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Mortgage Application Fraud Continues to Climb

liarsDespite improving economic conditions, occurrences of mortgage application fraud grew in 2013 for the third time in as many years, according to a report released Monday.

In its annual analysis of mortgage fraud across the country, LexisNexis Risk Solutions found 74 percent of mortgages submitted to its Mortgage Industry Data Exchange last year involved some sort of fraud or misrepresentation on the application. That figure compares to 69 percent in 2012 and 61 percent in 2011.

Tim Coyle, senior director of financial services for LexisNexis Risk Solutions and co-author of Monday's report, said restrictive credit conditions are partly to blame as originators struggle to boost profits. (The report deals only with confirmed fraud reports involving industry insiders.)

"The credit market is a lot tighter than it used to be, making it a lot more difficult," Coyle said. "As it becomes tighter, you're going to see more and more fraud like this, that is on the front end of [the mortgage process]."

Among other mortgage fraud types, "fraud and misrepresentation on the credit report" saw the most significant increase, rising to 17 percent from 5 percent in 2012.

On the other hand, "appraisal and valuation fraud" experienced the biggest drop over the year, with only 15 percent of loans reported showing those problems compared to 26 percent in 2012.

Just as more stringent regulations pushed up application fraud incidence, Coyle said increased scrutiny—in the form of the Home Valuation Code of Conduct—helped drive down appraisal fraud.

"This landmark regulation, which disrupted the historical appraisal process, has everything to do with the drop in this year's appraisal fraud," he said. "Although no longer in force, HVCC influenced the Appraiser Independence Requirements now found in The Dodd-Frank Wall Street Reform and Consumer Protection Act."

Florida held on to its rank as the most fraud-ridden state in the country last year, posting a Mortgage Fraud Index score of 529—more than double the index score for Nevada, which came in second at 221. An index level of 100 represents the anticipated amount of fraud based on a state's number of loan originations.

Despite having the highest index by far, the Sunshine State actually saw a major improvement from 2012, when it recorded a fraud index of 698.

"I was surprised to see Florida drop as much as it did. One hundred seventy points is a big drop in a year," Coyle said.

Also surprising was the appearance of Utah, which jumped to seventh place on the list with an index of 149—up more than 100 points from 2012. The LexisNexis team attributed the increase to the state's proximity to fraud hotspots like California, Arizona, and Nevada, indicating a potential movement in fraudulent activity.

"In the U.S., fraud across all industries is close to a trillion dollar problem," Coyle said. "The results of this study clearly demonstrate that the mortgage industry, like other industries, is making progress in combating fraud in some areas, such as appraisal fraud, but still has a lot of work to do in other areas."

About Author: Tory Barringer

Tory Barringer began his journalism career in early 2011, working as a writer for the University of Texas at Arlington's student newspaper before joining the DS News team in 2012. In addition to contributing to DSNews.com, he is also the online editor for DS News' sister publication, MReport, which focuses on mortgage banking news.

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