Occupancy fraud remains widespread – Scotsman Guide
Occupancy fraud remains widespread
As lending standards have toughened, some forms of mortgage fraud have decreased. But one type — when borrowers lie about their intention to occupy the home — has remained stubbornly high.
Lenders continue to leak money by charging non-owner occupants — many of whom are investors intending to flip properties or rent them out — the same mortgage rates as owner-occupiers. Mortgage companies are also taking on more uncompensated risk by approving low-downpayment loans on investment properties.
“It is a huge issue in the mortgage industry,” said Tim Coyle, senior director of financial services at LexisNexis Risk Solutions.
Coyle said his company’s analysis of customer feedback and recent Fannie Mae data suggests occupancy fraud has increased by 36 percent since 2011. LexisNexis recently developed a new occupancy fraud-detection product, saying that the data suggested that the mortgage industry would support a new product.
Coyle said investors have more incentive now than in bubble years to lie about residency. That’s because lenders are requiring higher downpayments, whereas before they would once approve a loan for investors with little or nothing down.
If they lie, Coyle said, borrowers can put as little as 3.5 percent down on a home as opposed to 20 to 30 percent for investment properties. Borrowers can also save anywhere from 0.5 to 1 percent in interest charges on the mortgage.
“The true occupancy fraudster wants to buy as many investment properties as he or she can,” Coyle said. “If I only have to put down 3.5 percent or 5 percent and call it my primary residence, I can do it multiple times as opposed to using all my funds in one investment property.”
Is occupancy fraud rising?
The data is inconclusive on whether occupancy fraud is rising. According to Fannie Mae’s most recent fraud report representing February numbers, the percentage share of home-occupancy fraud in Fannie loans has increased compared to the shares of other mortgage frauds. It represented a 19 percent share, up from 16 percent in 2012. That number, however, has bounced between 16 percent and 20 percent since 2009.
Other data suggests occupancy fraud has remained flat. In CoreLogic’s most recent loan fraud report, home occupancy fraud decreased by 1.5 percent in the second quarter of 2014 compared to the year earlier. CoreLogic’s previous reports in 2013 and 2012 showed the numbers were largely unchanged between years.
CoreLogic reported that the overall fraud rate in mid-2014 stood at 0.69 percent in a sampling of 11,100 loans. That means that fraud is relatively uncommon; however, the total indebted balance of loans containing fraudulent information in that quarter was a significant $19.8 billion. This was all types of fraud, a range that includes people lying about their incomes and debts to appraisals inflating the property values.
In the report, CoreLogic noted that new qualified mortage rules under Dodd-Frank would likely reduce many types of fraud as underwriters verified a borrower’s ability to repair the loans, but occupancy fraud could increase with the booming rental market. CoreLogic noted that 3.2 million rental units had been added as of mid-2014 since 2006. With more rental properties, owners have had more opportunity to lie about occupancy, the report concluded.
Other analysts say that although lying about occupancy remains widespread, underwriters and lenders have done a better job of uncovering it.
“It has definitely decreased from the time that subprime loans were available and lenders were very, very lax in their lending standards,” said Curtis Novy, a private California mortgage analyst who specializes in finding fraud.
“A lot of these lenders didn’t pay a lot of attention to the occupancy, didn’t ask a whole lot of questions. Currently, it is more difficult to obtain a loan. Lenders [and] mortgage underwriters will definitely look at the occupancy for red flags.”