Fraud risk increased in the second quarter of 2017; before the reports of the Equifax PII security breach. The national fraud risk index came in at 132.6 as compared to 131.5 for the first quarter of 2017, with a big jump up from the same quarter last year, which was 113.4.
Somewhere around 13,400 mortgage applications, or about 0.8%, submitted in the second quarter had some evidence of potential fraud.
The biggest culprits were in the refinancing of jumbo loans. In these, red flags included a quick refi after a purchase, a rapid rise in property values and questionable occupancy.
In fact, occupancy fraud led the pack for all loan types, increasing by about 7%. Ironically, the biggest decline came in the area of identity fraud. That may change however in the next few quarters as a direct result of the Equifax debacle.
One factor contributing to this increase is the corresponding increase in wholesale loan business. This type of production increased 48% over last year at the same point.
Traditionally, it is believed that wholesale loans are riskier because of the use of loan brokers to originate the business.
This may be compounded by the decrease in refi’s and a higher percent of business now coming from purchase transactions. Fraudsters, including sellers, buyers, and Realtors, along with some questionable loan originators, may push the envelope a little too far to get a deal done.
This is not meant to say that all these parties are up to no good. It’s to point out that when times get a little tough everyone is looking for ways to increase their business or get what they want. Some may just color a little outside the lines to get there.
Now, on top of the challenges faced by lenders as a result of the Equifax data breach, they need to keep an extra sharp eye out for potential fraud in their loan applications, especially those coming from outside originators. Better keep an eye on in-house originators as well as their income is based on the loans they close.
With refi’s off and more competition for the purchase business, in-house LO’s may push a little harder to get their deals approved and closed. That may be done by taking some dangerous shortcuts in getting to the finish line. Underwriters need to stay on top of things.
In addition, a comprehensive pre and post-closing review program is essential to identify, correct, and ultimately eliminate mortgage fraud. Some may try.
But, once it’s known you’re on the lookout for and have the systems and technology to quickly detect fraud, they’ll go somewhere else.
You may lose a few loans in the process, but you won’t lose your business. When business once again picks up, and it will, you’ll be in a much better position to take advantage of the opportunities, without the albatross of defects, defaults, indemnifications, and repurchases hanging around your neck.
Times are tough; you need to be tough on fraud.