Feigning occupancy to land a mortgage is the most common type of mortgage fraud perpetrated on lenders. On an average more than half of the claims made every year contain some level of occupancy misrepresentation. Such claims put lenders in a difficult situation, as based on their misrepresentations, lending institutions channel funds to close the real estate transactions. The smug notion that one white lie doesn’t really harm anyone is in fact a federal crime, and lenders should be prepared to deal with such misleading claims.
Occupancy fraud refers to situations when a prospect makes false representations about whether he or she will be living on the property being purchased. This is one of the most common types of mortgage fraud committed by people who are out to skew the system to their advantage. In one particular instance, Daniel Morar, a resident of Phoenix, Ariz., conspired to use “straw buyers” to purchase multiple properties with false occupancy claims and, in return, receive “cash back” following the closing of the real estate transactions. Finally, the law caught up with him, and Morar was sentenced to 5 years in prison.
When someone applies for a mortgage, it falls upon the lender to determine whether the person applying actually intends to live in the house purchase. However distinguishing between real investors and those masquerading as owner-occupants can pose a big problem for lenders.
Repercussions Across the lending Industry
False occupancy claims has impacted the lending industry for long. First of all, this treatment makes it costly for lenders because the terms of the loan vary depending on whether the property is being used for primary, secondary, or investment purposes. Terms are likely to be different between a primary property and an investment property, and lenders cannot accurately forecast or generate loan rates if people are answering the question incorrectly.
It can also be problematic for lenders as a result of the default rate, because the event could require the lender to buy back the loan if a fraudulent loan is ultimately exposed. This is costly for the lender, too.
Measure to Take Against False Occupancy Claims
Technology can help lenders check this menace to a large extent. With the help of technology lenders can determine if an applicant has a mortgage application anywhere else. Factoring in the commuting distance between the property purchased, and the buyer’s place of work can also give the lender a clue about the buyers intentions. Comparing the historical address in the applicant’s credit report to the one where the applicant claims he or she will be living can also be another red flag.
Educating applicants about the fall out of false claims can also help to curb intentions to cheat. Borrowers must be told that misleading statements on a mortgage application is a federal crime, which might get reflected in their credit history as a black mark for years after they are set free, thereby making it hard for them to borrow money from regulated lenders again.
If you suspect a false occupancy claim, you should file a suspicious activity report with the Treasury Department, which tracks suspicious and fraudulent mortgage activity. Doing your homework can help prevent the negative ramifications of false occupancy claims.