CoreLogic examines what is driving the rise in occupancy fraud in its 2023 Annual Mortgage Fraud Report
Mortgage fraud occurs when a borrower intentionally misrepresents information on a loan application. From false information regarding borrower income, employment, assets, and debt to fraudulently stating the intended occupancy of the property, loan officers and financial institutions have a lot to consider when proactively identifying fraud.
According to the CoreLogic® 2023 Annual Mortgage Fraud Report, an estimated 1 out of every 134 mortgage applications had indications of fraud in Q2 2023.
Among the various types of mortgage fraud, occupancy fraud is becoming increasingly prevalent. The most common type of occupancy fraud occurs when a borrower states on a loan application that they intend to live in a property but instead they use the property as an investment.
One motivation spurring this type of fraud is an attempt to obtain better loan terms than would normally be available for an investment home. Generally, programs, pricing, and underwriting guidelines are more favorable on owner-occupied properties.
Occupancy fraud rose 11.8% from Q2’22 to Q2’23
Mortgage lenders struggle with occupancy fraud because it’s easier to spot after it already happens. However, proactively detecting this type of fraud is especially consequential at a time of increasing repurchase risk. Loan buyback rates have increased annually since 2020. Repurchase rates in the first quarter of 2023 are up 759% compared with the same period of 2020.
According to a study published in early 2023 by the Federal Reserve Bank of Philadelphia, investment volumes varied between 2005 and 2017, but fraudulent investors (i.e., those committing occupancy fraud) consistently made up roughly one-third of the total pool of investors.
The share of investor purchases has surged since 2021. Today’s investors are becoming more likely to operate on a smaller scale, only owning three to nine properties. As a result, it’s not surprising that reports of occupancy fraud rates have increased since the pandemic.
The pandemic caused low occupancy fraud in 2020, but recent evidence suggests that the rate has since increased. The CoreLogic 2023 Annual Mortgage Fraud Report found that occupancy fraud in Q2 2023 is up 11.8% from a year prior. Similarly, the Fannie Mae Financial Crimes team’s Aug. 11, 2023 update reported that among all loans with mortgage fraud investigative findings, the percentage of loans with occupancy fraud increased from 10% in 2020 and 2021 to 19% in 2022.
CoreLogic’s Science and Analytics team recently analyzed trends in suspected occupancy fraud. The researchers compared where borrowers stated they lived on mortgage loan applications to public records after the loan was approved. If there were differences, it could mean the borrowers lied about living in the property they bought. For example, researchers flagged loans where a borrower claimed during mortgage loan origination that a property would be their primary residence, but post-closing public records identified the property as an investment owned by the initial borrower.
The percentage of suspect occupancy loans in the analyzed population has nearly tripled since 2020. Rates of potential misrepresentation among purchase loans are higher than refinances, but both have shown an increase.
Loans involving multi-unit properties were the most likely to involve potential occupancy fraud, followed by jumbo and FHA loans. Lower risk was associated with VA loans.
Lower interest rates may be a motivation to commit occupancy fraud. The average application interest rate on loans suspected of occupancy fraud is consistently lower than the average rate for legitimate investment loans, which decreases overall mortgage payments.
Occupancy fraud is a challenging issue that appears to be growing in the current market. However, time will tell if instances of this type of fraud will stay high once interest rates start to decrease.
It is easier to identify fraud after the fact than it is to prevent it. This can leave lenders at risk of repurchase. Rather than being left in the dark, lenders should understand fraud trends. Keep up with CoreLogic’s quarterly mortgage fraud reports and review existing processes using tools like CoreLogic’s LoanSafe to help mitigate increasing risk.