A new twist in mortgage fraud trend
Traditional occupancy fraud occurs when mortgage applicants deliberately misrepresent their intended use of a property, typically for more attractive financing terms. Investment properties may have lower maximum loan amounts, higher interest rates and higher fees. These differences may motivate a borrower to falsely claim an investment property will be owner-occupied. However, there is a relatively new scheme going on when a low-income applicant intentionally misrepresents occupancy status as an investment (even though the real intention is primary residence), so the expected rental income can be used as part of the applicant’s assets to satisfy the mortgage application debt/income requirement. This is referred to as a reverse occupancy scheme.
The reverse occupancy scheme has some typical characteristics , including
- Subject properties sold as investment properties
- Purchasers are first-time-home buyers with minimal or no established credit
- Purchasers have low income but significant liquid asserts authenticated by bank statement
- Purchasers make a large down payment
CoreLogic analyzed investment purchase mortgage applications in the last five years and identified applications with higher risk of reverse occupancy scheme based on the above four alert characteristics. The percentage of reverse occupancy scheme prevalence is calculated against the investment purchase application population for the top 50 Core Based Statistical Areas (CBSAs), based on U.S. Census population estimates.
The results indicate that among the top 50 CBSAs, New York has higher reverse occupancy risk than any other metro areas. Since 2014, New York’s reverse occupancy rate has increased year over year. The rate reached 13 percent in 2016. Although there are a few other CBSAs in the northeast region that have higher reverse occupancy rates, New York is a hot spot considering both percentage and volume of reverse occupancy.
Figure 1 compares New York’s reverse occupancy risk rate with other large CBSAs, such as Los Angeles, Chicago, Dallas and Houston. It also shows the average reverse occupancy rate at the national level for benchmarking.
When looking at New York state as an example, Figure 2 shows key characteristics of reverse occupancy scheme compared with the total investment purchase population. The reverse occupancy group’s median income is only 20 percent of the total investment purchase group’s median income. However, the loan amount is 40 percent more than investment purchase group. Its loan-to-value ratio and debt-to-income median values are also lower than the median values of the regular investment purchase population.
One of the key challenges of mortgage fraud is its ever-shifting migration patterns and new schemes. It morphs from one scheme to another depending on changing local economic and real estate market conditions and government programs. As the real estate markets are recovering after the housing crisis, the share of purchase applications continues to increase. GSEs are also expanding credit policies. Both of these trends provide opportunities for the return of known fraud risks as well as new twists and schemes. CoreLogic stands at the forefront of the real estate risk management industry and uses our best-in-class data and analytics to create intelligent, proactive solutions, helping our clients stay ahead of the game.
Contribution from Liang Tian
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