Until about May of 2007 there were plenty of non-conforming loan programs available for high loan to value real estate investment purchases. In fact it was still relatively easy for a borrower with a 660 middle credit score and six months of reserves to purchase an investment property with no money down. Then suddenly all non-conforming lenders lost their final investors and that deal vaporized.
Overnight, seemingly, it became a requirement for a borrower to have ten percent or more down payment to purchase a non-owner occupied property. Deals that were already in process across the nation and scheduled to close were suddenly no longer able to do so. The lenders who were underwriting the loans offered little assistance and, in fact, failed in many cases even to counter and ask for ten percent equity injection from the borrower. So the loan officer, the real estate agents, the seller, the title companies, and the borrower were essentially "hung out to dry".
Lest you think there was no way around this issue let me explain what certainly happened in mortgage brokerages and investment meetings across the nation: At least more than a few of these same loans were resubmitted to a different lender not as an investment property but rather as an owner occupied primary residence. It is an old serpent come back to slither through the real estate finance industry.
Until about 2005 this was the number one form of real estate investment fraud perpetrated by industry insiders. Factually we fought against this practice for several years until non-conforming loan solutions became available to real estate investors. Normally we identified this form of fraud by investigating just a few points of the loan application. Those points are still valid today and any underwriter paying attention to the file can easily spot these flags for fraud and pull the file for mitigation.
Does it make sense, for example, for a buyer to move from a three-thousand plus square feet home in the suburbs valued at four-hundred-thousand dollars to a twelve-hundred square feet home in the city value at one-hundred-eighty thousand dollars? Not likely. There are many other ways to detect this form of fraud which I will not expose because these are the tools of my trade used to identify and deter this type of fraudulent activity.
If you, as a buyer, are concerned about being caught in a web of fraud and would never intentionally commit mortgage fraud let me include some tips for you. If you are quoted an interest rate by one lender of, for example, nine percent for a mortgage to purchase a real estate investment property using fifteen percent down payment but another lender quotes, for example, seven percent and no down payment you are most likely speaking to a loan officer who either knows nothing about pricing a loan or intends to have you commit mortgage fraud so they can earn a commission check.
The FBI says that over eighty percent of mortgage fraud involves insider collusion. Chances are, however, if you sign on the line indicating you intend to occupy a property as your primary residence but a couple of years down the road it is discovered you never occupied the property but instead used it as an investment property it will be you who has signed your name indicating you did intend to occupy. Not doing so either willfully or unknowingly puts you at risk of being charged with mortgage fraud for profit. Your loan agreement will generally allow you only thirty days to take occupancy of the property.
Not being ignorant of the fact that this will continue to happen in part because many borrowers cannot understand how this is fraud and believe it does not hurt anyone let me take you on a short journey. There was a young man who worked for many years to save enough money to become a lender. He had only enough to lend to one purchase deal and created his lending guidelines to protect his funds. He required the person purchasing the property to live in it because he knew if it was an investment property and the person fell on hard times that person would pay his own home payment before he paid the payment on his investment properties. In other words the primary residence presented a much lower risk.
The young man did indeed fund a closing for a nice young lady who was purchasing her first home. She was so excited and had so many plans about how she would paint, redo the kitchen, put in new hardwoods, and landscape to give the home some wonderful curb appeal. The young man was excited for the young lady, he funded the transaction and was pleased when he received his first few mortgage payments.
Several months went by where the young man was receiving his payments on time until one month he did not receive his payment on time. He sent a letter to the young lady who indicated she would no longer be able to make her payments due to the fact that the people renting the home from her had moved out and left the home in terrible condition.
In the end the young man had to take re-possession of the property which required thousands of dollars to return to market condition. Instead of going through all that trouble he finally accepted a short sale offer on the property for tens of thousands of dollars in lost revenue. At last the young man's hope of helping people with his good, honest loans were destroyed. The cause? Nothing more than occupancy fraud.
But what if the payments are always made on time? Nobody gets hurt then, right? Wrong. Lending is risk based. The loan made on that property was based on risk that was mitigated by the borrower saying she would occupy the property. This lowered the down payment requirements as well as the interest rate. The hurt was done on the secondary market when the Little Old Ladies Medical Insurance Fund purchased the loan (had the loan been sold). They purchased a loan which should have been performing at a lower market exposure and higher monthly revenue to offset the risk. In fact, the mortgage pool was contaminated and could bring down the house.
Summing it up there is no way around the fact that, with only a few mitigating circumstances, owner occupancy statements can lead to mortgage fraud. This is almost always categorized by the FBI as "fraud for profit". Stay clear. Do not do it. There are dozens of ways you will be caught and many of them happen well after the closing date.
Ken Cook is Director of Operations and a certified Fraud Detection and Deterrence Officer for Novation Mortgage in Marietta, Georgia. He is also an accomplished author and industry trainer. He may be reached at 678-946-0101 or through http://novationmortgage.com Novation Mortgage uses the DISSCO system from Interthinx on every file submitted for approval.
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