The housing market has been heating up, and with that momentum has come new mortgage guidelines from Fannie Mae, the Federal National Mortgage Association (FNMA).
These new guidelines are meant to reduce the risk of Fannie Mae mortgage fraud. However, the implications for lending institutions are also far-reaching. What’s the expected impact on the broader housing market? Does the Fannie Mae anti-fraud policy make sense?
A and N Mortgage discuss the most important elements of these new Fannie Mae QC requirements below.
What Is Mortgage Fraud?
Intuitively, a reference to mortgage fraud will usually include deception or omission. For example, some people will intentionally provide false or misleading information to misrepresent their mortgage finances. They may also omit crucial details about their past borrowing behavior.
In the United States, mortgage fraud is a serious crime. If caught, perpetrators could face large financial penalties and even jail time. The most common examples of mortgage fraud arise from identity theft and falsifying income information, but individual consequences are only the beginning.
Could high rates of mortgage fraud destabilize the mortgage market? Yes, and it would make it harder for regular folks to access the homeownership opportunities they deserve.
Fannie Mae’s Role in Quality Control Directly Affects Fraud
The federal government chartered Fannie Mae in 1938 after the Great Depression, wishing to stabilize the mortgage industry and promote homeownership. The association’s main role is purchasing loans from private lenders and repackaging them as mortgage-backed securities (MBS). Lenders use these funds to offer more mortgage products.
Fannie Mae also plays a role in mortgage quality control, analyzing and regulating lender’s origination and loan manufacturing processes to identify potential risks. The goal is to reduce mortgage fraud by enabling responsible lending to only qualified borrowers.
Fannie Mae Mortgage Fraud Statistics and Trends
While all lenders must abide by the Fannie Mae mortgage fraud prevention regulations, it’s not always simple to police the quality of lending practices. CoreLogic’s data estimates the total rate of mortgage fraud in the United States at about 1 in every 134 applications (0.75% of all mortgages). Property types most at risk for mortgage fraud include two—to four-unit properties, with CoreLogic’s estimated fraud rate for these at 1 in 28.
It may seem surprising, but mortgage fraud spiked from 2020 to 2023, with cases rising by nearly one-third between 2022 and 2023 to 2,619 monthly fraud attempts. Could 2024 end up being one of the worst years for Fannie Mae’s mortgage fraud statistics yet? The appearance of these new Fannie Mae QC requirements has been considered a possibility.
One notable observation, though, is that it is the rate of occupation fraud that has risen the most (a borrower classifies a rental property as their primary residence to get lower interest rates). An outright case of occupancy fraud is hard to spot during a loan origination but easy to see after closing. That means occupancy fraud can directly increase mortgage repurchase rates—where the MBS investors demand their money back, and the mortgage lender takes the hit.
It’s easy to see why Fannie Mae’s anti-fraud policy updates happen. In fact, the two GSEs—Fannie Mae and Freddie Mac—have increased attention on repurchase activity significantly in recent years. Under the new guidelines, the lender’s standard repurchase request can cost up to 30% of the value of the loan, so it’s serious.
Recent Changes in Fannie Mae QC Requirements
With the Great Recession and 2008 subprime market crisis, industry regulators have worked on mortgage lender quality controls to reduce potential fraud. Fannie Mae QC requirements aim to reduce defaults and repurchases of loans. As such, this federal housing finance agency requires that all lenders and sellers in the United States perform the following:
- Per-funded quality reviews
- On at least 10% of mortgage loans per month
- Up to 750 loans per month
Lender institutions cannot circumvent these minimum requirements by using a statistically valid sample for QC purposes, either for government-backed or conventional loans.
Impact of Fannie Mae Quality Control Rules
So, how do the new quality control guidelines combat rising fraud and repurchase requests? Tighter quality control processes reduce defaults and loan repurchases happening. In the end, this should reduce lender losses, but do the Fannie Mae mortgage fraud trends say the approach is working?
Additional loan requirements always put pressure on lending institutions. The housing market is already strained, so won’t lower volumes and interest rate hikes make it harder to pay back these loans?
Taking on additional QC costs to manufacture loans when firms are already struggling could prove challenging. Lenders might be less inclined to issue loans, and home loan recipients will feel the pinch.
Is Fraudulent Activity on the Rise Despite the New Fannie Mae Mortgage Fraud Prevention Measures?
Yes, mortgage fraud has been on the rise. Still, it is hard to say right now whether the new quality control requirements for lenders, which went into full effect at the end of 2023, have had the desired effect.
More Challenges in Detecting Mortgage Fraud Despite Fannie Mae’s Updates
Fraud attempts, by their nature, are always difficult to detect. Other challenges to consider might include:
- Fraudsters are good at adapting strategies to overcome new regulations.
- Fraud attempts tend to increase under economic pressure, such as high housing costs or inflation.
- Fraud can take a long time to prove, especially with falsified payment trails, fake documentation, and fake employers.
Note the Fannie Mae Mortgage Fraud Trends But Seek Out Expert Recommendations
Mortgage lenders need to maintain their bottom line by continuing to issue high-quality mortgages, so quality control is important beyond just the Fannie Mae mortgage fraud problem. One avenue could be implementing automation in loan data authentication and processing, like machine learning automation, that reduces the risk of human error. Streamline the pre-funding and post-closure review processes, and lenders can free up resources to better maintain compliance with the Fannie Mae anti-fraud policy.
For ideas and insights into Fannie Mae QC requirements and more, contact A and N Mortgage online or call (773) 305-LOAN!
