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Rising refis drive down mortgage fraud risk and iBuyers help too

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Mortgage application fraud risk plummeted in the second quarter as refinance loans poured into the market, according to CoreLogic. Secondarily, iBuyers have also contributed to a lower risk environment.

The risk of fraud on a mortgage application declined 11.4% year-over-year in 2Q19, marking the first decline since the third quarter of 2016, according to CoreLogic’s Mortgage Application Fraud Risk Index.

However, the drop may not last long.

“The decrease in fraud risk mid-2019 appears temporary, based on unexpected interest rate drops and the resulting influx of low-risk refinance transactions,” Bridget Berg, principal of fraud solutions strategy for CoreLogic, said in a press release. “The absolute number of risky loans has not decreased.”

While not a primary cause for the decline, iBuyers, or companies utilizing technology to make instant offers on a home, helped push down fraud risk by accounting for 1% of all home sales last year, according to CoreLogic.

House flipping, involving the purchase and rapid resale of a home, has typically been cause for alarm where fraud risk is concerned. But a rising share of properties being bought and resold over the last two years are due to iBuyers, which offers less chance for fraud, according to CoreLogic.

House value markups from iBuyers are generally more conservative than those that result from traditional flipping, with prices increasing less than 10% on average.

But more iBuying activity in the future won’t necessarily equate to less risk.

“It is not surprising that iBuyer transactions have lower fraud risk, as there is a high level of transparency and standardization, and home prices are still rising. The fraud risk outlook may change, especially if smaller companies try to compete and home prices fall,” said CoreLogic’s report.

“If real estate speculators cannot sell properties fast enough at an acceptable price, they can quickly drain operating capital. A situation like this could motivate schemes where the property is sold to a straw buyer at an inflated price, similar to a builder bailout,” it said.

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