Federal Reserve Governor Lisa Cook stands accused by the Trump administration of mortgage occupancy fraud, claiming two owner-occupied properties in 2021.
U.S. Sen. Adam Schiff is being accused by the Trump administration of occupancy fraud involving California and Maryland properties.
New York Attorney General Letitia James is being accused by the Trump administration of occupancy fraud regarding a Virginia property. And she’s accused of misstating information in another mortgage loan application.
I don’t have a position on their guilt or innocence as I don’t have enough information regarding these three public figures or the governments’ cases against them. Rather, it’s a timely opportunity to give you some clarity about occupancy and other potential mortgage fraud matters so you don’t go and borrow trouble.
Let’s start with the hot topic of owner-occupancy.
What is mortgage occupancy fraud? This type of fraud happens when a borrower misrepresents his or her intent to occupy a property as a primary residence and instead intends to use it as a second home or investment property.
Why would someone lie about occupancy? It’s done to reduce the required down payment and/or improve the interest rate for the loan.
Owner-occupied borrowers can get in with as little as zero down on a Fannie Mae loan. Second homes require a minimum of 10% down. Investment properties require at least 15% down.
Both second homes and investment properties carry a full 1% higher interest rate.
For example, take an $800,000 primary residence with a loan at 5.99%. The principal and interest payment is $4,791. At 6.99%, the principal and interest payment is $5,317. That’s $526 more per month for a second home or investment property.
Here are mortgage application tips to keep you safe …
First, be as certain as you can that you are dealing with an honest, reputable mortgage loan originator who is not going to guide you down a fraudulent pathway just to make a commission check. Be sure the MLO has a valid license and has no disciplinary actions on his or her record. Call the MLO’s last three borrowers to learn more, if possible.
My second litmus test: You should be able to say whatever you’re doing over a loudspeaker. If you can’t, then you probably shouldn’t be doing it.
Also: don’t cross the line of trouble. Don’t even get near the line. Don’t go into gray areas either. Transparency is always your best defense against accusations about misdeeds.
For example, two years ago I had clients living in Yorba Linda. The husband and his wife were buying a property in Palm Desert (a common second home destination) that was worth less than his Orange County property. The husband works in Irvine. They were claiming the desert property as their primary residence.
The borrowers wrote a motivation letter as to why they were downsizing without first selling their Yorba Linda home. We were able to get a letter from the husband’s supervisor explaining he only had to be in the office two days a week.
For those two nights, he would stay in the Yorba Linda home. The other five nights a week he would be living with his wife in the desert-who stays at the desert home 100% of the time.
The loan was funded with the couple receiving owner-occupied pricing, and rightly so. And yes, the Yorba Linda property still had a loan on it. Because the owners lived in the property for at least one year before buying the desert home, it was proper;y considered a primary home. Years later, that distinction is no longer a factor in the new home purchase.
There are other ways buyers commit mortgage application fraud such as failing to disclose other properties owned, failing to disclose debts like court-ordered child support, and creating income through fake paystubs, W2s and tax returns.
Sometimes, borrowers run into an overly suspicious underwriter.
A few months ago, one of my lenders thought one of my borrowers was committing income fraud because he had a relatively new job with no W2s, working at a smaller firm. The borrower had recent history of being a consultant before he started this job.
The borrower started the job after the first of the year, so no need for a W2. We provided all of his electronic pay stubs to the underwriter. And we matched them up with the direct deposits from his bank account. That convinced the underwriter there was no fraud. The loan was funded.
How prevalent is mortgage fraud? One out of every 106 purchase mortgages is fraudulent, according to Matt Seguin, a senior principal for fraud solutions at the firm Cotality, formerly CoreLogic. One out of every 142 refinanced mortgages is estimated as fraudulent.
I personally think mortgage fraud is much higher, especially when it comes to the exotic mortgage world or so-called non-qualified mortgages. The income documentation requirements are very fast and loose, nothing like Fannie Mae mortgages.
What can happen to you if you get caught committing fraud?
—The lender could sue you for damages.
—Your name could end up on Freddie Mac’s mortgage watch list or another watch list.
—The lender may call the loan due. That means you are going to have to refinance it with a different loan or come up with the funds in another way to cough up the money to pay off the loan.
—You could be facing criminal prosecution. A conviction can lead up to 30 years in prison and a $1 million fine. That said, very few people get charged and convicted. According to the United States Sentencing Commission, just 58 people were convicted of mortgage fraud in 2021 (the latest available data).
I have one personal experience with mortgage fraud. It happened about 25 years ago.
A clever fraudster came calling about a $50,000 second mortgage on his home. Those were the days when certain lenders were loaning up to 125% of the property value. So, it didn’t seem out of the ordinary when this fellow wanted to leverage his house to a combined 95% of its value with a new second lien. He wanted the money for home improvement, he told me.
It went just like most loans go. I accepted his application, processed and packaged the file for the investor. The loan funded and he was on his way.
About six months later I received a call from an attorney representing the title insurance company over a defaulted loan. Apparently, this borrower also applied for a second mortgage through another lender at exactly the time he was applying with my firm.
Both loans funded within a day or two of each other. The borrower walked away with a whole bunch of money. It’s the mortgage version of pump and dump.
On May 28, Fannie Mae partnered with the artificial intelligence firm Palantir in respect to mortgage fraud detection. The data company says its technology can highlight “unique patterns” and identify fraud in mortgage packages before they hit Fannie Mae. Palantir was co-founded by the billionaire and political activist Peter Thiel.
Freddie Mac rate news
The 30-year fixed rate averaged 6.56%, 2 basis points lower than last week. The 15-year fixed rate averaged 5.69%, unchanged from last week.
The Mortgage Bankers Association reported a 0.5% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $111 less than this week’s payment of $5,129.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.49%, a 15-year conventional at 5.25%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 5.625% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.375% and a jumbo 30-year fixed at 6.125%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.5% with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.