“Eric Hill engaged in premeditated criminal acts with the sole purpose of enriching himself, without regard for millions of American homebuyers who rely on federal housing programs to insure their mortgages,” Wyatt Achord, special agent in charge with the Department of Housing and Urban Development (HUD) Office of Inspector General, said in a U.S. Department of Justice (DOJ) statement released on the case. “His fraudulent actions strike not only at the fiscal integrity of the FHA, but also our neighbors and communities who are victims of these schemes.” 

Hill, 52, and nearly a dozen co-conspirators, eventually were convicted and sentenced for their crimes. In Hill’s case, he was sentenced this past January to two-and-a-half years in federal prison to be followed by three years of supervised release. 

The Hill case is not a common occurrence in the world of housing finance, but it is far from rare. As the housing market enters a purchase-market cycle sparked by rising mortgage rates that have killed off a long-running refinance boom, we can expect to see mortgage-fraud schemes proliferate, industry experts say.

“The main drivers of the increase in fraud risk are the lower volumes of rate-term refinances and higher share of mortgages for the purchase of a home,” wrote Molly Boesel, an economist with CoreLogic, in an article summarizing the findings of the firm’s annual Mortgage Fraud Report. “Purchase transactions have higher fraud risk than refinances. 

“In a purchase, there are more parties involved, more commissions, and more motives to ‘make the deal work.’” 

According to Boesel, CoreLogic estimates that the current overall mortgage-application fraud rate is at about 1 in 120 loans. For purchase-only loans, that ratio tightens to 1 in 90 loans. “It becomes a more concerning 1 in 23 if we only look at investment [property] purchases,” she added.

The extent of the mortgage-fraud problem and its national reach can be gleaned from DOJ press releases gathered from across the country. A website tracking some of those cases, the Mortgage Fraud Blog, highlights 10 federal cases from March, April and early May. All were winding their way through the federal court system — with defendants facing Indictments, arraignments, plea hearings or sentencing for mortgage-related fraud. 

Following are some of the DOJ presser headlines for those cases and links to the official releases describing the charges.

• Brothers Facing Federal Charges for Alleged Bank Fraud in the Purchase and Sale of Two Baltimore Properties: Defendants allegedly falsified bank statements, misrepresented ownership intentions, and allegedly made false statements on a loan application — [Baltimore, Maryland]
• Former Real Estate Attorney and Wife Plead Guilty to Mortgage Fraud and Tax Charges [Boston, Massachusetts]
• Roswell Escrow Manager Arraigned on Charges of Wire Fraud and Illegal Transactions: The FBI Is Seeking Information from Potential Additional Victims — [Albuquerque, New Mexico] 
• Woman Previously Convicted in Fraud Scheme Admits to Defrauding the Federal Housing Administration, Business and Unemployment COVID Relief Programs — [Providence, Rhode Island]
• Disbarred Attorney Sentenced to Four Years for Conspiring to Commit [Mortgage-Related] Bankruptcy Fraud and Defrauding Clients of $1.3 Million — [Tampa, Florida]

CoreLogic’s most recent quarterly fraud report showed that its Application Fraud Risk Index jumped by 10.4% in the fourth quarter of 2021, compared to the prior quarter — from 125 to 138. Year over year as of Q4 of last year, the index was up 26.7% — from 109 in Q4 2020.

Rising rates slowed the rate-term refinance train in the fourth quarter of last year, according to the CoreLogic report, moving the market toward purchase loans — and increased mortgage-fraud risks. 

In fact, rate locks for rate-and-term refinances were down 89.2% year over year as of April and 36.4% month over month. Likewise, cash-out refinance rate locks were down 31.1% over the month of April and 51.7% from a year earlier, according to a recent report by Mortgage Capital Trading Inc. Purchase rate locks, by contrast, were up 2.2% month over month in April and 7.55% from a year earlier.

The 10 major metro areas where fraud risk was highest as of the fourth quarter of 2021, according to the CoreLogic report, were Las Vegas; San Jose, California; Miami/Fort Lauderdale; Los Angeles; New York/Newark; San Francisco/Oakland; New Orleans; San Diego; Austin, Texas; and Tampa/St. Petersburg.

Scott McNulla, a senior director overseeing regulatory compliance at loan due-diligence firm SitusAMC, said one way to guard against or spot red flags in the mortgage origination and/or securitization pipeline that can cause problems down the road is to ensure the loan-input data is correct from the start.

“I think as people shift to try to maintain their volume, it’s going to be important that they document their files well,” he said. “Having well-documented files is going to be key, especially as people look to sell to different entities with different guidelines and different overlays that will require additional scrutiny.”

Another source of data and a good indicator for mortgage fraud are the Suspicious Activity Reports (SARs) that financial institutions must file with federal regulators to comply with the Bank Secrecy Act when they suspect criminal activity might be occurring, such as money laundering or other fraud. The U.S. Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, tracks those filings and publishes the aggregate findings on its website.

A tally of FinCEN’s SARs data collected between 2014 and 2021 shows that total filings have generally trended upward since 2014 across depository institutions (banks); finance companies, which includes nonbank mortgage lenders; and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. 

In the specific area of mortgage fraud, however, SARs filings have trended downward at depository institutions, from a high of 35,258 filings in 2014 to 8,805 filings in 2021. The decrease in filings coincides with the rise of nonbanks as a major source of originations in the country.

“The nonbank share for agency [mortgage] originations has been rising steadily since 2013, standing at 75.1 percent in February 2022,” a March report by the Urban Institute’s Housing Finance Policy Center states.

There were 1,150 SARs filings lodged in 2015 related to potential mortgage fraud involving the GSEs, according to the FinCEN data, and last year that number stood at 5,042. For finance companies, mortgage-related SARs filings increased from 963 to 15,805 over that period. (The data for the GSEs and finance companies for 2014 represents only a partial-year reporting, so it was not used for comparison.)

It’s important to note that SARs filings related to mortgage fraud are only indicators of potential criminal activity, not proof positive. In addition, the filing trends are a byproduct of the strengthening, increased awareness and broader enforcement of anti-fraud laws in the years since the 2007-2008 housing market crisis. 

Following is a breakdown of SARs filings by institutional category for 2021, compared with 2020. Some SAR filings may list multiple suspicious activities.

Depository Institutions – Banks 
SARs Filings Related to Mortgage Fraud
2020: 11,349
2021: 8,805
Down: 22%

GSEs
SARs Filings Related to Mortgage Fraud
2020: 3,343
2021: 5,042
Up 51%

Loan or Finance Cos. – includes nonbanks
SARs Filings Related to Mortgage Fraud
2020: 10,766
2021: 15,805
Up 47%

An FBI backgrounder on mortgage fraud explains that it “is crime characterized by some type of material misstatement, misrepresentation or omission in relation to a mortgage loan, which is then relied upon by a lender.”  

“A lie that influences a bank’s decision — about whether, for example, to approve a loan, accept a reduced payoff amount or agree to certain repayment terms — is mortgage fraud,” the law enforcement agency’s overview states. “The FBI and other entities charged with investigating mortgage fraud, particularly in the wake of the housing-market collapse, have broadened the definition to include frauds targeting distressed homeowners.”

Knowing this reality, my priority before 2020 was trying to convince people that the U.S. wasn’t in a second housing bubble. To persuade people of this, probably one of the most important articles I have ever written in my life was in 2019, titled: Housing Bubble 2019? This was my best attempt to convince the housing bubble boys that what they believed in is more fabrication than reality before the years 2020-2024.

It’s now evident that housing did not collapse and in fact home prices are savagely unhealthy. And it’s not just here in America. As you can see above, other countries have experienced steep home-price growth and Canada is leading the way. Will the U.S. housing market follow Canada?

In short, the answer is no, we won’t have the type of home-price velocity that Canada has experienced because our housing market is more diverse than theirs. What I mean by that is Canada’s home-price growth has been significantly — even overwhelmingly — influenced by its two major cities: Vancouver and Toronto. While the U.S. has its high-priced metro areas, our size and diversity mean that our national home price index won’t ever be driven by just two cities.

In addition, the U.S. housing market is more tied to mortgage buyers. Unlike those two cities in Canada, we aren’t as reliant on foreign buyers to such a great extent. Just last month, Canada’s prime minister proposed a two-year ban on some foreign investors buying Canadian real estate to try to tame price growth. Here in the U.S., foreign buyers have always been less than 300,000 of total home sales for many years. When you think about our total home sales being between 5-6 million, foreign investment isn’t that much.

Size also matters. Canada’s population is near 38 million, whereas the U.S. population is near 332 million. We are a monster compared to them in population and the majority of homebuyers in America use mortgages.

When mortgage rates rise, two things always happen here in America.

1. The days on market grow, which gives people more choices and less forced bidding.
2. The growth rate of home prices slows down.

We saw this in 2013-2014 and 2018-2019. Home prices cooled down, and the days on the market grew. Even though nominal home prices never declined, the growth rate in pricing cooled. This should not change.

I’ve tried to stress that we need to worry about home prices getting overheated in 2020-2024, but not because of some massive credit boom like we saw from 2002 to 2005. As we can see below, our current situation isn’t about mortgage credit getting out of hand. This year purchase application data will have its first real year-over-year decline since 2014.

Because the largest number of homebuyers in America are mortgage buyers, this will keep home prices in check when rates rise. Knowing that demand in the years 2020-2024 has had the potential to break out, I set a firm five-year home-price growth model of 23%. Breaking that threshhold would mean we are in unhealthy home-price growth land. That level lasted only two years, and home-price growth worsened early in 2022.

Luckily, all we needed was the 10-year yield to get above 1.94% to create balance, and since home-price growth has been so hot since 2020, we will see some balance in home-price growth. This will prevent America from experiencing a parabolic growth of home prices breaking above disposable Income, as Canada has experienced.

What I see in the chart below is beautiful; yields are rising and taking some of the excesses out of the economy! The timing of this rise in yields was unique as It was early in February of this year that I went into “team higher rates” mode. On Feb. 20 I pinned a video on my Twitter account as a desperate plea that we needed higher rates to stick. Bond yields and rates took off from that point.

Home-price growth has seen many levels post-1996; the reality is that demand has been stable enough to keep inventory at bay (outside the housing bubble credit boom and bust).

Another factor in our low house prices (compared to other countries) is that other countries never had the excess credit leverage we saw in the U.S. from 2002-to 2005, which led to forced credit selling. This is why I believe Canada and other parts of the world have had continued home-price growth, while the U.S. had to deal with its credit bust.

As we can see below, we needed to deleverage a lot of housing debt as credit in America was getting worse in 2005 through 2008. Then, after all that, the great financial crisis happened. A lot of mortgage debt went away due to foreclosures and short sales, bringing home prices way down.

Currently, the balance sheet of the U.S. homeowner looks great, in fact it’s never been better. The housing crash premise that home prices have to go back to 2012 levels is crazy. Housing debt doesn’t work like margin stock debt. A stock can fall 40% in one day, whereas a home doesn’t have that kind of velocity. One of the reasons homeowners can’t sell their homes at a 50%-80% discount so freely is because the bank won’t allow them to if the home value goes below the house’s debt. The homeowner would have negotiated with the lender on this.

The leverage margin debt trading on stocks, on the other hand, can go up and down much more quickly. This has been a reality with supply for some time now; homeowners would need to have a job loss recession to be forced to sell their homes. With all the nested equity built in, a foreclosure process at scale would have to occur in a deep job loss recession with loans done late in an economic expansion. Those loans with a small downpayment risk foreclosure or short sale if home prices fall quickly during a job loss recession. However, most of the stock of homeowners is doing well, over 40% of homes in America don’t even have mortgages, and the nested equity is massive now.

While the home-price growth in Canada and other countries shows the potential for American home prices to skyrocket, I believe we have limits here in the U.S. Most homebuyers are mortgage buyers, so rates and credit limitations matter. We see a lot of home-price growth in parts of the U.S where more wealthy homeowners are moving, and that is part of the unhealthy home-price growth data we have seen since 2020.

However, even that has limits compared to Canada’s massive home-price growth versus disposable incomes. Our biggest homebuyers are the millennials, so housing demand has limits. Also, mortgage rates have been falling over 2% every new cycle since 1981 to a new low, which would mean if this trend continues, which I doubt, mortgage rates would have to fall to 0.125% – 0.50% in the next recession. This is not likely anytime soon since the low mortgage rates were 2.50% recently and we are over 5% today.

This is why if total home sales in America get to 6.2 million or higher in 2020-2024, consider that a beat and view this period as having a healthy amount of replacement buyers but no credit sales boom. With the massive home-price growth we have seen since 2020, this totally new and existing home sales level that I have been focused on is at risk with higher rates. As you can see below with the homebuyer profile from NAR, most of our buyers are millennials and Gen X. In time, Gen Z will be old enough to buy more, but we’re not there just yet.

From NAR:

Home prices have accelerated too much, in my view, but with rates now rising, we should see a cooldown in demand. What happens with higher rates is that we see more days on the market, and the growth rate in pricing cools down. I know it’s fun on social media to compare the home price growth in Canada versus the United States, but in reality, I don’t see us having similar dynamics so that the U.S. would boom in prices so much that we would catch up to Canada’s home-price growth levels versus disposable incomes. 

So, yes, it’s a good thing we aren’t Canada because we would be having a much harder housing affordability crisis if we did!

This data line has been negative year over year since June 2021. However, that was due to Covid-19 high comps that ended in February of this year.

Some historical references:

The last two times rates rose, this is what we saw — 2013/2014 negative — 20% year over year trend 2018 purchase application data was flat to slightly positive all year long; we only had three mild negative years over year prints when rates headed to 5%.

Sales trends always fall when rates rise, as we can see below. The sales data we have had already this year is backward-looking. So, expect the sales trend to drop some more. However, purchase application data is doing better than I thought by 6%-10% YoY.

A good rule of thumb is that when this data line shows weakness or strength more prominently, it’s up 20%-30% or down 20%-30% on-trend. We haven’t seen that yet; the -12% YoY decline is a noticeable weakness, but nothing too dramatic yet like what we saw from 2005-to 2008.

During the Covid-19 weakness and recovery phase, we saw negative 25%-33% year-over-year prints, and the recovery saw some positive 25%-33% prints. This data line is trend survey data. 2022 will be the first actual negative purchase application data year since 2014.

HousingWire: Will inventory finally break the streak and be positive year over year?

Logan Mohtashami: The year-over-year inventory trends will finally show some positive prints in the upcoming weeks. Higher rates are doing what they usually do, they create more days on the market, which allows inventory to grow.

The big difference now compared to the last time rates rose and created more inventory is that inventory levels were a lot higher back in 2014 than where we are today in 2022.

However, we will take what we can get because home prices were running way too hot in 2022.

While we are still far away from 2018/2019 levels of total inventory, anything, and I mean anything, we get is a plus now.

HousingWire: What is the biggest risk to your balance housing market take?

Logan Mohtashami: The most significant risk to my balance housing market take is that the economy starts to show some real weakness, and the inflationary data rate of growth begins to fall. Then the bond market will sniff this out and send bond yields lower, which means mortgage rates will fall.

This has always been the case in the past. Europe’s economy is slowing down. China’s economy is in a mess with its lockdowns, Russia is in a recession, and Japan’s economy still lacks the Tourism it needs. So, the U.S. once again is holding the world up. However, we see some cracks, and 3 out of 6 recession red flags are up, with the 4th one identified.

The last two big ones for my recession flags:

1. Leading economic index falls 4-6 months before a recession; so far, it’s just pausing here, No noticeable declines.

For all the nerds out there, here are the components of the leading economic index.

2. New home sales fall, which will create a slowdown in housing construction. So far, this hasn’t happened yet, but this is something to keep an eye out for for the rest of the year.

HousingWire: What are some of the key points that you think will be the hot topic for the housing update event happening on May 10th?

Logan Mohtashami: For the May economic forecast event, I will be focusing more on forward-looking indicators and how they should work with the inventory channels. Once mortgage rates rose after the price gains we had in 2020-2021 and 2022, we should have a shift in the housing market, and I believe we have to look at the forward-looking indicators.

Have more questions for Logan? Share them in the comment section below. We will work to address them here or in the next Slack Q&A session.