Whether wealthier borrowers are becoming more inclined to exaggerate their incomes or it is simply a ‘glitch’ in the numbers, there was a spate of fraud in the jumbo mortgage market during the third quarter – most of it coming in the form of income fraud, according to Interthinx's Mortgage Fraud Report.
Jumbo loans are mortgages with a conforming balance of $417,000 or more. Although the income and credit requirements for these loans are much more stringent compared to non-jumbo mortgages, jumbos have become increasingly popular among borrowers in recent years due to their comparatively low rates. Currently, a borrower may be able to secure a jumbo mortgage at an interest rate that is significantly lower than for a non-jumbo loan.
"With the rise in popularity of jumbo loans, lenders must be aware of both the credit risk and fraud risk those loans carry," says Ashley Woodworth, Interthinx vice president of business development and corporate strategy, in a statement. "While the most significant fraud risk gap occurred in the area of employment/income, it certainly wasn't the only area where risk was present. Occupancy fraud risk for jumbos, for example, was extremely high – more than 200 by our index versus 150 for non-jumbo loans. The risk is out there, and lenders need to be aware."
"The numbers don't lie," adds Jeff Moyer, president of Interthinx. "As we predicted last quarter, the shift toward a purchase-driven mortgage market increases the risk of fraud. Our goal in issuing this report is to make lenders aware of the fraud risk trends we've observed in the market so that they can remain vigilant in preventing those trends from becoming widespread issues within their own organizations."
For the third quarter, the national Mortgage Fraud Risk Index value is 108 – a 4% increase from the second quarter, and a 10% increase compared to the third quarter of 2012.
Interthinx notes that although the risk of fraud is slightly higher with jumbo loans across all fraud categories, "the most striking difference is seen in the employment/income fraud risk index, where the index value for jumbo loans is 146 versus a value of 69 for non-jumbo loans."
Looking at mortgage fraud for all loan types, California is the riskiest state, with an index value of 151 for the third quarter. According to Interthinx, California contains seven of the top 10 metropolitan statistical areas (MSAs) for overall risk, six of the top 10 MSAs for identity fraud risk, and all top 10 riskiest MSAs for employment/income fraud risk.
With a value of 146, the District of Columbia had the second highest Mortgage Fraud Risk Index value, surpassing all states except California. This is the first time that Washington, D.C., has been in the top two on the list since the inception of the report in the second quarter of 2009.Â
Occupancy fraud risk increased 17% in the third quarter compared to the second quarter, to reach a value of 147 on the index, and was up 36% compared to the third quarter of last year. Interthinx says the jump was due to increases in occupancy fraud risk for both purchase and refinance transactions, as well as a decline in the refinancing share of mortgage application volume.
To download a copy of the report, click here.