While mortgage fraud has serious consequences, it still takes place on a daily basis. Applicants and mortgage professionals alike have strong incentives to perpetrate fraud.
Mortgage fraud has always been a concern for lenders, but it’s been on the rise in recent years. This is largely due to the increase in digital mortgage activity that’s taken place in the wake of the COVID-19 pandemic. Not only have fraud attempts been more frequent, but they’ve also become more successful.
In this article, we’ll break down some of the recent mortgage fraud trends. We’ll also highlight some savvy solutions to help lenders detect mortgage fraud early on in the application process.
7 Troubling Mortgage Fraud Trends
Understanding the current mortgage fraud trends can help you protect your mortgage lending business by honing your prevention efforts. Here are seven of the leading mortgage fraud trend seen today:
#1 Fraud Attempts Are Increasing
Unfortunately, mortgage fraud attempts are only becoming more common. According to a report from LexisNexis,[i] the average number of monthly fraud attempts faced by mortgage companies in 2020 was 1,316, compared to just 1,280 in 2019. For digital mortgage lenders, the prevalence of fraud was even higher. On average, digital lenders faced 1,810 mortgage attempts each month in 2020.
Mortgage fraudsters have also been more successful with their schemes. In 2020, 55% of attempts caused fraud loss, compared to just 36% in 2019.
The increase in mortgage fraud attempts can be attributed to:
- Remote operations – During the COVID-19 pandemic, many industries had to go remote to stay in business. As a result, the mortgage industry has become increasingly digital. While online mortgage operations are convenient and cost-effective, they may also leave more room for fraudsters to enact their schemes.
- The transition away from refinances – Another shift that’s led to an increase in fraud attempts is the reduction in refinances and the increase in purchase loans. Purchase loans are more prone to fraud, since they involve brand new In contrast, refinance customers already have established mortgages, making it harder for them to falsify their information.
- Rising housing prices – Lastly, housing prices may play a role in the prevalence of mortgage fraud. The cost of a single-family home in the United States increased by more than 20% this year.[ii] Not only are houses harder to afford outright, but mortgages are also more difficult to qualify for. Mortgage interest rates are rising rapidly too. In the face of these financial challenges, some aspiring homeowners may be more inclined to inflate their qualifications in hopes of getting approved for more affordable mortgages.
Since mortgage fraud is only becoming more common, it’s crucial for lenders to understand the specific trends seen in the market today and get ahead of them with advanced monitoring and prevention tools.
#2 Misrepresentations are the Leading Form of Mortgage Fraud
As the mortgage landscape evolves, so do the types of mortgage fraud scams.
In the past, appraisal fraud and property valuation fraud were committed frequently. These types of schemes have been on the decline for nearly a decade. According to Fannie Mae, the most common types of mortgage fraud schemes today are:[iii]
- Income fraud
- Employment fraud
- Occupancy fraud
- Liabilities fraud
- Asset fraud
As you can see, many of these schemes involve misrepresentations on applications. Application fraud and misrepresentations have been increasing steadily since 2011. Even back in 2013, over 70% of reported loans contained this type of fraud.[iv]
#3 The Cost of Misrepresentations is Increasing
The financial impact of misrepresentations has also increased in recent years. Mortgage lenders lose an average of $5.34 for every dollar lost to real estate scams.[v]
The rising cost of fraud is largely due to the labor demands associated with:
- Conducting manual fraud reviews
- Investing and reporting cases of fraud
- Recovering from fraud
Since the cost of mortgage fraud is increasing, it’s only becoming more important for lenders to catch it early on in their loan origination processes. Losing money to fraud can drag down your bottom line unnecessarily. In such a competitive mortgage market, you don’t want to lose any of your hard-earned revenue to fraudulent schemes.
#4 Lenders are Struggling to Verify Information
So, what’s enabling all of this expensive mortgage fraud? For one, many mortgage lenders report that it’s more difficult than ever to verify applicants’ identities in the increasingly digital mortgage landscape. 45% of lenders say that identity verification is one of their top challenges.[vi]
In addition to identity verification, the following percent of lenders also struggle with:
- Address verification – 42%
- Email verification – 37%
- Phone verification – 36%
Verifying this information is made even more difficult in the face of phishing attacks and other social engineering scams:
- Phishing attacks use malicious emails, text messages, and websites to request private account credentials. Phishing messages often look like they’re coming from trustworthy organizations, which is why so many people fall for them.
- Social engineering schemes use various types of social interactions to obtain information about a company or individual’s online credentials. For instance, an attacker may pose as a repair person to gather sensitive data and infiltrate the company’s network later on.
When so many people’s online accounts are vulnerable to these scams, it’s even harder to ensure secure digital transactions.
#5 Wire Transfer Fraud is Being Committed More Frequently
While challenging, verifying addresses, emails, and phone numbers is essential, especially in the face of wire transfer fraud.
Wire fraud occurs when hackers impersonate mortgage professionals in an attempt to get lenders to wire them money. These scams often use fake email addresses, false phone numbers, and fraudulent bank accounts. Unfortunately, recouping money lost to wire transfer fraud is notoriously difficult.
Wire fraud attempts have increased significantly over the years. For example, from 2015 to 2017, wire fraud attempts saw a striking spike of 1,100%.[vii]
#6 Malicious Bots Are Becoming More Aggressive
With the rise of digitization, humans aren’t the only perpetrators of mortgage fraud. Bots are notable players now as well.
Bot attacks occur when automated scripts take over devices or servers. In the past year, bot attacks have increased significantly. The average percent of mortgage fraud committed by bots has gone up from 3% in 2019 to 16% in 2020.
One reason why bot attacks are becoming more common is because they’re harder to detect. Fortunately, IT automation can help mortgage lenders identify bot attacks with greater accuracy and efficiency.
#7 Lenders Aren’t Catching Fraud Like They Used To
Lastly, Fannie Mae has found that lenders’ ability to catch mortgage fraud is declining.
While the majority of fraud tips came from lenders’ self-reports in 2019 and 2020, Fannie Mae’s internal system uncovered nearly 69% of all fraud tips in 2021. Lender self-reports of fraud plummeted from 47% in 2020 to 18% in 2021.
This trend highlights a dire need for lenders to update their systems and strengthen their fraud prevention efforts going forward.
How to Detect and Prevent Mortgage Fraud
Since mortgage fraud is increasingly common, costly, and hard to detect, you need to have effective tools in place to help you combat it.
Here at Certified Credit, we offer many tech-savvy fraud and risk mitigation tools. Here’s an overview of our mortgage-fraud-fighting solutions:
- ADV-120 Fraud Report – Our ADV-120 Fraud Report enables you to verify your borrowers’ application information using a comprehensive, investor-approved approach. You can customize this report to suit your company’s risk tolerance.
- Wire Transfer Fraud Report – Our Wire Transfer Fraud Report complies with Consumer Financial Protection Bureau and secondary market regulations. It can verify your borrowers’ bank account information and send you status reports regarding transfer settlements.
- Liens & Judgment Report – Liens and judgments are often correlated with riskier borrower profiles. Since April 2018, tax liens no longer show up on credit reports.[viii] You can still keep tabs on these unreported activities with our Liens & Judgment Report. This report identifies any liens or judgments against your applicants. In turn, it can help you reduce your foreclosure and default risk.
- MERS Reports – Our MERS report can help you uncover any liens registered with MERS that are connected to your borrowers’ Social Security numbers (SSNs).
- Undisclosed debt monitoring – Some of your borrowers may take on additional debt after you pull their initial credit report. Depending on how much debt they incur, you may be required to re-underwrite their loans upon closing. That’s because Fannie Mae has strict guidelines regarding undisclosed debt.[ix] Failing to identify undisclosed debt could also increase your risk of fallout and repurchase demands. Our automated undisclosed debt monitoring solution, Cascade UDM, can alert you of any changes to your borrowers’ credit within 24 hours. Cascade UDM continuously monitors your borrowers’ credit reports for new inquiries, late payments, debt-to-income increases, and much more.
- Cascade VOE – Verifying your borrowers income and employment is crucial, but it can also be a cumbersome process when done manually. Cascade VOE allows you to automate this process from start to finish. As soon as your verifications return hits, you can receive convenient notifications via text/SMS, email, or within your LOS.
- 4506-C Tax Transcripts – Our 4506-C Tax Transcripts can help you prevent income fraud by ensuring your borrowers’ stated income lines up with their verified tax returns. It uses a direct connection to the IRS database to perform its verifications.
- SSA-89 Verification – To combat identity theft, you can use our SSA-89 Verification to make sure your borrowers’ Social Security information is accurate. This tool utilizes a direct connection to the Social Security Administration.
- Mortgage Participation Report – If you’re wondering if any of your applicants’ are on government exclusion lists, our Mortgage Participation Report can help you find out. This LQI-compliant due diligence report compares up to 20 names to ensure your borrowers are truly qualified for their mortgages.
- Flex ID Smart Select Shield – Verifying your applicants’ names, addresses, birth dates, SSNs, and phone numbers is essential, as highlighted by the mortgage fraud trends we discussed above. You can complete these verifications with ease using our Flex ID Smart Select Shield.
- ID Risk Review – Our ID Risk Review is a report that summarizes alerts from your borrowers’ credit reports, ranging from fraud alerts to SSN alerts.
- Portfolio Review – Unfortunately, mortgage fraud is often caught after loans have already closed. While you can and should enact proper prevention tactics, it’s also a good idea to keep tabs on your existing portfolio. Our Portfolio Review can scan your database of customers and applications for any risks that may be harming the health of your portfolio. As a result, it can help you reduce your chances of early payoffs.
Certified Credit: Stop Mortgage Fraud in its Tracks
As you can see, we offer an expansive suite of solutions that can help you catch mortgage fraud in its earliest stages. With the support of our fraud prevention tools, you can reduce your risk and improve your loan quality.
In addition to our fraud prevention solutions, we offer:
- Affordable credit reports
- Credit score improvement tools
- Automated lead generation tools
- Automated prequalification
- Automated verification of income and employment
- Settlement services
- Money-saving strategies
If you want to give our fraud prevention tools a try, schedule a demo with our team at Certified Credit today.
[i] National Mortgage News. 4 trends in mortgage fraud to watch out for.
[ii] Forbes. Housing Market Predictions 2022: When Will Prices Drop?
[iii] Fannie Mae. Mortgage Fraud Tip Trends.
[iv] LexisNexis. 16th Annual Mortgage Fraud Report.
[v] National Mortgage News. 4 trends in mortgage fraud to watch out for.
[vi] National Mortgage News. 4 trends in mortgage fraud to watch out for.
[vii] Rocket Mortgage. How To Beware Of Mortgage Wire Fraud During Closing.
[viii] Experian. Tax Liens Are No Longer a Part of Credit Reports.
[ix] Fannie Mae. Undisclosed liabilities – attacking this common defect.