In CoreLogic’s 2016 annual mortgage fraud report, they found that the risk for borrower income fraud increased 12.5% year-over-year and the risk of mortgage application fraud also increased 3.9% in the same time period. While mortgage fraud comes in many forms and can be perpetuated by any party involved in the transaction, these rising indicators were tied directly to misrepresentations by borrowers during residential mortgage transactions. The report also made a correlation between the increased fraud risks and industry trends like high LTV loans, relaxed credit policy, and an increasingly purchase oriented market, all phenomena that appear to have no end in sight.
Income mortgage fraud happens when a borrower knowingly misrepresents the existence, continuance, source, or amount of income used to qualify for a mortgage, or for a larger loan than they could have qualified for otherwise. While many issues that perpetuated this type of mortgage fraud have been resolved (i.e., mandated use of a 4506T tax transcript), determined borrowers are still finding ways to alter bank statements and other documentation to show themselves in a more favorable light.
The other common form of borrower mortgage fraud, application fraud, happens when potential borrowers omit or manipulate data on the loan application. Common examples would include intentional omission of other real estate debts or misrepresenting the purpose of the property.
To fight these trends, the mortgage industry has been rapidly adopting and promoting the usage of automated validation services. These types of services are used to retrieve documentation on a borrower’s assets, liabilities, credit, employment status, and income direct from the data source. When a borrower authorizes FormFree’s AccountChek asset validation service to retrieve their bank statements, the data that AccountChek retrieves comes directly from the banking institution in question and never passes through the borrower thus eliminating the opportunity for tampering.
Fannie Mae’s Day 1 Certainty program has begun to shed light on the availability of automated validation services and to reward lenders that utilize them in the areas of income, assets, and employment – as well as appraisal – thanks to the decreased risk of mortgage fraud. There are two huge advantages for lenders that utilize Day 1 Certainty. First, the process of acquiring documentation from the borrower(s) is much more efficient because it eliminates human error and paper processes. Second, a lender properly utilizing these services can receive enforcement relief of certain representations and warranties on the validated components of the loan.
As Fannie Mae continues to approve new vendors for their Day 1 Certainty program, reports have indicated that Freddie Mac is seeking to launch their own version of the program at some point this year. As the mortgage industry continues to open up the credit box and promote high LTV and even zero-down loans, the statistics show it will also be inviting a higher risk of mortgage fraud. Direct source data integrations are one way the industry can merge the need to become faster and more efficient with the need to mitigate risk.