Mortgage alert: Borrowers change how they cheat
The good news: Fewer borrowers are lying on their mortgage applications. The bad news: The remaining cheaters may be pulling a more dangerous scam. Instead of inflating their home prices, they are now inflating their incomes and assets, according to researchers at CoreLogic.
"There's no need to inflate the value of the home because home prices are rising," said CoreLogic's chief economist Mark Fleming.
But new federal regulations forcing lenders to prove that borrowers can repay their loans has some borrowers shifting the focus of their fraud to their personal balance sheets. Lenders are now scouring financial records, unlike during the recent housing boom, in order to make sure they are complying with new rules, so fraudsters are following suit, jacking up the numbers.
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That could be more dangerous to the banks, because jacking up a home price only hurts if the home price falls, but inflating income means the borrowers may not be able to pay the loan no matter what.
"The bubble markets of old, the lax lending practices, were making it a lot easier to perpetrate fraud. On a no-doc loan you didn't need to prove anything. Clearly that shifted to a much tighter underwriting standard environment," said Fleming.
Overall, mortgage fraud was down 5.6 percent in the second quarter from a year earlier, although it is up slightly quarter to quarter, according to CoreLogic. Fraudulent residential mortgage loan applications totaled an estimated $5.3 billion nationally in Q2, down from $5.5 billion a year earlier. That is still less than 1 percent of home loan applications.
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Of all the ways to defraud a bank, over 13 percent of loan liars misrepresented their incomes, a 7.5 percent jump quarter to quarter. While one-fifth of fraudsters deliberately over- or under-valued the home to achieve illegitimate gains in Q2, that was actually a 7.1 percent drop from the previous quarter.
While the propensity to commit fraud is declining nationally, perhaps due to stricter underwriting, the dollar value of fraud is rising, simply due to growing loan volume.
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The states with the highest estimated value of fraudulent mortgage applications were California, New York, Florida, Texas and Virginia. These states have some of the nation's highest home values.
—By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.