Stricter Lending Rules Haven't Curbed Lying Mortgage Applicants

Even with tougher rules, people are still lying to get mortgages
Photographer: Laura Segall/Bloomberg

The run-up to the housing market crash of 2008 was marked by iffy tactics to wring profits out of a hot market. New regulations and stricter lending standards have made it harder to engage in some types of bad behavior. But there's a twist: Those new rules may also be leading some mortgage professionals to engage in fraud, out of desperation.

Seventy-four percent of fraud cases reported to LexisNexis Risk Solutions last year included a falsified application, according to an annual report (PDF) on mortgage fraud, up from 61 percent in 2011. (The rate was 70 percent in 2008.) Falsified applications can include borrowers lying about their income, employment history, or whether they're buying a first or second home—all factors that might make it easier to get a loan or affect the interest rates they are offered. (The report tracks only cases in which a lender, insurer, or other industry player was able to verify fraud that was perpetrated with the help of loan officer, broker, or other professional.) There’s also been a marked increase in what the report calls credit documentation fraud, meaning falsified records that borrowers submit to banks to verify their loan applications. 

At least some doors to bad behavior appear to be closing. During the run-up to the housing crisis, mortgage brokers were given free rein to select home appraisers for the deals they sourced. Higher valuations justified higher prices—and by extension, bigger commissions for brokers. New rules implemented in 2008 made it more difficult for brokers to influence appraisals, almost certainly contributing to a decline in what LexisNexis calls appraisal fraud. Fraudsters have also been less apt to doctor closing documents or falsify documents that verify their deposits. 

The motivations for mortgage fraud are also subject to shifting winds. Brokers and other industry pros earned rich commissions when the housing bubble was inflating during the first half of the last decade; those who falsified applications at that time were getting while the getting was good. In leaner times such as the past year, fraudsters may be cheating to pad diminished earnings. “I can’t tell you exactly why people are committing fraud,” says Tim Coyle, a senior director for financial services at LexisNexis. “As credit tightens and volume goes down, we’re seeing people do things they wouldn’t ordinarily do.”