The New York Times
Mortgage lenders have good reason to require borrowers to specify whether they intend to live in a house they are financing.
“If it’s not your primary residence, the chance of you defaulting is very high versus your primary residence, where you’re living with your family,” said Tim Coyle, the senior director for financial services at LexisNexis Risk Solutions, which develops risk mitigation tools for banks.
On a loan application, borrowers must attest to whether the residence is a primary, second or investment property. At closing, they must sign an owner occupancy affidavit saying they will occupy the home themselves within 60 days of closing.
But some borrowers who plan to rent out a property rather than live in it aren’t truthful about their intent — a form of misrepresentation called occupancy fraud. “People will try to get an owner-occupied loan as opposed to an investment property loan because you can get a higher loan-to-value, meaning a lower down payment, on a primary,” said John T. Walsh, the president of Total Mortgage Services in Milford, Conn. “And you’re going to get a better interest rate on an owner-occupied.”
While the down payment on a primary residence could be as low as 3 percent, a loan for a single-family investment property would likely require at least 15 percent down, he said. And the interest rate on that loan could be as much as half a percentage point higher.
Occupancy fraud represented 19 percent of all mortgage misrepresentation on loans delivered to Fannie Mae in 2013, the latest data available from the agency, making up the largest category of fraud after misrepresentation of debt liabilities. False occupancy claims have since declined, according to the 2014 fourth-quarter fraud report released last month by Interthinx, another provider of risk mitigation tools. By its own measure, occupancy fraud was down 6 percent from a year ago, a decline that correlated with fewer loans involving borrowers with multiple loan applications on file, or using straw buyers. (Straw buyers, frequently family members or friends, obtain mortgages for those who would not qualify for a loan.)
Occupancy fraud is costly to lenders because it can raise the default rate and the risk that, if a fraudulent loan is exposed, the loan investor (like Fannie Mae) could require the lender to buy back the loan.
Aided by technology, lenders are getting better at rooting out false occupancy claims up front. Among the red flags are borrowers with mortgage applications pending elsewhere, or an unusually long commuting distance between the borrower’s place of employment and the property to be financed.
This type of fraud is more often attempted on a cash-out refinance, said David Norris, the president of loanDepot, an independent mortgage lender. Lenders might compare the historical address on the borrower’s credit report with the address of the property they say they are living in. “Or if the appraiser goes out and sees there aren’t appliances in the home, we know it’s not a primary residence being refinanced,” Mr. Norris said.
When lenders suspect something amiss, he said, they can file a Suspicious Activity Report with the Treasury Department’s Financial Crimes Enforcement Network, which maintains a database of suspicious and fraudulent mortgage activity.
LexisNexis has a new verification of occupancy product that applies a score to a borrower’s potential for occupancy fraud by drawing on 16 data elements, Mr. Coyle said. The tool is for use on applications for refinance or home equity lines.
Many people think lying about occupancy is “the white lie of mortgage fraud,” he said. “But it’s extremely costly to the banks and financial institutions.”
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