A lot has changed in the mortgage market during the past few years. Home prices have improved and sales have gotten more competitive. Even mortgage fraud has taken a different route.
Mortgage application fraud risk is down 5.6 percent year-over-year in the second quarter of 2013, according to the most recent CoreLogic MarketPulse, a monthly look at the U.S. economy and housing. What's more interesting is the fraud trend. The reports says the industry has seen a tendency toward income-based fraud, potentially because of ability-to-repay requirements and rising property values.
As part of legislation enacted after the collapse of the sub-prime mortgage market, lenders now have to verify a mortgage applicant's ability to repay the loan if it's a typical mortgage (such as through Fannie Mae, Freddie Mac, the FHA or VA). One big problem that contributed to the housing crisis was the stated income loan, in which borrowers needed to provide little in the way of verification that they could repay the loan.
The ability-to-repay requirement is designed to prevent lenders from approving mortgages borrowers cannot afford, and therefore some consumers may find financing out of reach. This could make it more likely that applicants try to falsely claim an income that's needed to acquire the mortgage, CoreLogic reports.
Adding another layer of change, a new debt-to-income ratio limit goes into effect Jan. 10, meaning a borrower's debt load cannot exceed 43 percent of his or her annual income. (At the moment, those limits vary by lender but can be as high as 55 percent.) A lender needs to verify all of this information through third-party sources, so while falsifying the numbers on your application is a bad idea in general, it's not going to get you very far, either.
On a geographic level, the places with the highest mortgage fraud risk were the areas in and around Atlanta; Miami; Tampa, Fla.; Riverside, Calif.; and Washington, D.C., as shown by an analysis of the largest metropolitan statistical areas. While it has the highest propensity for fraud, Atlanta is also considered an affordable city for buying a home, while Miami is one of the least affordable, according to a recent study by Interest.com.
The dollar value of fraudulent loan applications increased from the first quarter to the second quarter, but it did so alongside an increase in overall applications, so the quarter-to-quarter risk index remained the same. Other highlights from the quarter include a decline in underwater mortgages in every state, particularly in Nevada and Georgia. In the second quarter, 14.5 percent of borrowers were underwater, down from 19.7 percent in the first quarter and the recent peak of 25.2 percent in the fourth quarter of 2011.
Foreclosures have also continued to decline, with distressed property volumes falling in 96% of metro areas.