From Sunday’s New York Times:
Occupancy fraud represented 19 percent of all mortgage misrepresentation on loans delivered to Fannie Mae in 2013, the latest data available from the agency, making up the largest category of fraud after misrepresentation of debt liabilities. False occupancy claims have since declined, according to the 2014 fourth-quarter fraud report released last month by Interthinx, another provider of risk mitigation tools. . . .
Occupancy fraud is costly to lenders because it can raise the default rate and the risk that, if a fraudulent loan is exposed, the loan investor (like Fannie Mae) could require the lender to buy back the loan. [Emph. added]
I can’t find Fannie’s mortgage fraud numbers for 2007 and prior, when the housing market was peaking, but suspect the rate of occupancy fraud back then was substantially higher than the 19% of 2013. There was a bubble going on, remember, and if people had to lie on their mortgage applications to get in on a can’t-miss investment, they would do it.
I mention this because, while it was the bankers who were the ones most vilified for causing the housing crackup and resulting credit crunch (and who later paid out tens of billion for mortgage putbacks and in fines), in fact the banks in large measure—and please, spare me your howls of protest—were the victims in the wholes mess. In the case of occupancy fraud, in particular, the loan applicant knowingly lies to the lender, and says he intends to live in the mortgaged property, knowing he’ll pay a lower rate and get better terms, when in fact he plans to rent it out and then flip it as prices keep rising. In the event, we know that prices didn’t keep rising. Once fraudulent borrowers realized that, they stopped paying and walked away from the properties entirely. Their mortgages went in default, and eventually Fannie and Freddie demanded that the originating banks take them back. So in the end who got punished? The banks the borrowers fleeced in the first place!
In the runup to the housing bust, banks certainly got careless and sometimes worse, in their underwriting practices. They’ve learned their lesson, and paid the penalty. Fine. Let’s move on. But is it too much to ask that the other bad actors complicit in creating the housing crackup be held to account, too? It’s not hard to identify them. Their names are right there on the mortgage docs! In a just world, a non-insignificant number of fraudulent borrowers would be prosecuted, at least as a warning for next time. Instead, they’re portrayed as victims and are sometimes even offered relief, to be paid for by the same banks they scammed in the first place. Insane.
What do you think? Let me know!