Mortgage fraudsters are getting smarter. According to research from CoreLogic, 0.82 percent of all mortgage applications in the second quarter of 2017 contained some sort of fraud. In 2016, that number was only 0.7 percent.
Ideally, mortgage brokers would use modern tools to identify and prevent fraud, but that hasn’t been the case so far. Instead, brokers have been forced to combat fraud using most of the same techniques they’ve always used, while those who commit fraud have continued to refine their scams.
Fortunately, mortgage brokers have an ace in the hole: blockchain. While mortgage fraudsters depend on their ability to modify documents and hide information, integrating blockchain into the mortgage process will allow brokers to create an immutable audit trail of documents and transactions.
When brokers pull information—like bank transactions, debt records, and income sources—directly from the providers using blockchain, they will no longer need to depend on the honesty of applicants. Even better, when these records live on the blockchain, applicants can’t modify them or hide their origins.
Blockchain is the answer to the mortgage fraud crisis. Before blockchain becomes the standard, however, the mortgage industry needs to catch up.
Why Mortgage Fraud Is Increasing
Technology should make the mortgage process simpler and safer. But in the case of mortgage brokers, technology has mostly increased the volume of applications they need to process—without consideration for the fraud opportunities created by a faster processing pace.
Thanks to the greater demands of convenience, brokers today are overworked. They don’t have enough time to give each application the thorough research it deserves. Combined with stricter requirements in the wake of the housing crisis, some applicants feel incentivized to take advantage of the situation.
People who commit mortgage fraud are motivated by different factors. Some simply want lower payments on their homes. Others try to hide the nature of their potential ownership (for instance, by applying for a home as a residence, then using that home as rental property). Another group commits fraud for profit. And industry insiders might conceal sales incentives, use straw buyers, or find any number of loopholes to exploit for some quick cash.
For mortgage brokers, the key to preventing fraud is the ability to identify the truth. But unfortunately, great liars make the best scammers. A professional, well-drafted letter might look official enough to escape scrutiny, and if the broker doesn’t check the source, he might not discover that the letter isn’t all it seems. Interviews with prospective buyers could help, but committed fraudsters know enough about the process to cheat their way through the system to secure loans.
Mortgage brokers deserve better: they deserve blockchain.
How Blockchain Changes the Mortgage Industry
In the future, blockchain technology will be the norm in the mortgage industry. The sooner mortgage brokers begin using blockchain, the more insulated their processes will be from fraud.
With blockchain, brokers can pull information directly from the source. Manual entry of bank documents, pay stubs, and tax information not only increases the chances of human error, but also creates opportunities for fraud. Borrowers can tell brokers anything they want, and it’s up to brokers to determine what’s true and what’s not.
The mortgage lending process should be a trustless process—not because most people will commit fraud, but because it frees all parties from worry. When brokers use blockchain technology to pull relevant information directly from the source, borrowers don’t have to stress about verifying their income and debts. Brokers, meanwhile, don’t have to wonder whether potential borrowers were honest on their applications.
Blockchain verification could all but eliminate some types of fraud, including the kind that got Joseph DiValli sentenced to 18 months in federal prison. DiValli used straw buyers and a team of conspirators to submit fraudulent applications. Many of those applications included falsified appraisals and modified deeds. Had brokers been able to pull documents directly from their sources, they would have recognized the falsehoods and denied the loans.
The immutable nature of documents stored on the blockchain could revolutionize how mortgage brokers do business. Once stored on the blockchain, documents cannot be altered, dramatically reducing opportunities for fraud. By storing and safeguarding all applicant and third-party information, brokers and their lenders can create foolproof audit trails that follow applications from beginning to end.
If a fraudster wanted to modify a document stored on the blockchain, he would have to access and compromise thousands of storage spaces at one time. But blockchain organizes data in chains, every piece of which is stored in a different location. That absolute security frees brokers and lenders to sleep easily at night, knowing that their documents remain untouched.
Although blockchain represents the future of the mortgage process, it still only holds a small part of the market today. But as more brokers and lenders recognize the value and power of blockchain in real estate, that will change. Brokers cannot afford to let mortgage fraud continue to rise—and blockchain is the weapon they’ve been waiting for.
Joe Markham is the Founder and CEO of Block66, a new blockchain-powered platform that increases transparency, mitigates mortgage fraud, streamlines the deployment of capital and overcomes geographical lending restrictions in the mortgage industry.