Borrower fraud remains high on mortgage applications

Borrowers lie on their mortgage applications to improve their chances of receiving a loan.

The stricter mortgage lending rules that federal authorities have enacted since the housing crisis have had many positive effects, including reducing the number of subprime mortgages and essentially eliminating the threat of a new market bubble. One area where they have had little effect, however, has been in deterring borrowers from lying on mortgage applications.

According to a white paper published this month by LexisNexis, 74 percent of all cases of fraud they analyzed in 2013 involved application improprieties, a higher rate than in 2008, the year the market crashed. While borrowers lying on their applications is nothing new, the report says there has been an uptick in the number of brokers and mortgage professionals who are twisting the facts as well.

Thanks to the tighter regulations, brokers have fewer options to influence appraisals and falsify closing documents that can lead to higher commissions for them. As a result, they're turning to other channels for what LexisNexis calls fraud for profit, trying to make up for a market that is much smaller than in the bubble years. In the case of borrowers, fraud comes in the form of lying about employment history and income to improve their chances of getting a loan or bring interest rates down.

"I can't tell you exactly why people are committing fraud," said Tim Coyle, LexisNexis senior director for financial services, to Bloomberg Businessweek. "As credit tightens and volume goes down, we're seeing people do things they wouldn't ordinarily do."

Lenders should be wary of these practices. Loan servicing software helps track payments and create detailed reports to ensure that all financial information is accurate and up-to-date.