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According to First American Financial Corporation’s latest Loan Application Defect Report, the frequency of defects, fraud, and misrepresentations jumped to 4% on loan applications submitted in February. That’s a 1.3% increase above just one year ago.
A 4% increase may not seem like much but when talking about fraud and misrepresentations among mortgage applications it could prove to be an indicator of problems to come. Loan quality increased tremendously during the years after the crash of ‘08, now it appears it may be slipping.
With rates and home prices on the rise and a shortage of available housing stock, it becomes more challenging to find and qualify borrowers. To do so, lenders are stretching the credit envelope. This is okay as long as it done with care and a continued emphasis on loan quality and compliance.
The spring buying season is upon us, and with it, Realtors and lenders will be trying to put as many people into homes as possible. Lenders will need to have a full arsenal of loan products. They also need to ensure their originators are well trained to utilize these products and take a complete application to properly qualify an applicant.
There are no shortcuts to doing this right. Pushing the envelope is okay as long as you stay within the envelope. This is where it is important to have the required pre and post-close review functions to ensure accuracy, quality, and compliance and to identify any defects or weaknesses in your process and be on the lookout for misrepresentations.
Keep an eye out for those things that don’t make sense:
- Low paying job with high bank balances;
- Debt history that doesn’t match the income and assets;
- Renting while buying a rental property using the rental income to qualify;
- Minimum down payment with high reserves;
- Gifts…
Make sure you can get clear, concise, documented explanations for anything that doesn’t appear to be just right. Better to be safe than sorry.
So, go forward into the new buying season with your eyes wide open. Don’t be the victim of fraud or misrepresentations and carefully review loans to protect against, identify, and quickly correct any loan defects. It’s tough to lose any deal but some deals may not be worth the risk.
