Fraud risk rose on purchase market shift and more wholesale loans
The shift to a purchase market and an increase in wholesale mortgage originations contributed to a nearly 17% year-over-year rise in fraud risk during the second quarter, according to CoreLogic.
The national index of 132.6 is up from 131.5 in the first quarter and 113.4 in the second quarter of last year.
An estimated 13,404 mortgage applications, or 0.82% of those submitted during the second quarter, contained indications of fraud, as compared with 12,718 applications, or 0.7% of the total in the second quarter of 2016.
Purchase application volume increased to 66% from 55% year-over-year. Fraudsters have a stronger motivation and increased opportunity to do something wrong with a purchase transaction than with a rate-and-term refinance, CoreLogic said.
Meanwhile, wholesale mortgage production increased 48% year-over-year, to 7.8% of all loan originations from 5% in the second quarter last year. Traditionally, wholesale is considered to be more risky for loan funders than retail because of the use of intermediaries in the process.
"If the factors that influenced the increase continue, including a shift to purchase transactions and growing wholesale channel origination activity, it is likely that mortgage application fraud risk will continue to rise as well," said Bridget Berg, principal of fraud solutions for CoreLogic, in a press release.
"Fraud on cash-out refinance transactions and home equity loans may become more of a factor in the coming years as home values and equity rise."
The rise of digital mortgages should reduce fraud risk in the future.
"The move to digital mortgage processes may limit opportunities for alteration or interception of critical underwriting information, as data will be directed straight from reliable sources directly to the lender," Berg said in the report. "Fraudsters will try to get around these new safeguards by utilizing income and asset sources that do not participate in these automated processes and cannot be verified in a controlled environment."
Jumbo refinance loans had the greatest fraud risk increase by loan type during the quarter. Specific findings included a rise in rapid refinancings after the purchase, home value appreciation not being supported by market changes and occupancy red flags.
By fraud type, occupancy risk increased by 7% compared with the second quarter last year, while transaction risk increased by 3.9% and income risk rose 3.5%.
On the other hand, identity fraud risk declined by 7.3%, undisclosed real estate fraud risk declined by 2.7% and property fraud risk was down by 1.9%.
New York has displaced Florida as the state with the highest level of fraud risk, up 15% year-over-year. New Jersey was next, up 10%, while Florida was third, down 3%.
The Miami-Fort Lauderdale-West Palm Beach area had the highest fraud index for a metropolitan area at 259, down 7%. Buffalo-Cheektowaga-Niagara Falls, N.Y., was next at 235, up 105%, and New York-Newark-Jersey City was third at 229, up 9%.