If borrowers are willing to lie to get a mortgage, they must want one very badly, to paraphrase Capt. Augustus McCrea, Texas Ranger from the spellbinding novel “Lonesome Dove.”
To be sure, borrowers still intend to achieve the American dream of homeownership—even if they have to lie to qualify for a mortgage. In fact, the percentage of borrowers that “intentionally misrepresented” their incomes, or lied, increased 13.3% in the second quarter compared with the same period a year earlier, noted the quarterly fraud report from CoreLogic. Overall, fraud decreased 5.6% compared with the second quarter of 2012.
Corelogic’s results were based on predictive scoring of fraud incidents in an estimated 2.4 million mortgage applications.
No doubt, borrowers are hearing that qualifying for a loan is more difficult, than during the bubble years. These days, it seems, it’s every borrower for himself, so it’s not a complete surprise that an increased number of them will commit fraud to purchased the home they want.
They worry their incomes are not large enough, so they fudge their incomes enough to qualify for a mortgage. While the percentage of borrowers that lie on their applications represents a minority of loan applicants, if they receive a mortgage based on bogus income claims—and too many default in the future—the aftershock could undermine the viability of lenders.
That’s why lenders to protect themselves from violating a host of regulations and to preserve their reputations can’t be satisfied to merely make loans and hope things will work out for the best. The hope method of lending will undoubtedly lead to loans extended to undeserving borrowers—and potentially leave lenders, investors, and borrowers in dire circumstances.
Automation that flags data points, such as income, so an experienced person can review and make a determination will prove critical over time. That’s because the responsibility for culling out the borrowers with the assets to qualify for a mortgage on a legitimate basis—from those that are fabricating their incomes and committing fraud—falls on lenders to discern.
To be sure, the problem is manageable but only if the lender deploys strong, effective technology and employs an experienced staff to shield the lender against fraud. Technology can flag questionable or inconsistent data and experienced employees can scrutinize and validate income and other data. In the process, the number of loans that are approved based on false positives or false negatives are reduced.
That level of review can improve lending decisions and help avoid unscheduled, angst inducing visits from federal regulators.
The rule is straightforward: The better the data, the better the lending decision. But the devil, as we all know, is in the details. The failure to scrutinize borrowers with sufficient due diligence may mean a replay of the challenges the industry faced the last few years and acute problems down the road that include buybacks, poor-performing loans, an inability to pass regulatory audits, dinged reputations and fines.
Just how lenders will be forced “to pay the piper” if too many of their loans fail to perform due to fraudulent data is not clear. It is neither a stretch, nor a wild assumption, to assume the penalty will be severe, administered without delay, and corporate reputations may not just be dented, but damaged beyond repair.
Lender beware.
Matt Strickberger is the managing partner of OnPoint PR and Consulting LLC, a public relations firm that represents lenders, servicers, technology companies and others. He was editor of Mortgage Technology magazine from 1997-2000. If you have comments or suggestions for future columns, email him at mstrickberger@onpoint-pr.com.
