Buying and financing a 2nd home or an investment property is getting more expensive, and historically when this has occurred it has increased the likelihood of occupancy fraud.
The warning signs are all there: home price appreciation is at or near 40-year highs; mortgage interest rates are climbing, and in April the GSEs added new loan level price adjustments (LLPAs) for second home loans. The new adjustments can potentially add between 1.25% to as much as 4.125% to the cost for 2nd homes.
In general, Non-owner occupied (NOO) and 2nd homes usually have higher interest rates, larger down-payment, reserves and Credit Scores requirements in addition to lower debt-to-income ratios than primary residences. Even in normal real estate markets, these higher costs and tighter underwriting rules create an incentive for fraudsters to try to disguise 2nd homes and NOOs as primary residences. This market, however, is anything but normal: inventory is incredibly tight, fear of missing out (FOMO) is extremely high and in a work-remotely-from-anywhere world, it’s getting harder to tell who is working from home and who is committing fraud.
The agencies are expecting sellers to be vigilant about occupancy schemes, and lenders that aren’t will be facing hefty buyback demands.
Detecting occupancy fraud
Our FraudGuard® solution monitors transactions to determine whether 2nd homes and NOOs are being “masked” as owner-occupied to qualify for better rates and fees. The solution detects questionable second home deals based on the location of the property, its rental history and property characteristics (geo location, ownership of residence, property characteristics, etc.) The tool can identify undisclosed properties as well as mortgages associated with the properties that can determine owner occupancy for these findings. Finally, the alerts can also detect a variety of reverse-occupancy schemes that are used to help qualify for the refinance and purchase of these types of properties.
In addition to leveraging technology, prudent lenders will take the opportunity to review their underwriting and verifications processes to make sure that they are calibrated for today’s remote work trends. They may also want to update their training programs to ensure that occupancy fraud is top of mind, because it will certainly be top of mind for fraudsters.