GSE caps on investor loans may add to rising fraud risk: CoreLogic

The risk of misrepresentation on mortgage applications keeps rising, and new restrictions at the government-sponsored enterprises aren’t helping, CoreLogic said in a report released Tuesday.

The likelihood of fraud rose nearly 12% on a consecutive-quarter basis and almost 8% year-over-year to an index value of 122 for the first quarter, and the GSEs’ restrictions on non-owner-occupied loans mean it’s likely even higher now.

The GSEs’ new limits increase fraud risk because they put pressure on applicants to misrepresent their occupancy status so they can get the lower rates Fannie Mae and Freddie Mac offer, said Bridget Berg, principal, industry solutions, property intelligence at CoreLogic.

“New GSE caps and underwriting changes make it more difficult and expensive to finance investment and second home properties. These pressures are likely to impact both income and occupancy fraud risks in the coming quarters,” Berg said in a press release.

Fraud risk rose in the first quarter even though the share of refinance applications held steady at 65%, CoreLogic found. A refi-heavy market can minimize fraud risk, and when those loans peaked last year CoreLogic’s index fell to a 10-year low.

The first-quarter rise in fraud risk was likely driven by affordability constraints, which can lead consumers to misrepresent their incomes in various ways. For example, Freddie Mac recently found some falsified child-support payment information in some of its loan files.

Top metropolitan statistical areas where fraud risk is highest remain concentrated in Nevada, the New York area and the Sunshine state.

Las Vegas in the first quarter topped the list with an index value of 220, followed by Poughkeepsie, New York, 219; and three Florida metros: Miami, 211; Tampa, 176; and Orlando, 173.

CoreLogic’s index measures risk against a baseline value of 100 that reflects the share of high-risk loan apps in the third quarter of 2010.