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3 Common Forms of Occupancy Fraud

Dec 28, 2017 by User Not Found

Occupancy Fraud: A Lose-Lose Situation

In the mortgage industry, there are countless different forms of fraud ranging from the seemingly innocent omissions, to large scale market manipulation. One of the more common forms of deceit, which may seem like just a white-lie, is occupancy fraud.

When applying for a home loan, borrowers must state whether the property will be their primary residence, secondary residence, or investment.

Why do these factors matter to a lender when funding a loan?

Borrowers who intend to use the property as their primary residence are less likely to walk away from the home. If a primary residence borrower starts to struggle financially, they will fight tooth-and-nail to keep their home by taking on a 2nd job, refinancing, budgeting smarter etc. Some people are less likely to fight as hard to keep a vacation home that they occupy a few weeks a year. If a borrower walks away from a home and declares bankruptcy, the lender is stuck with the bill.

Lenders will provide lesser interest rates (0.5% less), higher loan amounts, and lower down payments if the property is declared to be a primary residence. To help prevent from getting stuck with a hefty bill, it is important for lenders to make sure their borrowers know exactly what “primary residence” means. If a mortgage insurance company determines the property was falsely claimed as owner-occupied, that is grounds to deny a mortgage insurance claim. If an investor (such as Fannie Mae) has purchased the mortgage, they can force a buyback in which the lender must keep the loan on their books.
3 Common Forms of Occupancy Fraud

What are some common forms of occupancy fraud?

1.       The borrower is a property investor. They claim they will occupy the subject property full-time for a minimum of 6 months after loan closing, so they get a lower interest rate. In reality, the borrower plans on fixing up the property and flipping it, without ever living there.

2.       The borrowers are young newlyweds whose credit is a little worse for wear. Therefore, they convince Grandma to become a third borrower on the loan, stating that she will live there with them. However, Grandma has no intention of leaving her retirement community in Coral Gables.

3.       The borrower works and lives in the city. They buy a nice vacation home up in the mountains, and plan on being there 2-3 months out of the year. They declare it the primary residence.

How can a lender keep from being duped?

Detecting occupancy misrepresentation is most often a case of common sense. Are the newlyweds really going to move into a home with the groom’s Grandma? Is the young professional who lives 5 minutes from work really switching to a two-hour commute? Is the guy who already owns 5 investment properties really going to move from his nicely updated condo into a shoddy fixer-upper?

Here's an example of how we helped one client conduct an occupancy review:

It’s important to say something if you see something suspicious. If a lender looks the other way, and an investor -- such as the mortgage insurer or Fannie Mae -- detects misrepresentation, the lender will end up with that mortgage back on their books. 

Post-Closing Detection Methods

There’s a variety of tools used by auditors, insurance companies, and investigators to determine if a primary residence was falsely claimed. Some of the more common procedures are:

1.       LexisNexis Occupancy Reports: LexisNexis has long provided a litany of powerful tools for the mortgage industry. Running an occupancy report can quickly give you a snapshot of who is living in the subject property. Data will be pulled from the local utility companies to see whose name is registered to the electric and cable bills, as well as what date they switched it on. A list of other individuals associated with this property will also appear, and information from tax records will be shown as well. LexisNexis will provide an “Occupancy Score” from 0 to 100 (0 being high risk, 100 being low risk) as a result of the report’s findings.

3 Common Forms Of Occupancy Fraud

2.       Borrower Interviews: Borrower interviews are exactly what they sound like. An investigator will place a call to the borrower, and ask a few questions about the transaction. It can be shocking to see how many borrowers will quickly contradict the information provided during the home loan process. All too often, you’ll reach Grandma who will explicitly say “That’s my grandson’s property in Colorado -- I’ve been living in Florida for years!” Case closed.

3.       Google Maps & Real Estate Listing Sites: No secret technology here. Plugging the borrower’s present address, subject address, and work address into Google maps will provide a solid indicator if this is a plausible move for the borrower or not. Commute lengths for work and accessibility of the property will be taken into account. R/E Listing Sites such as Zillow and Trulia often show pictures of properties long after they’ve been sold. By using either of these sites, you can view both the interior and exterior of the property to get a good idea of its condition.

Occupancy fraud has long been an issue that all lenders are aware of. Luckily, more and more tools are available to help detect and prevent this form of misrepresentation. Lenders face big risks if they let an occupancy misrepresentation slide through the cracks, which puts the weight on their shoulders to perform due diligence.

If you have any doubts while filling out the 1003, be sure to press the borrower on the subject and make sure they’re informed. The last thing you want is Fannie Mae knocking at your door demanding a pay day.

Recommended Reading: 5 Common Mortgage Fraud Schemes.

QuestSoft Verifications can confirm occupancy as well as verify income and employment so you can meet GSE requirements. Contact us today to learn more!