Technology can help prevent mortgage fraud, but until insurers get on board the problem will persist.
“There are products available to the market thanks to a number of vendors, but brokers won’t use them unless lenders accept them, and lenders won’t accept them unless insurers accept them, and insurers are reluctant to specify that new methods are okay,” said Alex Conconi, founder and CEO of Lendesk. “I believe CMHC needs to take a leadership role to make it known that these alternative forms of data verification are satisfactory.”
A recent Equifax survey on mortgage fraud found nearly 23% of millennial respondents thought it acceptable to submit inflated annual income when applying for a mortgage—which stands in startling contrast to 12% of the general population who answered in kind.
While it indicates a problem needing to be nipped in the bud, the industry remains rife with complacency.
“The industry runs on convention right now and everybody is very slow to make any changes because there’s a vacuum of leadership on what’s acceptable and what isn’t,” explained Conconi. “The way insurers work is they’re not going to get upset with you unless there’s a problem with the mortgage, at which point they audit the file and decide after the fact if you did your homework or not.
“Lenders are reluctant to do anything differently than what they’ve been doing in the past and that they know already works. Even if there’s something they know will work better, if there’s a risk the insurer won’t accept it, it’s a risk the lender doesn’t want to take.”
The survey results aren’t entirely surprising since millennials are hardest hit by affordability woes, which—in tandem with the fact that applicants provide necessary documentation—increases incidents of fraud.
“What’s broken is the mortgage application process because it depends on the borrower to provide all the information a lender is going to use to qualify them,” said Conconi. “We live in an interesting time where it’s harder and harder to get a mortgage because of higher housing prices and stringent qualification rules, and it’s easier to lie on applications because the industry relies on the borrower.”
The ramifications of falsifying income on a mortgage application aren’t fully appreciated by borrowers, especially younger ones, says Equifax’s director of consumer advocacy.
“One of the things many people don’t realize is if you’re caught perpetuating fraud, your name can end up in a national fraud database where any future credit application you submit, whether for a line of credit, credit card or car loan, can have a red flag appear next to your name,” said Julie Kuzmic. “That can make getting an application approved into an issue, and it’s certainly not just a one-time thing.”
Should fraud go undetected by lenders and insurers, the borrower may still get their comeuppance.
“Let’s say somebody is successful with that fraudulent mortgage application and they end up with a mortgage that they can’t carry long-term, that can result in late payments or not being able to pay in full,” said Kuzmic. “All those delinquencies end up on individuals’ credit files and have negative impacts on their scores.”