Occupancy Fraud, We're Watching You

By
Services for Real Estate Pros with Digital Content Creator
http://actvra.in/4997

It used to be the number one form of fraud: a buyer saying they intended to occupy a property when they never did.

If you don't know why an applicant would state they intend to occupy a property when they know they are purchasing it as an investment it has everything to do with being able to qualify for the loan. Lender guidelines for owner occupied properties are much less stringent than they are for non-owner occupied properties. Risk to the lender is much higher on investment properties therefore the gauntlet to approval for an investment loan is tougher than it is for an owner occupied loan. 

Owner occupied loans are easy to obtain on properties valued around $150,000 up to 100% financing even with stated income in most areas of the nation. In declining markets today many lenders are limiting investment property financing to 80% or even 70% while owner occupied loans are still allowed up to 90% or even 95%.

Fraud Unit BadgeUntil about 2003 this was a very common process but as the market loosened and more sub-prime loans were geared toward investors occupancy fraud began to decline and document fraud, appraisal fraud and stated income fraud took the lead. Now that the offerings from lenders have returned to pre-boom guidelines occupancy fraud has started to climb again.

Many people think it isn't a crime because "it doesn't hurt anyone as long as the payments are made". This is inaccurate. It hurts the lenders and their investors. It hurts the competing investors who play by the book. It hurts the lenders and their investors because they have made a loan based on the lower risk presented by an owner occupied property. Let's say the rate for a 90% non-owner loan is 9.5% while the rate for a 100% owner occupied loan is 7.5%. Immediately you can see that the lender is carrying 10% of the value in risk and they are loosing 2% in interest revenue per month.

So how does a real estate agent or loan officer identify occupancy fraud before it has a chance to manifest? While these signs are not absolute and may not be the smoking gun they are flags that need to be addressed with the lender and the borrower. As a loan officer or real estate agent you do have the fiduciary responsibility to the lender and the industry to identify and report suspicious activity. 

Home buyers moving from a $350,000 home to a $200,000 home need to have a very good reason. You may as well ask up front because the lender is sure going to require a solid and acceptable explanation.  That explanation better mean divorce, children all moved away, retiring, one spouse lost job or they are moving from a place where the same size and type of home have values that different.

A buyer looking for a "second home" in a non-resort area. Some buyers actually don't know the rules about a second home. Some buyers actually think a second home is an investment home. The rules vary slightly from lender to lender but generally speaking the house needs to be in a resort area at least 50 miles from the primary residence. We have actually done second homes for people who are college football nuts and have season tickets to their favorite college football team. We have also done second homes for people who work in one city and live in another when the second home was not in a resort area but they must be able to prove they actually work in the second city.

Anyone who moved into their current residence less than 12 months ago and is now shopping for a new primary residence will have a lot of questions to answer. Generally speaking people don't move every 12 months unless they are in the military, students or contract workers. Ask the questions up front so they won't stop the transaction 3 weeks into it when the compliance department at the lender discover the issue.

Use your common sense and your "sniff test" and think about it. Does it make sense for this couple driving a new Lexus to be looking at a $235,000 duplex in a shady area of town to actually live in? Is their current home listed for sale? How does the home the currently own compare to the homes they are shopping?

If you have any doubts - - ask!    

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Writer For Hire - I write. Whether you need blog content, research intense reports, data reports (and accompanying charts and graphics), ebooks, presentation content, speeches, advertising scripts, or similar, let me show you what you can have.

I started writing on Active Rain in 2006 when I was representing the mortgage industry. I am no longer in that industry and many of the older posts contain outdated information. Please do not contact me for LENDING or MORTGAGE questions but rather contact a licensed mortgage professional from your area. I have always been in marketing and branding and that is still what I do. Thanks for reading!

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Tags:
occupancy fraud
mortgage fraud
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Comments 12 New Comment

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Rainmaker
384,961
John Walters
Licensed in Louisiana
Frank Rubi Real Estate
For one thing Ken the mortgage companies never check to see who is living there after the loan is made.
February 07, 2008 06:03 PM
Rainmaker
271,173
Ken Cook
Writer For Hire
Digital Content Creator

Actually John we do check after the closing - That's what spawned this article. Last year a man begged my company to make the loan to him because he was moving from Alabama to Georgia. He wrote letters, had friends write letters and had his "boss" write a letter and give a verbal verification of the letter. He actually convinced our underwriter that he intended to occupy the home as his primary residence in spite of the flags indicating he *probably* would not do so.

In a regular quality assurance check earlier this week I discovered the borrower never did move into the property, quit claimed it to an LLC 6 weeks after closing and listed it for rent. It has never been occupied. I checked with the utility companies who service the home and there has never been water or electricity in the home since the purchase. We also occasionally do spot checks where we will send a note card to the subject address asking for the borrower to call us. If they don't call we may send someone to knock on the door. Lenders have been known to employ "agents" to knock on doors and verify residency. That practice is not as common as it was a few years ago but it will be back.

MERS is also a valuable tool - but I won't divulge how. 

February 07, 2008 06:15 PM
Ambassador
738,639
Jeff Belonger
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Social Media - Infinity Home Mortgage Company, Inc

Ken...  some excellent points. What's sad is that many loan officers either don't  know the difference themselves or just play stupid. I overheard one of my underwriters one day tell someone that a client was trying to buy a home in Philly, along the river,  as a 2nd home. Their primary was in Central Jersey. Sure, about 1 hour and 15 drive, but in Philly?  He claimed being near boat row lane was a 2nd home, to go to when needing to relax. Some things that just don't make sense, need to be investigated by the loan officer. Many just think of their pay check.  Again, you bring up some great examples and what could be done and what couldn't be done. And yes, it is coming back. I had one tell me that if I didn't agree with it, that he had another lender. I said.... go right ahead, and best of luck. 

jeff belonger
February 07, 2008 07:56 PM
Ambassador
883,319
Lane Bailey
Realtor & Car Guy
Century 21 Results Realty
Everything old is new again...  Isn't that how it works?  Criminals recycle the old scams after they have quieted down a little.  It's easier than thinking up new stuff...
February 07, 2008 11:07 PM
Rainer
94,045
Lisa Bosques
I've actually heard someone be nonchalant about their intentions to get an o/o loan for an investment property, only for me to say, "Umm, actually that's fraud and you could go to jail!". But I think that there are some lenders and real estate agents who turned a blind eye to it.  What is the actual penalty for this?
February 07, 2008 11:07 PM
Anonymous #6
Anonymous
Anonymous
Ken, A lot of loan originators in our Bradenton, Florida market were encouraging borrowers to lie on their application.  I think a lot of the higher-up knew about it, but can't prove it, of course.
February 08, 2008 05:42 AM
Rainmaker
271,173
Ken Cook
Writer For Hire
Digital Content Creator

Jeff - I love it when they say that, I say "See ya!" Then I note the property address, watch for it to come up on MERS and notify my counterpart at the lender. Thanks for sharing your story.

Lane - one step lazier and they'd be to lazy to steal.

Lisa - you can bet there are lenders and agents who turned a blind eye. I don't know the actual penalty but it is a jailable offense. 

Dan - that just makes me sick. Sometimes I hate to tell people I'm in the mortgage business because of the proliferation of scum in my industry. Then again there is scum in every industry. 

February 08, 2008 09:43 AM
Rainmaker
130,709
Bill Exeter
1031 Tax-Deferred Exchange Expert
Exeter 1031 Exchange Services, LLC
Great post!  It is so refreshing to see that some people still have morals and ethics!  Kudos! 
February 09, 2008 07:06 PM
Rainmaker
271,173
Ken Cook
Writer For Hire
Digital Content Creator
William - thanks! I have always said (and I mean it) I'd rather close my doors than to endanger my business and my personal record than to allow - much less commit - any form of fraud. Yes, I have seen literally millions close at other companies because I refuse to do it. And yes, I turn them in when I am certain it was a fraudulent deal which closed elsewhere.
February 10, 2008 08:19 AM
Rainmaker
130,709
Bill Exeter
1031 Tax-Deferred Exchange Expert
Exeter 1031 Exchange Services, LLC
Hi Ken, Glad to hear it! There are so few that will put morals and ethics first! Congratulations!
February 10, 2008 09:20 AM
Rainer
63,162
Steven Keefe
Coldwell Banker Sky Ridge Realty

Great Post with a lot of great information in it.

Thanks,

 Steve Keefe

February 12, 2008 11:38 AM
Rainmaker
305,653
Inna Ivchenko
Los Angeles / Valley Homes
Mannis Real Estate Group

I agree with Jeff, some lender do play 'stupid' , they have dead lines and bills to pay, they do want to be paid, right? It is difficult now get a loan, but let's go 2 y. back.....Sales are numbers...

Long story short, it is an individual choice ~ a person will be living knowing that he/she helped fraud or rejected such possibility.

June 08, 2012 12:25 AM
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Rainmaker
271,173

Ken Cook

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