Fraud Risk Grows as HELOC Lending Rises

As improvements in home values spark a rise in equity lending, analysts are concerned that fast-growing segment of the market is attracting more fraudulent behavior.

Examining mortgage application data processed by its LoanSafe Fraud Manager, property data firm CoreLogic reported this week that both the sources and frequency of mortgage fraud have transitioned from an alarming level after the crisis to a more "normal" state.

There is one exception, however: Home equity lines of credit (HELOCs), which have seen fraud risk rise along with demand for loans over the past year and a half.

That trend comes despite the recent decline in the total number of mortgage applications compared to normal levels.

"When interest rates troughed and then began to rise in late 2012 and early 2013, many of the best-qualified borrowers exited the refinance market. At the same time, increasing home values gave rise to higher levels of home equity, enabling many homeowners ... to purchase a different property, refinance, or obtain a home equity loan," said Xiaolin Tan, staff scientist for CoreLogic, in a blog post for the company. "While this dynamic has been a positive one for many households, the increase in HELOC activity has brought with it a higher level of fraud."

Tan offered as an example multi-lien HELOC fraud, which is an "extremely profitable scam" that takes advantage of the lag time between closing and recording a loan to solicit multiple loans on one property.

While that's just one example, Tan said many more types of HELOC fraud have come to light recently as equity loan volume has increased.

Contrary to that trend, CoreLogic found other types of mortgage application fraud measured in its index have remained largely stable, though performance is varied across loan segments: For example, fraud for both purchase and refinance mortgages with higher loan-to-value ratios has been consistently rising since 2010, while risk across other large segments has been flat or down.

At the state level, Florida remained the riskiest place for mortgage application fraud in the third quarter, keeping its historical spot. Nevada, another state hit hard by the housing crisis and still struggling to recover, ranked second. New York, New Jersey, and Hawaii rounded out the top five.

Meanwhile, Delaware and New York each saw mortgage application fraud risk hit its highest level locally since 2010 in the third quarter.