It’s one of the most common lies that home buyers tell mortgage lenders, and it may be on the upswing: In order to get a lower interest rate and down payment, applicants say they plan to occupy the house as a principal residence when in fact they have no such intention.
The incidence of occupancy misrepresentation rose 20 percent between 2011 and 2013, according to giant investor Fannie Mae’s latest sampling of loans involving known fraud.
Lenders and loan officers confirm that they regularly encounter falsehoods about occupancy. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Maryland, says, “I probably have someone try to tell me that [the house] will be owner-occupied twice a month, and [I] know darn well it isn’t.” Skeens says he then tries to “guide them through the nuances” — occupancy misrepresentation is illegal and not worth the risk.
Freddie Mac, the second largest mortgage investor, says it has not seen a recent spike in occupancy fraud, “but it’s always been a consistent misrepresentation in loan files and we’re concerned about it,” according to Jenny Brawley, a fraud investigator at the company.
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Fibbing about occupancy plans has long been a temptation for small investors who buy and fix up single-family homes for rental and for second-home buyers who plan to rent out their properties for part of the year. Depending on the lender, they might be able to save a half to a full percentage point off the interest rate on the loan by calling their purchase a principal residence. Plus they stand to save thousands of dollars on the down payment, which in the case of a mortgage backed by the Federal Housing Administration, could go as low as 3.5 percent instead of 10-20 percent or higher in the conventional, non-government marketplace.
With the rapid rise of rental investment groups and conversions of foreclosed homes into rental properties following the housing collapse, it’s not surprising that there may have been more misrepresentation about occupancy in recent years compared with earlier periods. Industry estimates suggest that 3.2 million single-family rental units were added between 2006 and 2012.
Metropolitan areas that saw high numbers of foreclosures and short sales, such as Florida and California, tend to rank among the markets with the highest rates of occupancy fraud. According to Interthinx, a financial services analytics firm, in the last quarter of 2014, Miami had the highest rate of occupancy misrepresentation on mortgages, followed by Los Angeles. Two other California markets — San Diego and Fresno — ranked in the top 10 markets nationwide.
But what loan applicants may not know is that lenders increasingly are using more sophisticated methods to sniff out lies — and they are coming after perpetrators. Previously, lenders might have employed teams of “door knockers” to visit houses to see if the borrowers listed on the mortgage actually lived in the houses they financed. Or they might have run spot checks on loans using tax, postal and motor-vehicle record databases.
Now, however, lenders have gone high-tech. Companies such as LexisNexis Risk Solutions recently have begun providing them with digital programs that instantly tap into multiple proprietary and public data resources, then use algorithms to pinpoint borrowers who likely lied on their applications.
Tim Coyle, senior director for financial services at LexisNexis Risk Solutions, told me that the company’s popular occupancy-fraud detection tool for banks and mortgage companies accesses 16 different data resources to discover misrepresentations by borrowers. Since the program is proprietary and has a patent pending, Coyle would not divulge which databases it uses. But he confirmed that they include credit bureau files, utilities bills, federal and local tax data, and a variety of other information.
What happens to borrowers who lie about property use and subsequently are found out? Usually it’s not pretty. Lenders can call the loan — demanding immediate, full payment of the outstanding mortgage balance. If the borrowers can’t afford to or refuse to pay, the lender typically moves to foreclose — wrecking whatever plans of long-term investment or vacation-rental-home ownership the borrowers might have had.
In cases involving multiple misrepresentations, lenders can also refer the case to the FBI: Lies on mortgage applications are bank fraud and can trigger severe financial penalties, prosecution and prison time if convicted.
Bottom line: Don’t do it.
Kenneth Harney is executive director of the National Real Estate Development Center.