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According to mortgage-fraud researchers, lying on home-loan applications was up 22.1% in the second quarter of this year as compared to last year. The trend identifies the culprits as real buyers who are short of the income level needed to qualify for loans. According to CoreLogic, overall fraud in mortgage applications is up 12.4% from a year ago with falsifying income being the fastest growing form of application fraud.

Other types of popular misrepresentations include occupancy fraud, where applicants tell lenders they plan to live in the house they are buying but instead rent it out. Fannie Mae is now looking out for applicants who claim to work for specific companies by providing income and employment information that's actually been fabricated.

Bridget Berg, CoreLogic’s senior director of fraud solutions, said the fraud is a function of what’s going on in the real-estate market — large numbers of would-be buyers squeezed out by rising prices, frustrated by not being quite able to afford what they want, and motivated to “embellish” or simply make stuff up. The good news is that the criminal activity still represents a small fraction of total loans being originated — just under 1%.

George Souto, a loan officer with William Raveis Mortgage in Middletown, Connecticut, says that although he doesn’t see many applications containing outright fraud, he does encounter situations where applicants make overly generous estimates of their incomes. These applicants don’t do this with the purpose of defrauding the lender, but because the income they report to the IRS is lower than their actual earnings before tax deductions for expenses.

But other lenders say too many borrowers don’t see scrupulous truth on mortgage applications as all that important. Joseph Metzler of Mortgages Unlimited in St. Paul, Minnesota, says they “feel it’s OK to pad information or leave it out, to improve their chances of getting approved.” But it’s not. It’s bank fraud and comes with serious potential penalties, including fines and imprisonment.

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