As the housing market becomes more competitive, homebuyers are increasingly pressured to seek out larger loans – leading some to misrepresent their income on loan applications.
Data from First American Financial Corporation’s Loan Application Defect Index for February 2019 revealed that a tightening housing market has motivated an increasing number of homebuyers to misrepresent the information they submit.
The index, which estimates the frequency of defects, fraudulence, and misrepresentation in the information submitted for mortgage loan applications, reported a 4.4% increase of misrepresentation from the previous month.
“Fraud can come in many forms, but income falsification remains one of the most likely misrepresentations,” said Mark Fleming, chief economist at First American. “By December 2018, income-specific loan risk had increased 12% compared with one year ago.”
Income risk has remained flat in 2019 so what is driving income misrepresentation? According to First American, the shift in the mix of loan applications toward more purchase applications and the pressure on borrowers is feeding the 2018 increase in income defects. Between January 2018 and December 2018, interest rates increased 0.61 percentage points, while house prices continued to grow. Because of higher interest rates, refinancing activity slowed and the share of purchase loan applications compared with refinance loan applications increased.
Fleming stated that purchase loan applications are more likely to have fraud than refinance transactions. During the strong seller’s market of 2018, borrowers had more motivation to misrepresent income on a loan application in order to qualify for bigger mortgages or bidding wars.