Fraud attempts on mortgage payoffs increased by five times in the second quarter versus the prior three months, and based on July’s data, that elevated pace is still ongoing, CertifID found.
Among the causes is the disruption in the banking industry caused by three high profile failures earlier this year, which resulted in shifts in deposit relationships.
The change opened the door for the fraudsters, explained Thomas Cronkright, the co-founder and executive chairman at CertifID.
The fraud prevention company unveiled its PayoffProtect verification product last September. In the second quarter, PayoffProtect caught $12 million of fraudulent payoffs, up from just $1.9 million in the first quarter.
The crisis at Silicon Valley Bank, the first high profile failure, happened on March 10. That started a chain of events where depositors pulled money from similarly situated depositories, which later also resulted in the closures of Signature Bank and First Republic Bank.
And within that transfer of liquid assets is where the fraudsters are able to find an opening. They pretend to be the entity receiving the payoff and contact the party responsible for moving the funds, saying they had previously been using a community bank.
The perpetrators claimed that they instead had established a new relationship with another bank and the funds needed to be sent to accounts there that they controlled. “There was a ton of that going on during this period that we reported against,” Cronkright said.
And because this was tied to an ongoing news story, victims had their guard down.
Higher home values are playing into the opportunity. “The title settlement industry handles a lot of payments where the buyer is receiving a substantial net proceeds amount, but it pales in comparison to the mortgage obligations that are satisfied at closing,” Cronkright said. And at the end of the first quarter, total mortgage debt outstanding was over $12 trillion.
It is not just the old line attributed to Willie Sutton about robbing banks because it’s where the money is, but another adage as well, which is that these fraudsters never retire a successful scam, Cronkright said.
It’s easy for the criminal to impersonate the borrower and obtain loan payoff information. And on the other end, institutions need to be more diligent in verifying where the funds are being transferred to. In one case, CertifID had the fraudulent information and used it to test a financial institution and four times a bank employee said the data was correct, Cronkright said.
Once they find success, the crooks are able to “layer in” and set up multiple transactions where they attempt to divert funds, he continued.
And this is just another flavor of the same business email compromise scams, which have plagued all sorts of commerce in recent years. Later, when they have indications that the transaction is progressing, a fraudster is able to imitate the borrower or another legitimate party.
Real estate related complaints reported to the Federal Bureau of Investigation about business email compromise schemes resulted in a record amount of dollar losses, $446.1 million, and the second-most ever number of incidents, 2,284, during 2022. And mortgage fraud experts agree that those totals are likely understatements of the size of the problem.
Mortgage payoffs represented 24% of cases and 47% of losses reported to CertifID’s fraud recovery services last year. Its State of Wire Fraud report found $1.4 billion or over 340,000 suspect wire transactions during 2022.
Another reason for the uptick is that fraud prevention firms have developed better detection tools, so more incidents are being reported, Cronkright said.
He has a second point of view on this, as Cronkright is also an owner of Sun Title Agency, where he has to manage against this very risk.
“You’re managing it on a transaction-by-transaction basis, and we have seen the movement across the financial markets and deposit accounts,” Cronkright said.
The upheaval in banking has people in that business asking, “Are we done yet? And we’re good for now or are we going to continue to see a lot of that depository movement?” he asked rhetorically.
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