Income application fraud risk to rise in buying season: First American

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Income-related mortgage application fraud risk holds potential to increase among rising buyer competition during the peak spring season, First American said.

Since the start of the year, this particular risk stabilized as price growth moderated and interest rates declined. The index for income-related mortgage application defect was 56 for the second consecutive month in February, after rising from an all-time low of 38 in March 2018.

In February, the First American Loan Application Defect Index increased to 95 from 91 in January; it increased 19 points since July.

After those seven consecutive months of overall rising defect risk, the index now reached its highest level since hitting 97 in December 2013. The all-time high point was 102 in October 2013. The index was 83 last February.

The purchase applications index was at 99, up 4 points from January. The refinancing index was at 86, up 3 points month-over-month.

Income fraud risk rose through much of the year, but stabilized recently behind moderate home price growth and dropping interest rates. But income fraud risk could increase as the spring home buying season gets going and likely becomes more of a seller's market again.

"Purchase loan applications typically are more likely to have fraud than refinance transactions," said First American Chief Economist Mark Fleming in a press release. "Furthermore, in the strong seller's market we experienced in 2018, borrowers have more motivation to misrepresent income on a loan application in order to qualify for the bigger mortgage necessary to win the bidding war for a home."

While mortgage fraud can come in many forms, income falsification remains one of the most likely misrepresentations seen, although that was mitigated by the implementation of ability-to-repay rules in January 2014, Fleming added.

Still, by this past December, income-specific loan risk had increased 12% compared over the prior year. Income risk peaked in December 2012 when the index hit 131.

"As affordability improves and demand increases going into the spring home buying season, we expect the seller's market conditions to return, potentially elevating income misrepresentation risk as well," Fleming said.

While income-related defect risk stabilized over the past few months, the risk of defects due to employment misrepresentations soared. In February, the risk of potential employment fraud was 175, the highest ever, up from 161 in January and 130 in October.

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Mortgage fraud Underwriting Purchase Mortgage rates Refinance First American Financial Corp.
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