As Mortgage Market Cools, Fraud Risk Heats Up

With rising interest rates cooling down the mortgage market, researchers warn the risk of mortgage fraud may be heating up.

Risky loan applications have been trending up for the past year, rising 75% during 2021, according to the real estate analytics group CoreLogic, which compiles a quarterly index of fraud risk. 

As mortgage transactions fall and the balance of applications shifts from refinancing loans more toward purchases, that threat level is likely to jump in the months ahead, said Bridget Berg, the firm’s head of fraud solutions.

“We can see an inverse relationship with the lending activity and the riskiness of the average loan application,” Berg said. “As overall loan application volumes go down, the randomly chosen loan application is going to be at a higher risk, there's going to be a higher concentration of higher risk loans.”

This dynamic is often seen when markets slow down and financing costs rise, Berg said. It is driven in part by desperate buyers as well as loan officers who, with fewer legitimate prospects, are more willing to turn a blind eye to fraudulent behavior or even participate in it to get deals done.