Coronavirus job disruptions lead to increase in mortgage fraud risk

Widespread uncertainties regarding income and employment have resulted in the first increase in mortgage loan application defect risk in 15 months, First American reported.

May's index of 62 was up one point from the all-time low of 61, reached in March and April thanks to very low levels of purchase activity. The May 2020 index was nearly 28% below the index value of 86 for May 2019. This is the first month-to-month increase in the Loan Application Defect Index since February 2019.

"The two primary drivers of the increase in fraud risk are employment and income fraud, which increased 10% and 7% respectively, relative to last month," Odeta Kushi, First American's deputy chief economist, said in a statement. "This is the first monthly increase in employment risk since October 2019. Higher income and employment fraud risk is likely a result of applicants, whose job and income may be affected by the pandemic's impact on the economy, attempting to hide that impact from the lender."

While an application defect is not necessarily a fraudulent act, it is a red flag for lenders to go back and review that item.

"An economic downturn can put pressure on home buyers to misrepresent information on a loan application in order to qualify for financing. The competitive home-buying market may also influence home buyers to misrepresent information in their loan applications to be more competitive when bidding for a home, creating an environment ripe for accelerating fraud risk," Kushi said.

The purchase defect index rose for the second consecutive month, to 81, which is its highest level since June 2019.

While the refi defect index also increased for two months in a row, the rise has been much slower, going up by just two points during the period, to 54.

Meanwhile, the employment risk index, which had plummeted downward in the past year, increased eight points between April and May to 90; one year ago, the index was 171.

Unlike many of the other risk indicators tracked by First American, the income risk index is actually higher on a year-over-year basis. For May, it was 64, up from 60 in April and 53 in May 2019.