How to Keep Fraud Out of 3% Down Mortgages

Editor's Note: This article is part of the National Mortgage News' MBA Annual Special. Click here to see more from the report.

Lenders need to have monitors in place to safely originate 3% down loans and reduce application fraud risk, said Bridget Berg, senior director of fraud solutions strategy at CoreLogic.

As lenders expand their low-down-payment mortgage programs, they must be vigilant about loan application fraud risk.

Since the second quarter of 2013, mortgage application fraud risk on purchase loans with a loan-to-value ratio over 80% has increased almost 29%, according to CoreLogic.

Going forward, the fraud risk will grow as an increased amount of higher LTV purchase loans come into the pipeline and underwriting criteria loosens, said Bridget Berg, senior director of fraud solutions strategy at CoreLogic.

But the risk this data exposes should be treated as a warning, not a stop sign.

"It is not meant to be an alarming, 'Oh my gosh, we need to not do low down payment loans.' [Lenders] need to have enough monitors in place so they know how to do them safely and don't get into some of the situations that caused the housing crisis," she said.

The government-sponsored enterprises reintroduced conventional 3% down payment mortgages in late 2014, but those programs have been slow to gain significant volume. So both Fannie Mae and Freddie Mac have worked with banks on creating programs looking to expand the market.

Bank of America, in conjunction with Self Help Credit Union and Freddie Mac, introduced the Affordable Loan Solution back in February. In May, Wells Fargo came out with its yourFirst Mortgage, a variation on Fannie Mae's HomeReady loan.

But current high LTV programs have gaps and can still miss potential buyers. So to find a way to meet the needs of the market going forward, Alterra Home Loans and New American Funding are working with Freddie Mac on a pilot program called Your Path.

It is prudent of Freddie Mac to run multiple tests in a controlled environment with different lenders to assess the performance risk of these loans and to assess how well they work to provide liquidity, said Alterra CEO Jason Madiedo.

The typical Your Path borrower lives with several generations of their family and consists of individuals with multiple sources of income.

The lenders and Freddie Mac want understand how those dynamics affect borrowers in a "contained test and learn environment" so they can see how to responsibly lend to this market and create sustainable homeownership, he said.

"We know that it's going to take time, something like this doesn't happen in a few months," Madiedo said.

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