Skip to main content

Occupancy Fraud and the Sub-Prime Melt Down

Alot of the media coverage of the subprime mortgage crisis has suggested that the "victims" have been poor and unsophisticated borrowers who did not understand the terms of loans that predatory lenders sold them. In truth, a large segment of these problem loans may have been made to more affluent, sophisticated (greedy?) borrowers.

When a borrower signs a loan application and closes on a mortgage loan, the borrower must swear that information provided to the lender has been truthful. To lie on a mortgage loan application in order to get a loan (or better terms on a loan) is FRAUD. It really doesn't matter what the loan officer tells the customer. It is dishonest and illegal.

One such fraud perpetrated on lender relates to occupancy. An investment loan almost always comes at a higher cost, with a higher interest rate, and requires a larger down payment than a loan for an owner-occupied residence.

These sorts of misrepresentations seem to occur most frequently with regard to speculative investments in new constructions condo projects. Would-be investors who hope to buy condo units at pre-construction prices and then sell for quick profits shortly after the units are completed and purchased from the developer. Alternatively, some may opt to hold the units as rental properties. In either event, these players want to keep their investment costs as low as possible and there is great temptation to "pretend" that they will live in the condo unit as their principal residence.

When prices are increasing, this is often a fairly easy/passive way to make money. On the other hand, as we are now witnessing, when the markets slow, it takes longer to sell these units and the prices do not increase sufficiently for these investors to make profits (let alone recoup expenses).

Sadly, over the last year, I have seen several clients sell these types of properties at a loss. In some instances, I have even seen clients walk away from their earnest money deposits rather than complete a purchase contract on a unit they know they cannot immediately resell.

Not surprisingly, it turns out that a fair number of people who have bought on these sort of speculations have also started defaulting on their mortgages.

The Wall Street Journal reports on a Fitch Ratings study that found such "Occupancy Fraud" in as many as two thirds of of the subprime loans that defaulted within 12 months of origination. Another research firm, BasePoint Analytics suggests that 20% of all mortgage fraud involved this type of deception.

Investors tend to be more likely than borrowers who live in the homes to walk away from their purchases when home prices fall.

Source: The Wall Street Journal, Ruth Simon and Michael Corkery (02/06/08)

Comments

Popular posts from this blog

The Equifax data breach and you — 6 steps to take now

Identity thieves hit a major credit reporting agency—hard. Millions of consumers’ confidential identity information has been compromised.

Equifax, one of the big three credit reporting agencies announced that a massive security breach took place earlier this year. Offenders accessed data sets of 143 million US consumers.

What to do when drones fly near your home

Imagine a quiet evening on the deck of your new home when—out of nowhere—a noisy drone begins hovering around your property, almost certainly snapping photos or video. It’s like Space Invaders meets Gladys Kravitz. So what do you do?

Help! My Neighbor’s Old Tree is Growing Over my Roof

Let’s say about 100 years ago, a family planted an oak tree on the edge of their property. Over generations it’s grown into a magnificent tree that provides summer shade, autumn color and a swing for the neighborhood kids. You probably even liked the tree when you bought the house next door to it.

But today, its root system is invading your basement, its acorns bombard your yard and its huge limbs loom threateningly over your roof. By law, can you cut it down? Trim it? Turn it into a boat?