There's fraud risk in almost half of real estate transactions

Close to half of all mortgage-related transactions showed some sign of potential fraud risk in the second quarter, with a majority arising from errors in closing-protection letters, according to Fundingshield.

Approximately 47.1% of transactions in a $74 billion portfolio across residential, commercial and business-purpose lending had issues that could lead to wire or title fraud, the company said. The share was virtually flat compared to the previous quarter's 48%. Loans with errors had on average 2.21 issues per loan, just off from 2.22 in the first quarter, according to Fundingshield's new report. 

"With a heightened cyber-threat environment with more cyberattacks resulting in more leaked private information, bad actors have more data to leverage to exploit gaps in controls in the mortgage and real estate market," said the fraud prevention provider's CEO Ike Suri. 

Issues within closing-protection letters, the contracts between lenders and title underwriters, were found in just over 45% of loans between April and June, a new record. The share rose from 44.6% three months earlier. The second quarter also saw near all-time high risk potential related to wire data and CPL validations, which address the standing of title agents, their registration status and data accuracy between various companies' systems.  

Validation issues appeared in 9.8% of transactions and wire risks on 8.8%. Such errors elevate the risk for fraudsters to obtain knowledge of upcoming real estate deals and steal funds intended for legitimate business purposes through various means, including email compromise. The annual growth in risk from CPL validation increased 45% between the second quarters of 2023 and 2024, Fundingshield said. 

In research published earlier this summer, Lexisnexis Risk Solutions determined that, in the face of fraud, only about half of financial services businesses felt fully confident of their ability to successfully deal with scams, which often involve impersonation of a business or its employees. Fraudsters view real estate transactions as potential lucrative opportunities due to the large amounts of cash changing hands. 

At the same time, other companies have introduced platforms aimed to detect document manipulation and file tampering in order to identify potential fraud.  

Elsewhere in Fundingshield's report, the company found the growth rate in errors of any kind increased 26% from year to year across the country. But in attorney-closing states, which require lawyers to be present at the transaction, issues grew by 90%, primarily due to unauthorized practice of law errors, according to the company.