When it Comes to Mortgage Fraud, Lenders Must Stay Vigilant


BLOG VIEW: Mortgage fraud is a huge problem for financial institutions. In the second quarter of 2020 alone, it’s estimated that one out of every 164 mortgage applications contained some indications of fraud. Consequently, organizations – particularly financial institutions – need to have rigorous processes in place to prevent fraudsters from succeeding.

As defined by the FBI, mortgage fraud is a “crime characterized by some kind of material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender.” In other words, any lie that influences a financial institution’s decision to supply someone with a loan or agree to certain terms of repayment is a mortgage fraud. Mortgage fraud can generally be divided into two categories: fraud for profit, where the aim is to make money by exploiting the mortgage industry, and fraud for housing, which usually refers to illegal actions taken by a borrower in order to secure ownership of a house.

At the moment, demand for housing in the United States far outstrips supply. Freddie Mac reports that there are 3.8 million single-family homes fewer than what is needed to meet demand – which in turn is driving prices up by 9% year over year. As a result, it has become more expensive for first-time home buyers to enter the market – and more lucrative for sellers looking to offload property. 

It is possible that the current conditions of the housing market will lead to an increase in the number of fraud for housing schemes. As competition for even entry-level homes grows considerable, many will likely feel the need to exaggerate their income and other assets on their applications if they want their bids to be considered. Mortgage applications are a particularly vulnerable area for fraud, simply because it is so easy for applicants to falsify some or all of their documentation.

According to a survey done by Equifax Canada, 23% of millennials (people aged 18 to 34) think it is acceptable to inflate income when applying for a mortgage, compared to 12% of the general population. While this is not to say that millennials are necessarily more likely to commit mortgage fraud, it does indicate that there is a significant proportion of the population that is willing to falsify their mortgage applications in some way.

In fact, industry insiders have noted “an increase in errors and a general sloppiness in the application, documentation and approval process” for loans, perhaps due to a combination of low interest rates (and therefore a spike in demand for refinancing) as well as the general lack of experience of most mortgage underwriters, with most having been in their jobs for two years or less. Even if these errors are not made with malicious intent, they could still cause a financial institution to approve a mortgage under false pretences.

Taken together, all of these factors underscore the necessity of having electronic verification and automated KYC checks. Manual checks can be rife with errors, and staff don’t always have the proper training to be able to recognize documents that have been falsified. Electronic platforms, on the other hand, are able to check multiple sources in a matter of seconds to confirm that someone is who they say they are. They can also pick up discrepancies that might not be visible to the human eye, thus making them a more reliable method of verification.

As the housing market continues to heat up, it is even more important to be on the alert for suspicious activity. By adopting these solutions now, banks and other financial institutions can better protect themselves from mortgage fraud while also reducing the amount of time it takes to onboard new customers.

John Dobson is CEO for SmartSearch, a UK-based provider of regulatory technology, including solutions for AML compliance and fraud protection.

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