The Growing Concern of Occupancy Fraud

A recent podcast from CoreLogic took aim at the topic of fraud trends in the mortgage space in the latest installment of the company’s Core Conversations series, “Occupancy Fraud May Be the Next Risk for the Mortgage Industry.”

Hosted by Maiclaire Bolton Smith, VP, Hazard & Risk Management for CoreLogic, the conversation focused on CoreLogic’s 2023 Mortgage Fraud Report, which found that fraudulent occupancy loans have nearly tripled since 2020. The podcast featured insight from Bridget Berg, CoreLogic’s Principal, Industry Solutions, Property Intelligence, as she shared her 30 years of major financial institution experience with the audience, having focused on all aspects of mortgage fraud, managing investigations and developing fraud risk programs and analytics. Prior to joining CoreLogic, Berg served as VP of Fraud Strategies at Wells Fargo Home Mortgage.

Occupancy fraud typically occurs when an investor identifies an investment property as a primary residence to obtain more favorable rates. While this type of fraud can be difficult to spot during the origination process, it is relatively easy for an investor to identify after closing, which increases repurchase risk.

The spike in mortgage rates, as they edge closer to the 8% mark, has exacerbated affordability for most Americans, as the rising cost of taking out a mortgage has spurred many to consider ways in which to lower the price tag.

And while the rise in occupancy fraud was recorded by CoreLogic in Q2 of 2023, overall instances of mortgage fraud have remained relatively flat, with one in 134 applications containing instances of fraud, up from one in 131 applications during the same period in 2022.

“While mortgage fraud is nowhere near the levels it reached prior to the financial crisis 15 years ago, detecting its presence remains a top concern for lenders,” said Bolton Smith. “And this can be complicated since mortgage fraud is a term that encompasses a number of different schemes that require lenders to be on the lookout for different triggers.”

As Berg explained, “Nearly everybody who’s involved in a mortgage transaction has some kind of motive. The thing about fraud is it gets rationalized. They might say something like, ‘This is a stupid rule,’ or, ‘I know this person is going to make their payments,’ or, ‘I really need this commission.’ Or maybe we say, ‘The borrower’s going to save money if we do it this way.’”

In order to prevent and combat occupancy fraud, CoreLogic recommends increased scrutiny of loans that score in the high-risk range of our predictive fraud risk score. Our analysis found that these loans are more than twice as likely to have indications of occupancy misrepresentation.

While identity and occupancy fraud risk were found the most prevalent in the CoreLogic report, additional types of fraud identified in the report included:

• Income risk, which increased 6.2% overall, driven by several factors, including borrower incomes inconsistent with the location of the borrower or subject property, employment status, or years on job.
• Transaction fraud risk, which increased 1.9%, due to potential illegal flipping activity and higher rates of corporate/LLC/private lender sales.
• Property risk, which was impacted by higher delinquency rates and foreclosure activity, but was mostly offset by fewer valuation issues as home prices stabilized. The overall impact was a small increase of just 1.8%.
• Undisclosed real estate debt risk decreased 17% overall, down 21.8% for purchases, and 9.3% for refinances. The Q2 2023 purchase buyer population is less likely to own additional properties than the Q2 2022 purchase buyer population.

“Investment properties, as you can imagine, if you’re stressed out on your finances and you’re going to let your property go, you’re going to let your investment property go before your own home,” explained Berg. “They’re riskier from a credit standpoint, so they’re priced higher and you can have a lower loan-to-value on those loans. You don’t have as beneficial of financing terms for an investment property as you do for an owner-occupied primary.”

Click here to access CoreLogic’s 2023 Mortgage Fraud Report, and click here to listen to the Core Conversations Podcast: Occupancy Fraud May Be the Next Risk for the Mortgage Industry.