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Chrisman's Corner: Are Home Loans Risky for Lenders?

JMAC’s clients are sometimes asked by borrowers about risk, especially when they find out the price of a non-owner occupied loan (like a rental) is worse than an owner-occupied loan. Financing investment and second homes can be more risky for lenders since the chance of the borrower defaulting on a house that is not their primary residence is much greater.

Occupancy fraud is also one of the more common types of mortgage fraud, as borrowers tend to lie about their occupancy in order to obtain better pricing and lower down payment options. The down payment on a primary residence is as low as 3 percent, whereas the down payment for an investment property is at least 15 percent. One way that lenders defend against this occupancy fraud is to ensure that borrowers attest to whether the subject property is a primary, secondary or an investment home on the loan application and they have to sign an owner occupancy affidavit saying they will occupy the home within 60 days of closing, although these safeguards don’t always prevent occupancy fraud as this type of fraud represented 19 percent of all mortgage misrepresentation on loans delivered to Fannie Mae in 2013, which amounts to the largest category of fraud after misrepresentation of debt liabilities. 

Fortunately for JMAC, other lenders, and investors, these numbers have declined since, as occupancy fraud has declined 6 percent in 2014. If fraudulent activity is exposed, the lender may be required to buy back the loan but lenders are beginning to recognize occupancy fraud more due to advances in technology. Some of the red flags include borrowers with mortgage applications pending elsewhere, or an unusually long commute between the borrower’s place of employment and the subject property, or an appraiser notices there are no appliances in the home.