We often hear that there is no such thing as a perfect
crime. Perhaps that is why there is
always a fraudster trying to improve them.
CoreLogic says the newest wrinkle in mortgage fraud is
a reverse approach to the old misrepresenting occupancy scam. Traditionally it has been prospective
investors who have claimed they intend owner occupancy. By posing as a resident owner they might
qualify for a better interest rate, lower fees, a smaller downpayment or higher
loan amount than they would by applying for a mortgage as an investor.
CoreLogic analyst Willa Wei says there is a rising
incidence of home buyers doing the exact opposite - claiming they will be
renting out their purchase while actually intending to occupy. This allows them to claim "expected" rental
income to satisfy the mortgage application debt/income requirement. That income, of course, will never materialize.
This is referred to as a reverse
Wei says there are several typical
characteristics that might alert lenders to this variation.
- 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 used these four
characteristics to analyze investment purchase mortgage applications submitted
over the last five years and identify those with higher risk of such fraud. 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 company found New York had a
higher reverse occupancy risk than any other metro area and it has increased in
each of the last three years, reaching 13 percent in 2016. A few other CBSAs in the northeast region
that have higher reverse occupancy rates but, "New York is a hot spot
considering both percentage and volume."
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.
Using New York state as an example, the
figure below shows key characteristics of reverse occupancy purchases compared
with the total investment purchase population. The reverse occupancy group's
median income is only 20 percent of that of the broader investment purchase
groups median. The median loan amount,
however is 40 percent more than that of the investment groups as a whole. The median
loan to value (LTV) and debt-to-income (DTI) ratios of the risk group are also
Wei says a key challenge of finding
and combating mortgage fraud is the emergence of new schemes and their ever-shifting
locations. Fraud "morphs from one scheme
to another depending on changing local economic and real estate market
conditions and government programs."
With real estate recovering from the housing crisis, the share of
purchase mortgage applications increasing and Freddie Mac and Fannie Mae
expanding credit policies there is fertile ground for the resurrection of old
types of fraud as well as twists on old ones. The heat map below shows that the places that
stand out for their risk of reverse occupancy fraud are primarily areas where
both home prices and rents have appreciated at the fastest rate.