Elevated interest rates have had ripple effects across the U.S. property market. From the appearance of the lock-in effect, which has slowed down home purchases, to increasing questions of affordability, the climbing cost of taking out a mortgage has spurred many to consider how to lower the price tag.

One trend that CoreLogic® has spotted in the property market is an increase in suspected occupancy fraud. In the 2023 Mortgage Fraud Report, researchers found that suspected occupancy loans have nearly tripled since 2020. This type of fraud, which is difficult to spot during origination, typically occurs when someone identifies an investment property as a primary residence to obtain more favorable rates.

Despite this uptick in the subcategory, the overall instance of mortgage fraud has remained relatively flat. In the second quarter of 2023, CoreLogic estimates that 1 in 134 applications contained fraud, up from 1 in 131 during the same period in 2022.

But occupancy fraud is not the only tactic on the table. In this episode, host Maiclaire Bolton Smith sits down with Bridget Berg, a senior leader in loan solutions at CoreLogic, to talk about the types of mortgage fraud, where it is most prevalent in the industry and why it can be so difficult to detect.

In This Episode:

2:19 – An overview of the prevalence of fraud through the years.

3:56 – Host Maiclaire describes what it’s like to go through a routine audit following a mortgage, and guest Bridget Berg explains the different ways people can defraud lenders.

5:56 – Is there more fraud happening now than in previous years? How did the pandemic change the trend?

8:29 – Why should occupancy fraud should be top of mind for lenders?

9:47 – Is mortgage fraud difficult to detect, and are there triggers and are there ways that lenders can identify risks?

11:16 – Erika Stanley goes over the numbers in the property market in The Sip.

12:33 – A discussion about the fraud risk associated with occupancy declarations and HELOC loans.

Links:

• 2023 Mortgage Fraud Report
• October 2023 U.S. Home Price Insights Report

Up Next: HELOC Loans May Be the Next Threat for Mortgage Fraud

Find full episodes with all our guests in our podcast archive here: https://clgx.co/3zqhBZt

Bridget Berg:

You could have a situation where something looks very suspicious, but if you have a closed circle of information sources that are all going to say the same thing, you really can't prove it. Those tend to be some of the more difficult ones to detect.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host, Maiclaire Bolton Smith, and I'm just as curious as you are about everything that happens in our industry. Mortgage fraud, that's a subject that doesn't crop up too often for most of us. But when it does, it's rarely punished because it's seen as a victimless crime.

Bridget, welcome to Core Conversations.

BB:

Thank you, Maiclaire, for this opportunity to chat about fraud. I'm really happy to join you for the conversation today.

MBS:

Well, we are glad to have you here at CoreLogic and really excited to talk with you today on the podcast.

Erika Stanley:

Before we jump into talking about mortgage fraud, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn, or @CoreLogicInc on X, formerly known as Twitter, and Instagram. But now let's get back to Maiclaire and Bridget.

MBS:

Mortgage fraud, that's probably something that people would never think of. Can you just give us a brief overview of the ways in which this type of fraud can take place? Probably honestly, one of the most interesting things is how prevalent is it?

BB:

MBS:

Yeah, no surprise.

BB:

It had been pretty rampant, and we've really controlled it. It finally got the attention that it needed, and a lot of controls came into place, but some of the more common types of mortgage fraud are done to get a deal approved and closed. It's just really out of necessity. Nearly everybody who's involved in a mortgage transaction has some kind of motive. The thing about fraud is it gets rationalized. They might say something like, "This is a stupid rule," or, "I know this person is going to make their payments," or, "I really need this commission." Or maybe we say, "The borrower's going to save money if we do it this way."

MBS:

Oh, interesting.

BB:

Sometimes it's fraud for convenience because it's just like, "I don't have the time to do this the way they want me to do it.

MBS:

Wow.

BB:

"I've got a good shortcut, and I can be more efficient." It hits all of those places.

MBS:

That's really interesting. I talk on this podcast a lot, we recently just bought a new house. One thing that was interesting to me was we actually got an audit following our mortgage. We didn't do anything wrong. Our mortgage broker didn't do anything wrong. But it to me kind of raised the awareness that they're really on the lookout for mortgage fraud now because they were just like, "Can you explain this to us?" We had an explanation and everything was fine. But the first time we got our mortgage, we didn't get anything like that. That was really interesting to me.

BB:

That was probably a QC process, and they pick loans randomly or they may have had a trigger. I know you were talking about some of the ways that fraud can take place, and I wanted to mention some of the people involved and why they do it.

First off, it's the borrower. The borrower might give you false information about the source of their down payment or their income or their credit history, or it could be somebody in the loan manufacturing process. Anywhere from the loan officer through the people who are selling your loan, they could lie about the origin of a document, false system entries. Like, "They really applied this day instead of that day." They may facilitate misrepresentation by other parties, or they might actually directly create false documents, and leases would be a really common one.

MBS:

Interesting.

BB:

Borrower needs to sell their prior home. It's not sold yet. I can't qualify with both mortgages, so magically I have a lease appear that covers — oh no, now they're going to rent it out, and they've got more than enough money to cover to payments.

MBS:

Interesting. Wow.

BB:

Another one would be commission parties or property sellers that may instruct the borrowers or the loan producers because obviously they have a commission or they really want to get that house sold.

MBS:

Wow. That's fascinating. It's really interesting. I personally, and I'm sure many of our listeners, wouldn't think of all of the different places where fraud actually could happen. I guess the question I have now is do we think now in this environment there's maybe more scrutiny for fraud now than there has been in the past?

BB:

It's hard to say. Right now, our fraud risk has been pretty flat. We had a couple of really unusual years. Everybody was hyper-aware of fraud when the pandemic started because everyone was like, "Oh my gosh, we can't go into houses."

MBS:

Everything was virtual.

BB:

"We don't know if people are really working because we can't call them on the phone at work."

MBS:

Wow.

BB:

There was a lot of angst around it, but what actually happened in the real estate industry is that, hey, we actually hypercharged the property market and everybody was able to refinance their homes, and so we were flooded. The mortgage industry was flooded with good loans. They were just streamlined refinances of the same people and the same property to a great extent, and people who really wanted to move. Everybody was predicting there was going to be high fraud during that. What happened was all the fraud went to the PPP loans, to be honest.

MBS:

Can you define PPP loans for us?

BB:

Sure. That was Payment Protection Program, so that was a government program where they were subsidizing employers to keep people working. I think a lot of the attention at the banks went to trying to deal with the fraud that was happening in that sector.

MBS:

Interesting.

BB:

Meanwhile, in the mortgage industry, we had fairly lower risk because of the interest rates were down and lenders had so many good loans to choose from.

MBS:

Wow.

ES:

Although lenders had plenty of good loans to choose from, there was still fraud happening. Last year, concern grew over HELOCs, or home equity lines of credit. HELOC loans, a second loan type that allows owners to borrow against their home value to access cash don't have the same strong process that traditional first mortgages do. The result is that those looking to defraud banks can apply for multiple HELOC loans simultaneously while escaping detection. You'll hear Bridget talk more about this later in the episode.

BB:

Coming out of it. Now we're into a lot of purchase transactions, but the markets are so tight, there's not much supply so we haven't seen the fraud rise yet. Everybody's kind of on the cusp of it, and occupancy fraud seems to be top of mind right now.

MBS:

What exactly is occupancy fraud?

BB:

Occupancy fraud usually exhibits where somebody misrepresents their intent to occupy the property as an owner-occupied primary.

MBS:

Oh, I see.

BB:

Investment properties, as you can imagine, if you're stressed out on your finances and you're going to let your property go, you're going to let your investment property go before your own home. They're riskier from a credit standpoint, so they're priced higher and you can have a lower loan-to-value on those loans. You don't have as beneficial of financing terms for an investment property as you do for an owner-occupied primary.

MBS:

Interesting. That's why there's always that question of is this going to be your primary residence?

BB:

Right. That seems to be. Then income is a perennial focus-

MBS:

Sure.

BB:

... for the qualifications.

MBS:

Is mortgage fraud difficult to detect? Are there triggers that make them aware to look for it? Or how hard is it to detect?

BB:

There are so many different types of mortgage fraud, and I told you that there's a bunch of different motives and actors. There's a lot of different complexities, so it really runs the gamut depending on the expertise of the person who's committing the fraud. Yes, some of them that are more just borrower are often quite easy to detect. I'm going to occupy the property, and the underwriter can kind of see it doesn't make sense that you're really going to occupy that property.

Just validating information with a trusted source. Like, "Hey, I went to the IRS and found out how much you make." That's a trusted source. That stops the majority of the simple attempts. However, if there is a lot of motive and collusion, and it's a more complex scheme where many people acting together could be very difficult to detect. It may never be detected. It might not be detected for years. You could have a situation where something looks very suspicious, but if you have a closed circle of information sources that are all going to say the same thing, you really can't prove it. Those tend to be some of the more difficult ones to detect.

MBS:

Interesting.

ES:

Las Vegas, Phoenix and New York posted the nation's largest monthly gains about 1% each. While Portland, Oregon declined by about 0.2%. But not all price tiers are created equal. High-priced homes continued to show relative weakness and were down by 1.3% year over year. Similarly, demand contracted for luxury and second homes. Mid-tier home price growth remained flat while low-tier properties moved into positive territory, up 0.5% after three months of annual declines. That's the Sip. See you next time.

BB:

I wanted to say that a lot of frauds go undetected, and no one ever knows.

MBS:

I'm sure. Yeah.

BB:

If you misrepresented... Back to the occupancy misrep. If I misrepresent the intent to occupy a property, I get my lower down payment, I get my lower fees, I get easier qualifications. As long as I pay it back and nobody ever challenges it, it's accomplished. It's unlikely to be detected. That's where we get that latent fraud on the books where you've originated loans, they made it through, successfully closed, and you don't always detect them. You gave me the example of the first time I did a mortgage, nobody ever came back and asked me any questions. But this last time, they did. There's random samples that are done, and they don't touch every loan. It's just a very small sample. What they do when they ask you those questions, they're not really good at identifying fraud. A lot of times, they're trying to complete some required checklist to say-

MBS:

Gotcha.

BB:

... I did this, that and the other thing. They're very good though at detecting when somebody got a car loan right after closing because it's real easy to run a new credit report. If it was something that happened like there right after, or if you quit your job right before closing, those things are easy to detect. What happens is those easy-to-detect frauds get overrepresented when people are looking at what kind of fraud is out there. It's the easy ones to detect that tend to get reported and that everybody knows about. Some of those tougher ones are probably sitting on the books.

MBS:

Right. Wow, so interesting. I guess that triggers the thought too, that one thing that I know was quite a trend last year was home equity line of credits or HELOCs. When we look at HELOC loan fraud specifically, is that particularly of concern for lenders? Can you explain a little bit about why that might be noticeable?

BB:

Sure. HELOCs usually go through a different kind of process. They're cheaper to originate. They're not getting sold to the GSEs. GSEs, the Government Sponsored Enterprises that are Fannie Mae and Freddie Mac, they're involved in probably 80% or more of all loans, the traditional loans. They have a lot of requirements. But the HELOCs, the home equity lines of credit, don't go through the same processes. They have streamlined processes, and so often they don't get the same level of scrutiny or fraud detection checks that other loans get.

MBS:

Interesting.

BB:

Back to the occupancy misrep, a lot of times HELOCs are not available on investment properties. If somebody is trying to tap their equity from an investment property, they might not have a lot of good options other than trying to get that HELOC because they don't want to have to pay off that low interest rate loan from two years ago. Because of the streamlined processes, a lot of people don't run fraud tools against their HELOCs in the same way they would for the other types of loans. I think we have a bigger risk right there. It's going to probably take a while to find out. HELOCs also go through different processes. They don't have the same kind of QC. They don't go to Fannie Mae and Freddie Mac, who may do more reporting on the kinds of frauds. Some of that is going to be unknown.

ES:

Maiclaire and Bridget spent this episode talking about what fraud is, where it happens, and why latent fraud is difficult to detect. In next week's episode, the conversation will continue as they talk about who ends up paying when someone defaults on a loan, and how automation may open the door for fraud to increase. See you there.

MBS:

Thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcasts to be notified when new episodes are released. Thanks to the team for helping bring this podcast to life. Producer, Jessi Devenyns; editor and sound engineer, Romie Aromin; our facts guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.

ES: