'Super sellers' housing market raises fraud risk to 13-month high

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The refinance boom kept mortgage loan application defect risk flat — at record-low levels in July — but fraud risk for purchases climbed again, according to First American Financial.

First American's Loan Application Defect Index remained at 61 in July from June, but fell from 76 compared to the same period the year before.That overall annual drop of 19.7% can be attributed to the continual descent of the refinance index. The refi index decreased to a score of 50 in July, down from 52 in June and 69 in July 2019 — a 27.5% decline year-over-year and new record low.

However, the purchase component rose for the fourth month in a row, inching up to 83 from June's 82 and 80 the year prior. It matched the highest reading since June 2019, driven by the intense competition of inventory shortages. In the last three months, the purchase index rose 7.8% while the refinance side dropped 5.7%.

"Historically low mortgage rates are prompting eager buyers into a housing market with a severe shortage of homes for sale, making for a very competitive home-buying market," Odeta Kushi, First American's deputy chief economist, said in a statement. "In today’s super seller's market, borrowers have more motivation to misrepresent information on a loan application in order to qualify for the bigger mortgage necessary to win the bidding war for a home. If this dynamic persists, it is an environment ripe for rising purchase fraud risk."

At the state level, Wyoming posted the highest defect score at 79, with 78 in Idaho and 77 in both Maine and South Dakota. Scores of 42 in New Hampshire, 46 in West Virginia and 49 in Alaska were the lowest. Meanwhile, Alaska exhibited the most short-term fraud risk growth, with its index increasing 8.9% in July from June. Vermont's 7.1% and Pennsylvania's 5.9% followed.

Broken down to metro areas, the top fraud risk index of 85 came in McAllen, Texas. Syracuse, N.Y., was second at 81 and Chattanooga, Tenn., third at 78. Scores of 47 in San Antonio and 48 in both Bakersfield, Calif., and Detroit occupied the other end of the spectrum.

The largest monthly jump came in Scranton, Pa., with index growth of 24.5%, followed by 7.7% in Des Moines, Iowa, and 7% in Allentown, Pa.

Since all loan transactions are now being done digitally, mortgage companies need to look for digital answers to combat and avoid any fraudulent applications.

"With a sharp increase in fully online transactions, lenders need to be more proactive than ever when it comes to fighting fraud," Sam Bobley, CEO of Ocrolus, said in a statement to NMN. "The good news is that lenders can now significantly bolster their fraud defense capabilities with just a few lines of code. Lenders can deploy application programming interfaces to fight different types of borrower fraud and programmatically corroborate data across multiple sources."

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Mortgage fraud Purchase Refinance Underwriting Housing inventory Mortgage rates First American Financial Corp. Originations