Fraud risk within the mortgage industry was unchanged from fourth-quarter 2021 to first-quarter 2022, although risk has spiked on a year-over-year basis, according to CoreLogic.
The company’s National Mortgage Application Fraud Risk Index receded slightly quarter over quarter, dropping from 138 in Q4 2021 to 137 in Q1 2022. On an annual basis, however, the index climbed 15% from its reading of 119 in Q1 2021. Higher index readings mean a greater risk of fraud.
The index is derived from an aggregation of individual loan application fraud risk scores. The year-over-year increase can be attributed to the large decrease in loan volumes, coupled with a dwindling refinance pool due to rising interest rates. Due to the involvement of more parties, purchase loans traditionally carry higher fraud risk than refinances, so the decline in the refi market share (which comprised only 46% of all loan applications in Q1 2022, down from 53% in the previous quarter) has helped push the risk index upward.
The index is likely primed for more increases, at least in the near future. CoreLogic’s second-quarter projections call for further diminishing of the rate-and-term refinance share, along with an overall decrease in lending volume. More of the refinance population will involve cash-out loans, which carry a higher risk of fraud than other types of refis.
That’s not great news for lenders. A new True Cost of Fraud Study from LexisNexis Risk Solutions found that, on average, every $1 of mortgage-related fraud costs originators at depository institutions $5.34, while nondepository originators have an average loss of $4.66 for every dollar of fraud. These costs come from expenses related to various aspects of fraud mitigation, from detection and investigation to reporting and recovery.
Fraud costs, LexisNexis reported, are most prevalent from borrowers who use online and mobile transactions. Direct-to-consumer (retail) and correspondent lending are the leading transaction types for fraud, with direct-to-consumer loans representing a larger share of fraud costs and average monthly attacks. Depository originators, along with title and settlement companies, also experience a notable portion of fraud losses from construction-related loans, LexisNexis reported.
“Although the future is uncertain, it’s safe to assume that the accelerated movement to online/mobile transactions will continue to grow and that mortgage originators, servicers and title/settlement companies should build out and enhance the digital customer experience while protecting against fraud,” said Dawn Hill, director of real estate fraud and identity strategy at LexisNexis Risk Solutions
“A successful fraud detection and prevention approach involves an integration of technology, cybersecurity and digital experience operations in a way that addresses the unique risks from different transaction channels and payment methods, as well as by individuals and types of transactions.”