With three of Donald Trump's adversaries now under investigation for occupancy fraud, the practice of misstating a home's intended use on mortgage applications is drawing fresh scrutiny. We asked experts how widespread the problem really is and what the renewed attention could mean for the industry.
The type of fraud a government-sponsored enterprise regulator
"That misstatement has been around for decades, largely because it can lower the borrower's costs and down payment requirements and for less diligent lenders, can go undetected," the chairman of Prieston Capital and the American Mortgage Law Group said.
The key risk this raises for lenders in the conforming market where many sell their loans are buyback requests.
"It's usually treated as a material misrepresentation, and the originating lender may face a repurchase demand. Those can be costly, which is why prevention and front-end diligence are so important — and why solutions like
The government-sponsored enterprises and other loan purchasers don't want mortgages with occupancy fraud because when a property gets mischaracterized as a primary home, the loan's terms and pricing don't properly account for its vulnerabilities. This is particularly concerning in soft markets.
"Investment properties carry greater risk, as they are more likely to face strategic default if home prices drop significantly," said Dawn Dlouhy, manager at LexisNexis Risk Solutions.
What some numbers around occupancy fraud look like
"Mortgage fraud is uncommon overall. However, when it does occur, occupancy fraud and income misrepresentation are among the most frequent forms," Dlouhy said.
Overall, the estimated incidence of any type of fraud in mortgage applications was one in 116 or 0.86%, but it was up 6.1% compared to 12 months earlier and 1.4% on consecutive quarter basis, according to Cotality's second-quarter mortgage fraud brief.
Occupancy fraud based on findings in loan applications shows an uptrend followed by a drop, which stabilized a bit this year.
"From 2021 until 2023, we saw large increases year over year in the occupancy fraud risk. Since 2023, this risk seems to have plateaued and is even showing some signs of decline," said Matt Seguin, senior principal, mortgage fraud solutions at Cotality.
Cotality's data shows a 30% rise in 2022 in this particular misrepresentation, followed by a 10.1% increase in 2023.
But in 2024, Cotality reported a 6% decrease, followed by a shallower 0.9% reduction in incidents for this year's second quarter
Even so, occupancy fraud was the second most prevalent type of mortgage fraud in 2024, representing 29% of investigative findings related to misrepresentation, according to Fannie Mae data Seguin cited. Only income fraud, at 46%, was higher.
Those numbers suggest occupancy fraud has risen from where it was in 2021, when it accounted for just 12% of investigative findings and was the third most common form of misrepresentation behind income and liabilities.
"We suspect they saw that increase until 2024 because their data, on closed loans, lags behind ours and it takes a while for the fraud to be found, potentially years," Seguin said.
What typically defines a primary residence
Seguin said he generally defines occupancy fraud as a departure from standard language in a deed of trust that requires borrowers to "occupy, establish and use" a home as a primary residence within 60 days of the "execution of the security instrument" for at least one year.
The language does contain the caveat that there can be exceptions for "extenuating circumstances" beyond the borrower's control. The lender also can agree to an exception in writing and should not "unreasonably" withhold to consent to do so.
"The agencies are very strict with regards to occupancy and primary residence," said Prieston. "If a borrower owns multiple homes, the others must be classified as second homes or investment properties, depending on use."
Prieston said the only types of exceptions he would see to that rule would be a divorce or a job relocation during the 60-day period.
Seguin said there historically have been challenges in detecting occupancy fraud at the time of application because "there is not a foolproof way to predict a borrower's future intent."
How occupancy fraud can be prevented and detected
There is data and document analysis lenders can do in order to help prevent occupancy misrepresentation in some cases, according to Seguin.
"If someone is refinancing a property worth $200,000 and also owns a property worth $2 million, and claims that they will be living primarily in the $200,000 property, that may raise a red flag," he said, citing one example.
Renters' insurance or other coverage on a property or a seasonal location also could be a reason to request more information from a borrower, he said, noting there may be explanations for these but they should be questioned.
"In the case a borrower owns a home currently and doesn't need to sell their home to qualify for the loan, it's always possible that the borrower doesn't move into the new property they just purchased as they claimed and as required by the language in the deed of trust," Seguin added.
In this case, detection may be more likely to occur later on in the servicing process by noticing discrepancies like a mailing address that doesn't match the collateral property or finding the property listed for rent online, he said.
The GSEs have been working more closely together on fraud prevention
