Mortgage fraud – a five-year rising trend that’s set to continue

Every year Experian publishes its annual Fraud Report. The document has cemented its reputation as a critical benchmark for trends and news within the financial services sector, based on Experian’s in-depth analysis of data shared through the National Hunter anti-fraud system. Nick Mothershaw, report author and director of identity and fraud at Experian, shares some of the insights, analysis and findings with Mortgage Finance Gazette

This year’s rise in mortgage fraud marked its fifth consecutive annual uptick. It was an increase that saw the headline figure record an 8 per cent increment from 2010 to 2011.

Together with smaller rises in insurance and current account fraud, the rise in mortgage fraud was a significant driver in the increase in overall fraud rates across all financial services products.

Historically, fraud rates in mortgages have seen spikes followed by falls as opportunistic fraudsters indiscriminately test and switch from one financial product to another in an effort to get their hands on more readily available, or lucrative funds.

But it’s no surprise the current uptick in mortgage fraud has continued, after getting underway in earnest at the start of 2008, coinciding with the beginning of the economic downturn.

Fraud statistics

At the start of 2006, around 15 frauds per 10,000 applications were being detected. By 2008 the figure stood at around 26 per 10,000. A total of 34 per 10,000 mortgage applications were found to be fraudulent in 2011. Now, we are well into the fifth annual year-on-year increase – and the upward trend looks set to continue.

By comparison across the retail financial services sector, the rise in mortgage fraud is matched only by an on-going spike in current account fraud, which saw a significant surge during the first quarter of this year. Records show that 44 in every 10,000 applications were detected as being fraudulent.

Attempted insurance fraud has also increased to its highest point since late 2009, with 13 in every 10,000 applications or claims detected as being fraudulent during Q1 – up from 10 in Q4 2011. The majority of insurance fraud hinged on some form of product abuse, or false payment information.

Card fraud and automotive fraud both saw 40 per cent year-on-year falls during 2011, suggesting a combination of vigilance, identity capabilities and verification technology are improving. Elsewhere, fraud on savings and loan products has seen modest falls within the past year, also reflecting improving industry-wide good practice.

Opportunists

The numbers suggest opportunists may now be scrutinising the relative competiveness of credit products far more closely prompting the notable swings between cards and loans, given the sizeable difference in APRs now available. For instance, post-promotional card rates are now around three times higher than loans, which may be driving more first-party fraudsters towards them.

But as the rate of automotive and credit card fraud has fallen away during the past 18 months, following a dramatic spike in the early part of 2010, fraudsters quickly  switched their attention elsewhere last year by more frequently targeting mortgages and current accounts.

Although down overall during 2011, the final quarter of last year also saw an uptick in savings fraud, suggesting these types of products are likely to be under renewed pressure for the foreseeable future, as fresh attempts are made at using savings accounts as a springboard and back-door to other more lucrative and sizeable lines of potential credit that mortgages can provide.

Mortgage fraud

For the past 15 years, the country’s wealth and buoyant economy was underpinned by rising house prices and the relative ease of access to funds. But as financial stress has increased, so has the rise in mortgage fraud – largely driven by a critical combination of a squeeze on lenders’ liquidity and falls in household incomes.

On the one hand banks have now imposed far stricter lending criteria, carefully scrutinising the affordability of all borrowers, or more rigorously stress-testing mortgage deals. While on the flipside, lenders have seen attempts by more cash-strapped borrowers to get their hands on funds become more diverse and more inventive.

First-party fraud

The vast majority of attempted mortgage fraud (93 per cent) is committed by so-called first-parties - or consumers. Typically, first-party fraud involved falsification of employment status, critical financial information or non-disclosure of adverse credit.

The likelihood is that the rising mortgage fraud numbers are largely prompted by a significant segment of financially-stressed, ‘non-professional’ fraudsters, willing to hide a patchy credit history, over-exaggerate their earning potential, personal finances and employment status.

More than a fifth of first-party mortgage fraud is due to income inflation, while misrepresentation is almost exclusively as a result of the non-provision of requested documents, which may include salary details or short-term borrowing commitments.

Undeclared credit has shifted from serious adverse – County Court Judgements - to a broader disclosure of more general credit commitments, highlighting lenders’ increasing focus on affordability.

It is also worth noting that even some high-earning demographic segments will misrepresent their circumstances when applying for mortgages.

At the same time, the relative numbers and availability of self-certified mortgages have all but dried up, putting some self-employed borrowers under further, acute pressure to prove their creditworthiness.

Of course, it could also be argued that the rising numbers of detected mortgage frauds are also a testament to the improved level of scrutiny, stress-testing and affordability checks lenders now put applications under.

It’s clear that the majority of fraud is being committed by first-parties – opportunistic individuals or customers willingly misrepresenting their personal position and circumstances, to get access to funds that may otherwise be beyond them.

But the past 12 months have also seen a shift from the more traditional types of fraudsters.

Mosaic classification

In the past, first-party fraudsters were largely drawn from Experian’s Mosaic classification of the Upper Floor Living segment – those typically living on limited incomes, renting modest flats from local authorities or housing associations, in neighbourhoods suffering acute unemployment, or sickness and a resulting low quality of life.

While this group continues to feature strongly among principal first-party fraudsters, the segment has now been overtaken by the Terraced Melting Pot – largely made up of young, poorly educated people living close to the centre of small towns. Some live with a partner with children. They generally work in relatively menial, blue collar or routine occupations, often relying on state benefits to bolster low incomes.

The switch reflects the continued squeeze on personal finances and overall financial stress. As a result of poor or patchy credit, more and more ‘non-professional’ fraudsters are clearly attempting to ease their position, misrepresent applications or make exaggerated claims over income and personal finances.

The New Homemakers and Liberal Opinions Mosaic segments have all featured in the past and continue to feature strongly, again reflecting the levels of financial stress and hardship faced by many in these groups.

New Homemakers – as the segment title suggests – are defined as those who live in homes which are likely to have been built within the past five years. They have limited experience as consumers since managing their own domestic arrangements may be something they have not previously had responsibility for. Many are not familiar with the costs and benefits of using different methods of payment or lines of credit.

Typically, Liberal Opinions are young, professional, well educated people, who enjoy the vibrancy and diversity of inner-city living. They are found in London and larger provincial cities.

The past 12 months has also seen a significant shift in the victims of fraud – so-called third-party fraud. Traditionally, the main at-risk fraud demographic was the Experian Mosaic segment Alpha Territory – typically drawn from the most wealthy and influential individuals in the UK, those occupying positions of power in the private and public sectors. Many live in fashionable inner-London suburbs.

But they have now been overtaken by lower income, but equally vulnerable Mosaic groups made up of Upper Floor Living, Liberal Opinions and New Homemakers.

The switch marks a significant step change and move away from more affluent populations, to lower and middle income populations. Despite their lower relative affluence, the segments clearly prove to be worthwhile for opportunistic fraudsters suggesting that anything goes and anyone is fair game.

While the overall net gain for each attempt may yield less, fraudsters are not making any distinction and are simply willing to attempt greater numbers of lower value frauds, often closer to home.

Looking ahead, ongoing financial stress, the challenging employment market, rising costs and increased pressure on disposable income show no significant signs of easing in the near future.

Factor in the broader reductions in family income following the recalibration of Child Benefit eligibility, which may prompt a greater reliance among low to middle income groups on short-term borrowing from credit cards, current account overdrafts and loan facilities, and the likelihood is that opportunistic mortgage fraud attempts will continue.

ID validation

Success in the continuing fight against fraud will continue to hinge on identity and the speed and accuracy of validation – particularly given first-party fraudsters are likely to continue manipulating their income and financial circumstances, while technological advances enables third-party fraudsters to increasingly rely on the use of completely false documents, instead of simply presenting altered ones.

As fraud continues to rise it is clear that businesses which take effective steps to tackle it are also directly investing in safeguarding their cash flow and protecting their profitability. At the same time protecting their customers from the threat of fraud will not only ensure regulatory compliance, but will also help underpin their reputation.

Although many fraudsters are continuing to indiscriminately use traditional routes to attack financial institutions and organisations, they also continue to be fast, flexible, inventive and willing to quickly adapt to new technology and opportunities.

Mobile channels

Threats are continuing to evolve and develop in line with the proliferation of mobile channels, interfaces and platforms that consumers can choose to use.

As we move in to the second half of 2012, it is clear we are now racing towards a tipping point en-route to full mobile interaction and transaction, which will see traditional payment habits and identity validation channels change forever. It’s a trend that will affect every sector of society – particularly personal banking, as well as retail, telecoms, insurance and the way we directly interact with government departments.

Hand-held devices will become the key to transactions in the future. But their success also hinges on ensuring fast, secure access to personal data is the key to keeping customers safe and engaged.

The penetration, relative ease and convenience of mobiles and other hand-held devices means they will soon play a fundamental role as our new virtual identity cards, available for use at anytime, anywhere and by default creating a virtual wallet that replaces consumers’ current stack of plastic credit, debit, loyalty and membership cards.

But as the volume of transactions completed via virtual wallets rises, safeguarding our identity, personal privacy and data will become more critical than ever in tackling fraud. They will, by default, become our personal firewalls.

Advances in real-time data-sharing technology mean virtual identities can be protected without disclosing critical and sensitive information every time an electronic transaction takes place.

But there is clearly no room for complacency as fraudsters are always inventive and quick enough to spot emerging opportunities. They will always readily switch from one product to another – and from one channel to another.