HELOC loans may be the next threat to mortgage fraud

As Mortgage Fraud Declines in Q2 2022, Home Equity Lending Presents a Loophole for Exploitation

CoreLogic estimates that one in 131 mortgage applications had indications of fraud in the second quarter of 2022, and HELOC loans appear to be a growing concern.

Despite the obvious legal fact that fraud is wrong, a notable number of people in the United States participate in fraudulent schemes because fraud can seem like a victimless crime and is rarely punished. However, institutions that lend on false information risk higher levels of default, unsellable loans, or redemption risk during the life of the loan. While mortgage fraud is far from the levels it reached before the financial crisis 15 years ago, detecting its presence remains a major concern for lenders.

Not all diets are created equal

The term "mortgage fraud" is a broad umbrella, which CoreLogic categorizes into six subtypes to study fraud risk:

• Income Fraud
• Real estate fraud
• Identity theft
• Transaction Fraud
• Occupation Fraud
• Undisclosed real estate debt

Of those six categories, only one - undisclosed real estate debt - declined year-over-year according to Q2 2022 data from Corelogic. Other areas of fraud risk, including income fraud and property fraud risk, have increased dramatically, reversing the trend of previous years. This reversal is correlated with the reduction in refinancing requests and increased requests for purchase credit.

"The risk of income fraud remains a major concern for lenders, but there is a growing focus on property value risk as house prices slow growth and homes take longer to sell. sell," said Bridget Berg, director of fraud solutions at CoreLogic. "Data from CoreLogic supports these concerns, as our most predictive metrics for revenue and property fraud have increased more than 20% over the past year."

HELOC loans are at risk of fraud

When the Federal Reserve has started raising interest rates At the start of the year, the mortgage refinance activity that defined 2021 was down 69%. Simultaneously, overall lending volume has declined significantly in the 12 months ending June 2022.

This noticeable shift in loan processing volume has coincided with new buyers finding it more difficult to qualify for mortgages now that interest rates have risen rapidly. However, the strict regulations that banks typically apply to buyers looking to take out a traditional first mortgage don't typically apply to those taking out home equity lines of credit (HELOCs), a type of second loan that allows homeowners to borrow against the value of their home. to access cash.

"Home equity loans don't have the same solid process as traditional first mortgages," Berg explained. "These loans do not require title insurance, have less arduous underwriting processes, and do not always require the applicant to be physically present at a closing table to access cash. The result is that those seeking to defraud banks can apply for multiple HELOC loans simultaneously while evading detection.

The result is a perfect storm that leaves some populations, such as older homeowners, vulnerable to scammers seeking to access money in homes that have seen a unprecedented increase in equity in recent years.

While seasoned professionals can spot many discrepancies in loan applications, add CoreLogic's LoanSafe Solutions to bring s additional information and information to help lenders and avoid the risk of closing a fraudulent loan. Proprietary insights drawn from a consortium of lenders and powered by CoreLogic data and analytics identify issues in lending transactions, including tenure, ownership or identity risks. Another consortium-based solution, the Multi-Closure Alert Program identifies the risk of shotgunning, which is when a borrower takes out HELOCs simultaneously from different lenders.

Affordable targets are four times more susceptible to fraud

Properties come in many shapes and sizes, from single-family to multi-family. Just as homebuyers are looking for the perfect fit for their lifestyle, mortgage scammers find the perfect way to poke fun at lenders.

Last year, data from CoreLogic alerted lenders to an increased risk of fraud associated with two- and four-unit properties, as the White House announced efforts to expand funding for owner-occupied multi-family properties. This year, CoreLogic Data demonstrated that the risk associated with mortgages for these properties is four times higher than the risk associated with single-family homes.

"The most common fraud risk on two- to four-unit properties is misrepresentation of occupancy. Investors pretend to be owner-occupiers to get better financing, like bigger loans, lower interest and fees," Berg said. "Less common, but much more costly, are 'fraud for profit' schemes where a property is purchased and returned to a straw buyer at an inflated price. Since multi-family homes are more expensive and rent can be used to help the straw buyer qualify, these are attractive targets for the program.

Play by the rules

As mortgage transactions continue to shift from refinances to purchase loans, the home loan market's susceptibility to fraud will continue to be a concern.

Whereas "fraud for profit" is a business that involves professional homebuyers who steal money and equity by defrauding lenders and landlords, "housing fraud" is a scenario in which an individual falsifies an application to obtain a loan for a house that is out of budget. When borrowers deceive other parties on a mortgage application to influence an appraiser and manipulate a property's value, they also affect the real estate market as a whole.

Mortgage fraud can also have secondary impacts such as reduced public school income, which depend on property taxes. A memorable example of the effects of fraud is the Great Recession housing crash of 2009 - a disaster that led to the creation of the Financial Fraud Enforcement Task Force by President Obama.

Despite scrutiny of schemes such as straw buyers or housing fraud, cases of fraud continue to trouble lenders.

Rising real estate values ​​have been seen in the United States in recent years, with markets like Miami, Phoenix, Los Angeles and Houston increasing by 27.1%, 22.1%, 12.9% and 16.4% respectively. Several of these metropolises, including Miami, Houston and Los Angeles, are also on the list of the top 15 CBSAs with the highest fraud risk, according to CoreLogic's Mortgage Fraud Report.

Recently, there have been signs of a general slowdown in the housing market, house price growth slowed for fourth consecutive month in august. However, for houses whose price remains attractive, the market is always competitive.

For lenders and market security as a whole, understanding and identifying fraud is crucial. CoreLogic can help make this process more efficient by providing information on where to look, as well as connecting lenders together to help identify gaps even before dodgy loan applications make it to the closing table.

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