As volume in specific spaces increased in the third quarter, so did fraud
While Cotality’s Q3 fraud report showed some good news on the overall fraud front, some areas of concern still exist, especially in the multifamily segment and investment properties in general.
Overall, the company’s National Mortgage Application Fraud Risk Index fell 2.7% from the second quarter, but was still up 8.2% year over year. The company estimates that 1 in 118 mortgage applications has indications of fraud.
Matt Seguin (pictured top), senior principal, fraud solutions at Cotality, said the areas of biggest concern continue to be on the commercial side.
“The two biggest segments, or the riskiest, are investment properties and multifamily properties,” Seguin told Mortgage Professional America. “The really interesting part is, what’s driving that is the volume has really increased in investment and multifamily over the last year. So that's what really seems to be driving the annual increase in the index is the volume increase in the two biggest segments.”
According to the report, 1 in 45 investment applications and 1 in 26 multifamily applications have indications of fraud. But the volume of investment property loans increased by 36% year-over-year, and multifamily increased by 64%.
The rise of the DSCR loan
One of the theories Seguin has about the increase in fraud in those two areas concerns the rise in Debt Service Coverage Ratio (DSCR) loans.
“I think it's the rise of the DSCR loan,” Seguin said. “It's made investment loans a lot easier for someone who maybe has 5 to 10 investment properties. Like, ‘I don't have to provide all my tax returns and all these leases and go through all of that.’ I think the other part is it's a cool thing to be a landlord today and to own a rental property.
“If you go on TV, there are rehab shows and fix-and-flip kind of shows constantly. And there are similar things on social media. I'm sure you can watch a TikTok video. I think that all comes together and plays a factor in driving up that volume.”
Cotality processes hundreds of alerts and matches them with known fraud cases to better predict where fraud will occur. Two areas that are connected and have seen increases in fraud are income and occupancy fraud. Income fraud was when the buyers or investors had high income relative to the property they were purchasing.
“In income, there was one that really fired a lot: high income when the property value is low,” Seguin said. “It led you down two paths. One was inflated, exaggerated income. Or, maybe it's a sign of occupancy misrep. Somebody’s buying a house, an owner-occupied house well below their means, and it's trying to trigger you to think, does this loan make sense? On paper, everything looks great. But it is that old underwriter, common sense check that takes place there.”
Identity fraud growing
Another area brokers might not consider when looking for fraud is identity theft. It is much more common in other types of credit products that need less documentation. But it is showing up in Cotality’s data as an area to keep an eye on, Seguin said.
“That one is interesting, because I think I see a lot of news about identity fraud, but it's not really in the mortgage space,” he said. “It's more in banking or personal lending where that seems to take place. Identity fraud doesn't seem to be as much of a player in the mortgage fraud world, but we did have some alerts that really started jumping out this last quarter that were worth mentioning here.”
Seguin believes some of the issues could just be simple mistakes when entering Social Security numbers. However, there are stories of people acquiring data from deceased individuals.
“There's an alert that looks for Social Security numbers that are for deceased borrowers,” he said. “There was a bit of a jump in those that popped up. Maybe it's a fat-finger error. But we all know that Social Security numbers are bought on the black market. We'll see if that trend continues here in the future.”
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While that could be a growing concern, Seguin believes the mortgage industry has safeguards in place to prevent SSN fraud.
“I think our industry is pretty good at catching this,” Seguin said. “There are so many tools. Just even credit reports are going to fire alerts on this kind of thing. So, it's going to be a lot of effort for the fraudster to go through. You're probably looking at some sort of straw-buyer situation there, if that's legitimately going on.”
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