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Should You Be Worried Mortgage Application Fraud Is on the Rise?
Applying for a mortgage can make you feel like your future happiness depends on your ability to decipher the Rosetta Stone. Application forms are long and confusing, standards for acceptance are often opaque and arbitrary, and if your lender refuses to give you a loan, there goes your dream house.
The mixture of anxiety and confusion might help explain why almost three-quarters of mortgage fraud is committed during the application process, according to the latest annual study from Lexis Nexis Risk Solutions.
Application fraud includes things like misrepresenting your income, employment history, or level of debt when reporting your information to a bank when applying for a loan. Lexis Nexis finds application fraud has been increasing as a percentage of total mortgage fraud for the past three years.
Michael Breer, a Boston-based real estate blogger and agent with Sotheby’s, says the trend may be a response to bankers using higher standards to determine who deserves a loan. “The whole process [of securing a mortgage] has become more difficult since 2008,” Breer said. “It’s a lot more rigorous.”
Breer also says confusing rules about what exactly counts as income, or what kinds of liability need to be disclosed, muddy the process and make it easy for people to skew applications in their own favor. “They can always claim they were ignorant of that fact or they didn’t know they had to claim that,” he said.
Paul Willen, a senior economist in the research department of the Federal Reserve Bank of Boston, agrees. In fact, he thinks in many cases “fraud” is too strong a word for the types of misrepresentation common on mortgage applications.
“The process is so arbitrary and filled with strange rules” about things like year-end bonuses and home value appraisals, he said. “Most people – if you asked them, ‘Are you committing fraud?’ – they would say ‘No.’ I don’t think they feel like they’re doing something bad.”
Still, Willen concedes that such frequent “fudging,” as he calls it, can have a negative effect on scrupulously honest homebuyers. “If you are in an environment where everybody else is fudging it, the lender is just going to assume everyone is fudging it, including you, and so [if you’re reporting accurately] it’s as if you have less income.”
But Willen urges mortgage-seekers not to get hung up on the issue, especially because income, one of the most fudge-able things on a loan application, is not actually a very good predictor of whether someone will default on mortgage payments.
An applicant’s credit score and ability to handle a large down payment (both of which are tough to fudge) are much better indicators of trustworthiness, according to Willen. And he thinks lenders know that and base their decisions more heavily on those factors.
Greer adds that Boston homebuyers are largely insulated from the effects of application fraud, though for reasons they may not like. He says Boston home prices are typically so high, “you’re more likely to have high income buyers, people with higher credit.” That kind of buyer generally isn’t worried about having a mortgage application denied, anyway.
In all, Willen says even if application fraud is on the rise, it’s nothing new and its effects are manageable. “There are problems with this every time you have some situation like college applications, job applications – people inflating the degrees they’ve received, inflating their GPAs,” he said. “I think it’s less of a problem with mortgages than people think.”
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