Lenders are seeing more attempts at reverse occupancy mortgage fraud, with borrowers typically pretending that their primary residences are investment properties.
Non-owner-occupied mortgages usually require the borrower to put more money down and pay a higher interest rate than for a typical residential mortgage. The appeal for fraudsters is that they can skirt minimum-income requirements with non-owner-occupied mortgages by listing rent proceeds as income, failing to disclose that they will be living in the properties and not paying rent.
Fannie Mae warned lenders about the scheme, which usually involves multiple-unit properties, in January. According to a Fannie Mae alert, the scheme typically arises from an application for a non-owner-occupied property purchase, with a first-time buyer who is willing to make a large down payment and has significant verifiable liquid assets, but who also has minimal or no established credit and a small income.
The scheme's growth comes from the new rules that were designed to stop the infamous no doc and low doc loans — loans that were made based on little or no documentation of borrower income. Some consumers have been looking for ways to get around the strict underwriting guidelines created by Qualified Mortgage rules and the ability-to-repay rule — rules that require lenders to make good-faith efforts to ensure that borrowers will be able to repay their loans.
One red flag to watch for is when a first-time homebuyer is looking to buy a multi-unit property as an investment, said John Walsh, president of Total Mortgage Services in Shelton, Conn. In that situation, "our radar goes up," he said.
An underwriter at Total Mortgage Services recently came across an application depicting a scenario similar to the Fannie Mae alert: A potential borrower with low income who couldn't meet the debt-to-income ratio test for an owner-occupied home mortgage and who claimed plans to rent out all units in a multi-unit rental property, using the rent income to pay back the loan.
Instead, the borrower planned to occupy one of the units, which would eliminate a portion of the expected rental income and impair their ability to repay the loan, Walsh said.
Checking borrowers' statements about occupancy is one of the hardest tasks for lenders in the preclosing verification process.
"You're still going to have unscrupulous people out there who are going to try and beat the system,” Walsh said. “One of the things we can't prove [when it comes to occupancy] is intent."
With a fraudulent representation of occupancy, the mortgage industry suffers because the true risk of the loan is underrepresented, which makes it a mini version of one of the causes of the subprime mortgage meltdown, said Nick Larson, manager for real estate and mortgages at LexisNexis Risk Solutions.
"We had the loans on the books that looked like one thing but in fact are another and have a higher risk factor than a true purchase loan," Larson said.
Lenders also have to be aware that a mortgage application can have multiple misrepresentations.
"Employment and income misrepresentation are perennial issues in the industry," said Sonya Andreassen, vice president of enterprise fraud management, mortgage, at PNC Financial Services Group. "When you have a particular target or requirement, like the debt-to-income requirement under the ability-to-repay rules, people know what they have to aim for. So sometimes if they are a little short of that, you can understand they may have incentive to get into that house."
While the mortgage industry considers the reverse occupancy scheme to be a type of occupancy fraud, the scheme should be categorized with frauds that misrepresent the borrower's income sources or assets owned, said Ann Fulmer, an industry consultant and expert on mortgage fraud.
Reverse occupancy fraud can also point to money laundering, Fulmer said. While the January Fannie Mae fraud alert didn't make a direct connection to money laundering tied to foreign groups, it did state that sometimes the scheme includes an "ethnic commonality among the purchasers and other parties to the transaction," which might indicate that an organized group is behind the applicant.
From the perspective of Walsh of Total Mortgage, the reverse occupancy scheme is just the latest twist in attempted housing fraud.
"Tomorrow, there will be another one. They're always trying to figure out ways; you just have to be on your toes," he said. "There is no book on fraud, but there are certain things that just might stick out to you as not making sense."
Fannie Mae's suggestion to detect this scheme: Lenders should make sure that the borrower's monthly income is in line with the verifiable liquid assets claimed. For example, when the borrower is seeking an $800,000 loan with a $280,000 down payment and liquid assets of $361,573, but has income of only $1,448 per month, the income-assets differential is an obvious red flag, Fannie Mae said.