Buyers who don’t make a full payoff are inviting foreclosure.
Adding to that financial calamity, the borrower is likely to be listed in the Suspicious Activity Reports as part of FinCEN — the Financial Crimes Enforcement Network. Once this negative history is established, the borrower can be locked out of future loan approvals.
Schemes: When Mortgage Fraud is Organized, the FBI Steps In.
If a buyer is caught making serial misrepresentations on loan applications, or involved in some sort of scheme involving mortgage fraud, the Federal Bureau of Investigation can step in to investigate. Financial institution fraud is a serious crime. Indeed, the FBI regularly issues educational materials to the public, to explain that false statements on a loan application constitute a real estate crime.
Definition:The FBI defines mortgage fraud as a material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender. It is a subcategory of financial institution fraud.
Thus, there are two levels of mortgage fraud. On the individual applicant level, there is fraud for housing. This typically involves a material misstatement on one mortgage application. Then, there is organized fraud, called fraud for profit. This involves schemes in which several loan applications and multiple banks are misled. The activities can encompass forged signatures, stolen identities, elder abuse, deed theft, tax fraud, conspiracy, and other elements of white-collar crime. This becomes a matter of federal criminal law.
Misrepresentation: Careful Mortgage Representatives Work Closely With Applicants to Prevent It.
Borrowers’ misstatements can have serious repercussions. With this in mind, we can better understand why mortgage companies approach applications so cautiously. Why they can’t seem to stop insisting on backups for an applicant’s statements, and additional forms of evidence until a day before closing!
What we’ve talked about here is just one of the concerns running through the mind of a mortgage representative who aims to get a mortgage green-lighted by the underwriters.
Supporting References
Bridget Berg for CoreLogic.com: The CoreLogic Quarterly Mortgage Fraud Brief (Aug. 5, 2021). See also CoreLogic®: National Mortgage Application Fraud Risk Index.
American Land Title Association’s ALTA Blog: Mortgage Fraud Increases as Market Shifts to Purchases (Aug. 10, 2021; citing research by CoreLogic).
FirstTuesday Journal: Occupancy Misrepresentation – It’s a Big Deal (Aug, 24, 2015).
Reuters: U.S. Existing Home Sales Surge to Eight-Month High in September (Oct. 21, 2021), citing data supplied by the National Association of REALTORS®.
U.S. Federal Bureau of Investigation: White-Collar Crime. What We Investigate – Financial Institution / Mortgage Fraud.
Deeds.com: Guide to Fighting Real Estate Deed Fraud.
Photo credits: RODNAE Productions, via Pexels.