With three of Donald Trump’s adversaries now beneath investigation for occupancy fraud, the apply of misstating a house’s supposed use on mortgage functions is drawing contemporary scrutiny. We requested experts how widespread the issue actually is and what the renewed consideration may imply for the business.
The sort of fraud a government-sponsored enterprise regulator is specializing in has lengthy been a priority for the mortgage business, mentioned Arthur Prieston, chairman of an business consultancy and regulation agency.
“That misstatement has been round for many years, largely as a result of it may well decrease the borrower’s prices and down cost necessities and for much less diligent lenders, can go undetected,” the chairman of Prieston Capital and the American Mortgage Law Group mentioned.
The key danger this raises for lenders within the conforming market the place many promote their loans are buyback requests.
“It’s normally handled as a cloth misrepresentation, and the originating lender could face a repurchase demand. Those might be pricey, which is why prevention and front-end diligence are so necessary — and why options like repurchase insurance coverage have gained traction,” Prieston mentioned.
The government-sponsored enterprises and different mortgage purchasers don’t need mortgages with occupancy fraud as a result of when a property will get mischaracterized as a major dwelling, the mortgage’s phrases and pricing do not correctly account for its vulnerabilities. This is especially regarding in mushy markets.
“Investment properties carry better danger, as they’re extra doubtless to face strategic default if dwelling costs drop considerably,” mentioned Dawn Dlouhy, supervisor at LexisNexis Risk Solutions.
What some numbers round occupancy fraud appear like
“Mortgage fraud is rare total. However, when it does happen, occupancy fraud and earnings misrepresentation are among the many most frequent kinds,” Dlouhy mentioned.
Overall, the estimated incidence of any sort of fraud in mortgage functions was one in 116 or 0.86%, but it surely was up 6.1% in contrast to 12 months earlier and 1.4% on consecutive quarter foundation, according to Cotality’s second-quarter mortgage fraud temporary.
Occupancy fraud based mostly on findings in mortgage functions reveals an uptrend adopted by a drop, which stabilized a bit this yr.
“From 2021 till 2023, we noticed massive will increase yr over yr within the occupancy fraud danger. Since 2023, this danger appears to have plateaued and is even exhibiting some indicators of decline,” mentioned Matt Seguin, senior principal, mortgage fraud options at Cotality.
Cotality’s knowledge reveals a 30% rise in 2022 on this explicit misrepresentation, adopted by a ten.1% enhance in 2023.
But in 2024, Cotality reported a 6% lower, adopted by a shallower 0.9% discount in incidents for this yr’s second quarter
Even so, occupancy fraud was the second most prevalent sort of mortgage fraud in 2024, representing 29% of investigative findings associated to misrepresentation, according to Fannie Mae knowledge Seguin cited. Only earnings fraud, at 46%, was larger.
Those numbers counsel occupancy fraud has risen from the place it was in 2021, when it accounted for simply 12% of investigative findings and was the third commonest type of misrepresentation behind earnings and liabilities.
“We suspect they noticed that enhance till 2024 as a result of their knowledge, on closed loans, lags behind ours and it takes some time for the fraud to be discovered, doubtlessly years,” Seguin mentioned.
What sometimes defines a major residence
Seguin mentioned he typically defines occupancy fraud as a departure from customary language in a deed of belief that requires debtors to “occupy, set up and use” a house as a major residence inside 60 days of the “execution of the safety instrument” for no less than one yr.
The language does include the caveat that there might be exceptions for “extenuating circumstances” past the borrower’s management. The lender can also agree to an exception in writing and shouldn’t “unreasonably” withhold to consent to accomplish that.
“The companies are very strict with regards to occupancy and first residence,” mentioned Prieston. “If a borrower owns a number of properties, the others should be categorized as second properties or funding properties, relying on use.”
Prieston mentioned the one kinds of exceptions he would see to that rule could be a divorce or a job relocation throughout the 60-day interval.
Seguin mentioned there traditionally have been challenges in detecting occupancy fraud on the time of utility as a result of “there may be not a foolproof manner to predict a borrower’s future intent.”
How occupancy fraud might be prevented and detected
There is knowledge and doc evaluation lenders can do so as to assist forestall occupancy misrepresentation in some circumstances, according to Seguin.
“If somebody is refinancing a property price $200,000 and likewise owns a property price $2 million, and claims that they are going to be dwelling primarily within the $200,000 property, that will increase a crimson flag,” he mentioned, citing one instance.
Renters’ insurance coverage or different protection on a property or a seasonal location additionally may very well be a purpose to request extra info from a borrower, he mentioned, noting there could also be explanations for these however they need to be questioned.
“In the case a borrower owns a house at the moment and does not want to promote their dwelling to qualify for the mortgage, it is at all times potential that the borrower does not transfer into the brand new property they simply bought as they claimed and as required by the language within the deed of belief,” Seguin added.
In this case, detection could also be extra doubtless to happen in a while within the servicing course of by noticing discrepancies like a mailing handle that does not match the collateral property or discovering the property listed for hire on-line, he mentioned.
The GSEs have been working extra intently collectively on fraud prevention with Palantir, an organization with ties to a Trump ally that goals to proactively establish misrepresentation by analyzing patterns in relationships throughout totally different events concerned in mortgage transactions.
