Why decreasing mortgage fraud hinges on eliminating the middleman
New technology makes it easier for mortgage brokers to stop fraud. But unfortunately, fraudsters always seem to be one step ahead.
According to recent research from CoreLogic, mortgage fraud rose 17 per cent from 2016 to 2017. Fraudulent applications from borrowers accounted for one in 122 applications during the first half of 2017. The types of fraud differ, but all of them allow one party to steal money from another—and the swindled party often doesn’t discover the fraud until it’s too late.
One of the most common scams, occupancy fraud, occurs when borrowers use a property for something other than what they claimed on the application. For instance, an applicant might claim he wants a mortgage for his own house (to get a more favourable interest rate), then turn around and rent the unit for a profit, pocketing extra money that would have gone to the lender had the applicant been honest. Other common tactics include falsification of income and debt, misrepresented employment, and hidden sources of down payments.
While wide-scale mortgage fraud rarely makes the front page today, this smaller-scale fraud has become a major issue for mortgage brokers. In 2016, one former real estate sales associate received nearly five years in prison for concealing sales incentives from lenders. A few years earlier, two men in New Jersey were found guilty of falsifying employment information and using straw buyers to scam more than $13 million from investors. In 2015, a developer in Annapolis pleaded guilty to $2.5 million of fraud involving closing costs.
With so many people committing small-time fraud—and so many inventive ways to hide that fraud—mortgage brokers must be diligent in their collection and verification of applicant information. No one has the time to play private investigator on every applicant, though. So what’s a mortgage broker to do?
Fortunately, there is an easier way. Rather than trust applicants to provide accurate information and then spend time verifying that information later, mortgage brokers can cut out the middlemen and get immediate access to true, verifiable data by turning to the blockchain.
How Blockchain Can Stop Mortgage Fraud
Employers, banks, and other parties clog up the mortgage process and make it difficult for brokers to verify whether an applicant’s information is true. But rather than tolerate these inefficiencies and hope for the best, brokers should turn to technology that can eliminate the middlemen while still retrieving information directly from the source. The technology that makes this possible—blockchain—hasn’t been involved in the real estate business for long, but it’s already changing how mortgage brokers prevent fraud.
For example, when brokers manually enter borrower information like bank documents, pay stubs, and tax forms, they trust borrowers to tell the truth. But borrowers in the traditional mortgage process can tell brokers anything they want. And the only way to catch this fraud is to look closely at each application, then hunt down individual middlemen who can confirm or deny the truth of applicant claims.
On the blockchain, however, this tedious process turns into a trustless procedure. Brokers don’t need to trust applicants for anything: they can simply pull employment documents, debt information, and financial records directly from the employers, lenders, and banks. Not only does this free brokers from the arduous task of verifying applicant information, but it makes the process easier for applicants, too. Instead of tracking down an entire stack of documents, applicants can just provide their personal information and let the brokers take care of the rest.
The best part is that the documents put onto the blockchain are immutable, which means applicants and fraudulent insiders can’t change them once they’re submitted. The documents are final. And in this transparent process, anyone can look at the trail of records and see who received what and when. With such a powerful combination of security, convenience, and speed, blockchain makes perfect sense as the next step of evolution in preventing mortgage fraud.
Even parties other than brokers and applicants will benefit. Soon, regulators will combine conveyance and recording into one seamless transaction. And sellers and buyers will stop arguing about title insurance, which will become unnecessary as blockchain makes title records globally accessible.
Blockchain remains a misunderstood technology in the eyes of the public, but for mortgage brokers, implementation of this technology can’t wait. With rising mortgage fraud and increasingly complex lending processes, brokers should cut out the middlemen as quickly as possible and move to a more accurate, trustworthy alternative.