Falsifying “Owner Occupancy” Status Gets New Criminal ScrutinyDaniel Dobbs2024-07-31T13:54:11-07:00
If you are an agent representing a client who is playing fast and loose with their loan application, their bad behavior can “splash” on you if there is an investigation.
Proving one’s lack of participation in a housing scheme may still result in legal fees and/or a cloud hanging over one’s license (and career), all because of fraudulent actions by buyers, even though one has no knowledge of their intentions.
Your best defenses are to ask questions, listen for answers, and compare those answers to your MLO’s knowledge of the client.
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Your MLO is your “canary in the coal mine” for detecting fraud.
According to a January 14 press release (for all loans originated after April 1), Fannie Mae’s limit for their secondary market portfolio is only 7% of these three types of loans:
1) residential rental properties (one to four units),
2) investment properties,
3) second-home mortgage applications
As a result, rates climbed even further than at first anticipated, up an entire percentage point in rate (plus additional fees) in just 45 days.
Many buyers are being forced to seek “private-label” mortgages (banks and hard money—good luck with that), whose underwriting criteria are much more conservative than Fannie/VA/FHA’s.
Higher credit scores, larger down payments, and lower DTI ratios make it harder for investors to qualify.
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The rate increase has pressured investors “to get creative” when making offers to look as if the transaction is owner-occupied.
In addition, transactions involving non-occupying co-borrowers and buyers receiving large gifts of funds are also drawing a much higher level of increased data scrutiny.
Buyers can expect a longer wait time (48 hours) for full loan approval as underwriters review data from both borrowers.
In addition, transactions involving non-occupying co-borrowers and buyers receiving large gifts of funds are also drawing a much higher level of increased data scrutiny.
It’s nothing personal, but the market is rampant, with investors seeking “straw buyers” to act as owner-occupants for their investor purchase.
It’s a poor choice, as defrauding Fannie, Freddie, HUD, or VA is a felony. Being found guilty of “Housing Fraud for Profit” is a quick ticket to the “big house” and ongoing audits by the IRS and Calif. State Franchise Board.
Proof Of Occupancy
How to Recognize Your Client is Committing Fraud!
Lenders, of course, want evidence that a property will, in fact, be owner-occupied.
Here are the circumstances they scrutinize:
1. Do the buyers have other homes? If buyers own another nicer or larger (owner-occupied) home, multiple rental properties (or units), or have co-signed for every relative in their family, these factors will raise red flags.
2) “Letters of Explanation” Don’t Help. They may even legally bury the buyer and possibly the agent. If your client is committing fraud, letters of explanation (LOEs) asserting they are “really, really really” buying a home as owner-occupied is a confession to their scam. “Do not pass. Go and do not collect $200.”
3) Proximity to Employment. Another element coming under increased scrutiny is courtesy of the Covid pandemic.
Many buyers are simply claiming to work remotely and getting a letter or a verification of employment stating that they can.
It is not that simple for many apparent reasons.
With the vaccine rollout, many businesses (depending on the employee’s productivity, position, and type of industry) will want to see their employees regularly “bright-eyed and bushy-tailed.”
In addition (based on my 40+ years of experience), most employers are loathed to make verified future promises of “conditional” employment, as it creates legal issues if the employee/employer turns contentious.
Self-employed borrowers must prove that moving to a remote location will not adversely impact their business.
This issue is problematic (at best) because relocation almost always interrupts income for self-employed persons.
In the era of digital tracing, “getting caught” is easier than ever. Occupancy checks” are as easy as a few critical strokes for an investigator.
Voter registration, property tax bills, Social Media, car registration, utility bills, etc., are all damming evidence leading up to occupancy fraud.
4) Tax Returns
All buyers must sign IRS form 4506 when signing loan docs. This form entitles a lender to access a buyer’s future tax filing for up to one year.
So, if a buyer purchases a property as owner-occupied, then (clandestinely) rents it out and claims it on their next tax return, it was a bad choice!
It happened to a (former) client of my CPA, whose loan I declined to originate; the buyer inadvertently told me (bragged) of his plan (too much wine), so I stepped out of the transaction.
The buyer only purchased a home with an FHA loan to claim a small amount of rent and significant (net) property losses on his Schedule E tax form. Along with “bada bing bada boom” came an FHA auditor.
Note: FHA routinely (if they have any doubt) will literally have someone knock on the property’s door to ask who lives there.
And that’s precisely what happened. Ten months later, FHA exercised the “4506” and called the loan due. Tax audits followed, and he was charged with a series of wire fraud and loan fraud charges.
A callable debt is a provision in a loan that allows the mortgage lender to require you to repay the loan in full before the end of the loan term. This may happen when the terms of the loan are breached (fraud).
Moving In For Twelve Months
When they sign loan documents, owner-occupant borrowers must attest that they intend to live in the property for a minimum of twelve months.
In case of a job transfer, a military re-assignment, death (or crippling illness/injury) of a borrower, all constitute reasons why homes could be rented out instead of occupied.
But remember, the homeowners have the burden of proof to show why they aren’t occupying the home.
