Thanks to relatively stable market conditions and low mortgage rates, some financially fortunate and savvy homebuyers may be shopping for second and third properties — and while that may be good news for both buyers and the real estate industry, the bad news is that certain types of related mortgage fraud are also on the rise.
A recent report examining trends in mortgage fraud by LexisNexis says that despite tighter credit standards and a heightened regulatory environment, “It is clear that the financial environment resulting from the 2008 housing market crises remains a breeding ground for origination fraud.
“The reduced volume of consumers who are able to qualify for mortgage loans has led to a fiercely competitive, and in some ways, familiar fraud-for-profit marketplace in which fraudsters resort to dishonest practices in order to fabricate creditworthiness and close deals. Ultimately, fraud and misrepresentation, especially in the mortgage application process, is likely to remain a serious and ongoing national problem.”
Although many types of mortgage fraud are actually on the decline, LexisNexis says one type is becoming more pervasive: occupancy fraud, which occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on his loan application that he will occupy the property as his primary residence or as a second home.
According to Tim Coyle, senior director of financial services at LexisNexis Risk Solutions, occupancy fraud accounted for 19 percent of all mortgage misrepresentation in Fannie Mae’s review of loan originations from 2013 — a 39 percent jump over loans originated in 2011.
Because occupancy fraud is the most significant fraud category that most mortgage lenders are not positioned to defend themselves against, LexisNexis began to look closely at the numbers, pulling multiple data sets for lender clients who found themselves struggling to combat the fraud.
“With one of our clients, a national lender, they were able to tell out of a portfolio of 87,000 loans that there were 113 bad ones,” Coyle, who co-authored the mortgage fraud report, said. “When we ran our tests, we found 290 instances of occupancy fraud. What that means to them is a difference of $25 million to $65 million of unnecessary repurchase exposure. That kind of exposure can hit a bank’s bottom line unexpectedly.”
It can also expose real estate agents and brokers to risk, he added.
According to LexisNexis’ report, the mortgage application fraud and misrepresentations that are present on almost 75 percent of reported mortgage loan investigations involve industry professionals.
“Real estate professionals need to be careful and concerned about fraud,” Coyle said. “When fraud is discovered, each file looks at all of the professionals that were attached to that loan, and those companies can get entered into a fraud contributory database for professionals. You don’t want your name associated with that.”
Why do buyers do it? Financing packages tend to be better for owner-occupied homes. Most lenders define owner occupancy as living in a residence for at least a year.
But despite the enticement of a good mortgage loan deal, there may be stiff penalties for anyone caught committing occupancy fraud, Coyle said.
“Your lender could call your loan due, for starters,” he said. “And it’s a federal offense. The FBI could call. You could serve years in prison. It’s happened countless times. It’s ruined lives. It’s ruined careers.”
Coyle said LexisNexis is currently working on its 17th annual mortgage fraud report and plans to focus on occupancy fraud rates, including geographic areas hardest hit by the fraud. The report is due in December.
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