Mortgage fraud risk jumps 7.3% in one year

The potential for mortgage lending fraud accelerated over the past year, with risk related to undisclosed transaction details driving much of the surge, according to Cotality.

In its latest report, the real estate data platform found fraud risk was up 7.3% year over year in the first quarter. Risk lessened over time, though, coming in mostly flat from the previous three-month period, with an 0.3% drop. 

Cotality's mortgage application fraud risk index score finished at 133 at the end of March, according to its quarterly published data. The reading surged from 124 a year earlier.  

"While mortgage delinquencies are currently low across the U.S., the market is ripe for an increase in fraud because of the continuing high interest rates, slow housing market and other increasing costs of homeownership like insurance affordability," said Matt Seguin, Cotality senior principal, fraud solutions, in a press release.

Of indicator categories tracked, Cotality found elevated risks in income, transaction, occupancy and property data. 

The largest growth emerged in transaction risk, which jumped 4.6% year over year. Examples of potential transaction-related fraud are hidden sales concessions, an undisclosed pre-existing relationship between buyer and seller or regular instances of home flipping not reported to the lender. 

"If market conditions continue to challenge sellers, risks like misrepresented down payments, inflated prices and straw buyers could increase dramatically," Seguin added.

Property values not aligning to a borrower's age or market also contribute to transaction risk.

In the occupancy category, the number of homes designated as a borrower's residence but later listed for rental grew 50% over the previous six months, but other factors brought down the potential for risk in the category overall, Cotality said.  

Factors, such as high salaries inconsistent with length of time employed or mismatches with local geographies influenced income risk. Property risk entails higher-than-expected values for homes compared to the surrounding market or being resold in less than a year after its previous sale. 

Each dollar lost to mortgage-related fraud ended up costing $4.36 to fix the problem in 2023, according to a Lexisnexis Risk Solutions study from last year. 

Weeding out fraud has emerged as a top agenda item at the Federal Housing Finance Agency in the first few months of Director Bill Pulte's tenure. In April, the FHFA introduced a public fraud tip line for consumers to report suspected incidents but did not reveal who would investigate claims or what would be done with information received. 

Where fraud risk increased the most

Fraud risk grew significantly in several Northeastern U.S. markets, according to Cotality's report. Of the 10 markets with the highest index scores, four were located in the region. The market surrounding Poughkeepsie, New York, landed on top with a reading of 416, with risk potential jumping 37% on an annual basis.

Similarly, New Haven, Connecticut, which was in second place, saw risk potential up 30%. Lower on the list was Albany, New York, but the threat of fraud in the state's capital leaped 82%, Cotality said.