Fraud and repurchase risk are two notable concerns within the mortgage industry. In the past year, mortgage fraud has been on the rise as demand has shifted away from refinances.[1] Since purchase loans involve more parties, they carry a higher risk of mortgage fraud.
What’s more, the housing market is facing a shrinking volume. Homes are in high demand. Historically, these types of market conditions have led to an increase in income and asset misrepresentation. Any misrepresentations uncovered in your mortgage applications could lead to costly repurchase demands down the line.
Fortunately, you can protect yourself from mortgage fraud and repurchase risk with the help of undisclosed debt monitoring (UDM). Below, we’ll examine how UDM provides this protection.
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What Are The Different Types of Mortgage Fraud?
Mortgage fraud comes in many forms. Some common types of mortgage fraud include:
- Identity theft – Fraudsters may use fake or stolen identities to purchase homes after getting their hands on Social Security numbers, pay stubs, or other types of personal information. Oftentimes, identity theft victims don’t find out that the fraud is taking place until it’s too late.
- Equity skimming – Equity skimming is when someone uses a straw buyer to purchase a home. A straw buyer is someone who agrees to purchase the home and transfer its ownership using a quit claim deed. The fraudulent person can then rent out the property until the home is foreclosed upon.
- Document falsification – Sometimes, desperate applicants will modify their documents to inflate their income, assets, employment history, or credit reports.
- Asset rental fraud – Some applicants may bolster their list of assets by renting them or borrowing them during the application process.
- Income fraud – Income fraud occurs when an applicant lies about their employment or overstates their income. Some fraudsters may go as far as to falsify fictitious paystubs from fake employers.
- Transaction fraud – Transaction fraud takes place when a buyer and a seller enter into an undisclosed agreement about the transfer of the property. For example, they may falsify the existence of a down payment to transfer a home’s ownership for nefarious purposes. You can often spot this type of fraud by a lack of real estate agent involvement or quick transfer of the property’s title post-sale.
- Occupancy fraud – Occupancy fraud occurs when a borrower misrepresents their intended use of a home. Mortgages for investment properties typically receive higher interest rates than primary residences.[2] Knowing this, some applicants may lie and say they plan to live in a home that they intend to rent out. On the other hand, some buyers may say they’ll use a property for investment purposes so they can claim future rental income and pad their eligibility. In reality, they may plan to live in the home as their primary residence.
- Appraisal fraud – Appraisal fraud enlists the help of a corrupt appraiser who misrepresents the value of a home. Appraisal fraud often occurs during property flipping scams. For example, a borrower may ask an appraiser to undervalue the property upon purchase and inflate its value upon resale.
- Undisclosed debt – Finally, some borrowers may lie about their liabilities to convince lenders they can afford larger loans than they can. 23% of fraudulent mortgage applications contain misrepresented liabilities.[3]In addition to hiding existing debt, some borrowers may incur additional debt between their mortgage application and loan closing date, which is known as the “quiet period.” This debt is called undisclosed debt, since it’s not formally disclosed during the application process. Some common forms of undisclosed debt include auto loans and large credit card purchases.Oftentimes, borrowers incur undisclosed debt without any fraudulent intentions. An opens a store credit card or buys a new vehicle. Other times, borrowers may apply for a mortgage before taking on this debt, knowing that doing so afterward could jeopardize their eligibility.
As you can see, mortgage fraudsters have many creative schemes up their sleeves.
The good news? Mortgage fraud is becoming increasingly challenging to commit. Thanks to innovative technologies, like UDM, mortgage lenders are more empowered than ever to verify borrowers’ information and fight against fraud.
How Undisclosed Debt Impacts Repurchase Risk
Whether or not a borrower has fraudulent intentions, their undisclosed debt can increase your repurchase risk.
Here’s why:
- Undisclosed debt can alter an applicant’s eligibility – When you assess a mortgage applicant’s eligibility, their debt-to-income (DTI) ratio is one of the most significant factors you consider. You want to make sure your borrowers can afford to take on a mortgage in addition to their existing liabilities.
If an applicant’s debt increases notably after you approve their application and begin originating their loan, it could make it so they no longer meet your requirements.
- Undisclosed debt may hinder your ability to sell loans on the secondary market – You’re not the only one who cares about your borrowers’ ability to repay their mortgages on time—government-sponsored enterprises (GSEs) do too. If you plan to sell a loan on the secondary market to Fannie Mae or Freddie Mac, you’ll need to let them know about any undisclosed debt.
Fannie Mae and Freddie Mac have specific rules regarding undisclosed debt. For instance, if your borrower’s DTI ratio increases by three percent or more during the quiet period, they’ll require you to re-underwrite the loan before selling it to them.[4]
- Undisclosed debt could lead to costly repurchase demands – Lastly, undisclosed debt can increase your repurchase risk. For example, let’s say you successfully sell a loan to an investor. This investor may request to have the loan reviewed at some point. If the investor uncovers any undisclosed debt during their review, they reserve the right to demand that you repurchase the loan. Unexpected buybacks can devastate your cash flows and bring your business growth to a halt.
UDM: The Solution For Undisclosed Debt
Luckily, there’s an easy solution to undisclosed debt: undisclosed debt monitoring. UDM is a service that continuously monitors your borrowers’ credit reports for new:
- Increases in DTI
- Tradelines
- Credit inquiries
- Balance changes
- Late payments
- Collection items
When UDM is in place, you can be notified of these changes in real-time. Receiving automated alerts enables you to focus your attention on the borrowers who require additional reviews, rather than worrying about your entire portfolio. In turn, UDM can streamline your workflows and help you maintain higher loan quality standards efficiently.
Thanks to these benefits, UDM can also help you prevent certain types of mortgage fraud and reduce your repurchase risk.
What is Cascade UDM?
Here at Certified Credit, our advanced UDM solution is called Cascade UDM. Cascade UDM can monitor your borrowers’ credit reports throughout the quiet period.
Cascade UDM is easy to set up and use. All you have to do is share your list of borrowers with our team. After that, you can rest assured that your borrowers will be actively monitored for up to 120 days. You can customize your monitoring timeline to suit your lending process.
Cascade UDM will share alerts with you within 24 hours via email. Thanks to its convenient API, you can also request to receive alerts directly within your loan origination system (LOS).
Benefits of Cascade UDM
Cascade UDM can assimilate into your existing workflows with ease. That’s because it seamlessly integrates with many popular LOS, allowing you to track all of your borrowers’ information from one place.
You can also customize how Cascade UDM sends alerts, whether you prefer receiving emails or LOS notifications. Once you’ve set your alert preferences, Cascade UDM’s automation will take care of the rest.
Most notably, Cascade UDM can help you stay in compliance with the GSEs’ Loan Quality Initiative (LQI) standards. LQI standards require you to check your borrowers’ credit reports upon closing to ensure they’re still eligible for their loans. While you can request refresh credit reports for this purpose, Cascade UDM eliminates the need.
Best of all, Cascade UDM helps you identify any potential closing issues with time to spare. In contrast, refresh reports may spring surprises on you last minute, which can disrupt your sales pipeline and put stress on your origination team.
Certified Credit: Cascade UDM, Affordable Refresh Credit Reports, and More
As you can see, UDM is a powerful tool for preventing mortgage fraud and repurchase demands. Most importantly, Cascade UDM can bestow you with peace of mind, knowing that your borrowers’ credit is always under review during the quiet period.
Here at Certified Credit, we offer many helpful mortgage lending solutions in addition to Cascade UDM. Some of these solutions include our:
- Affordable credit reports
- Automated lead generation tools
- Automated prequalification
- Automated verification of income and employment
- Credit score improvement tools
- Fraud and risk support
- Settlement services
- Money-saving strategies
You can give Cascade UDM a try by signing up for our Cascade UDM demo. If you want to experience our other solutions, simply schedule a credit consultation with Certified Credit.
Are you ready to reduce your mortgage fraud and repurchase risk? Partner with Certified Credit today.
Sources:
[1]Housing Wire. Risk of mortgage fraud is on the rise in the current market.
https://www.housingwire.com/articles/risk-of-mortgage-fraud-is-on-the-rise-in-the-current-market/
[2] Lending Tree. How Much More Will You Pay for Investment Property Mortgage Rates?
https://www.lendingtree.com/home/mortgage/investment-property-mortgage-rates/
[3] Equifax. Undisclosed Debt: The Mortgage Blind Spot.
https://www.equifax.com/business/blog/-/insight/article/undisclosed-debt-monitoring/
[4] Fannie Mae. What is required if additional debt or reduced income is discovered after the underwriting decision?
