What is truly owner occupancy?

Question

Not sure if this is an innovative strategy or just illegal but I would like some input. I have a friend who bought several rentals ALL with primary occupant loans (3.5-5% down). What he does is include utilities in the rent he charges, and has all the utility bills under his name and sent to a P.O. Box.

Is this a legitimate way to get out of the 20 and 30% down required for investor loans?? What would be the consequence of doing this?

Ed Wood · Answer

Here's what happens.  The fraud committed is called "occupancy fraud" for some reason a lot people in general think it's ok to do this not knowing how serious this is.

As the loan is sold up the chain there are several QC checks and if there is any hint of fraud in the file a SARS report is file on the borrower with the DOJ.  For occupancy they can look at last 2 years tax returns from the 4506T form the borrower signed, they can pull nationally any properties owned by the borrower and spot check for tax billing vs property addresses and other methods. There is no notification when when a SARS report is filed on a borrower.

If there is indication of occupancy fraud the investor who purchased the mortgage has a PI firm AKA 'mortgage investigator' go out to the property knock on the door and they ask questions like, "are you?" "oh, how long have you lived here", "are you a tenant" things like that fishing for a answer that confirms the the owner does not live in the property.

When the PI files the report the loan starts to unwind and reps and warranties kick in this means the originating lender, bank or broker must pay buy the loan back and at this point the borrower is probably notified and the loan is called due and payable immediately.  Now whether the authorities get involved further is a different matter.  I would think authorities getting involved would be dependent on their current case load, and how many SARS reports were filed on the borrower for the same incidence.  It could take years for them to do anything.

I'm surprised the underwriters did not catch his actions if the borrower has done this several times.  Underwriters look for rapid acquisition of properties from a nationwide title search, they double check address and if there are any discrepancies the borrower needs to write a letter of explanation on title and the credit report as well as other methods.

Jon Holdman · Answer

I think you need some new friends, @Sebastian Gast.   Criminal activity has a way of rubbing off.

Account Closed · Answer

Apparently his friend does. LOL!

Robert Leonard · Answer

http://www.fbi.gov/about-us/investigate/white_collar/mortgage-fraud/mortgagefraudwarning.pdf

All it takes is a disagreement between him and anyone who knows what he's up to - then the gig is up.  You can play that "catch me if you can" game along with him, which your "not like the go around knocking or doors" comment suggests.

“Whoever is careless with the truth in small matters cannot be trusted with important matters”   - Albert Einstein

Account Closed · Answer

Sebastian,

The fact that your friend has been able to obtain several mortgages with low down payments revealed that not only he has committed mortgage fraud, but he has also not reported the rental income. Don't be surprised if an IRS agent is reading this thread and might be contacting you real soon to find out who this friend of yours is. :)

Bill Gulley · Answer

Well, that's pretty well stated!

Chris, you're correct, Fannie, Freddie, HUD, USDA, FHA, VA, DOJ, may all have due diligence reviews as well as all banks, credit unions and any lender providing RE financing. Someone who moves out on day 336 a few times could likely be banned by HUD, no prosecution, just banned from secondary market loans, not good.....unless they have a reason like moving due to employment or other issues as there is the intent to game the system. True, we don't know the facts.

There are several systems and multiple agencies that can get involved in such cases. Ed spoke, I believe, primarily of due diligence examinations from activities of the secondary market. Private companies provide these examinations for lenders for sold/purchased portfolios but also on portfolios held. There are also in-house due diligence reviews, mortgage wholesale entities do check up on those who originate for them.

State RE Commissions examine files closed in Brokerages, they also go to closing companies, I believe holding periods are seven years on site,  files are thinned out and contracts and HUD-1, title and other docs are sent to repositories by companies, they use to micro-fiche docs, I'm sure someone scans them now, the history of transactions is not hard to discover.

Bank examiners rifle through bank loans looking for discrepancies.

As Ed mention, you could have a follow up with an investigator or examiner knocking on a door. If at the examination level it is apparent that fraud was committed it can be turned over to an appropriate law enforcement agency, the Sheriff or State Troopers, but it could be FBI, FDIC, Treasury Dept. or HUD, depending on the matter, they all carry guns and badges, you get to go for a ride and based on the facts at hand, well you can guess. You get to see a real live Federal Prosecutor too.   Getting nailed for just "Occupancy Fraud" usually isn't the only charge, you also may get mortgage fraud, conspiracy, mail fraud and a host of other charges along with it.  Generally, when you cross the line on one issue you have also crossed the line on other related areas of law. Financing and banking laws are intertwined across several agencies of jurisdiction, it's rather sophisticated and well designed as our economy relies on compliance.

The thing too about fraud, for those thinking they have some statute of limitations, those limitations begin when the fraud is discovered, not when it was committed.

As mentioned, there are many ways to be discovered, I'd say most Realtors will report violations of law for whatever reason, so do other investors.

Prisons are full of very smart people, chances are you're not near smart enough to out wit the system for very long.

I suggest your "friend" sell or refinance his properties and you not ask about the chances of getting caught, they aren't that good. :)

Chris Martin · Answer

Going just from what you wrote, this indeed belongs in Innovative Strategies. We don't know enough to jump to conclusions about loan fraud. I am assuming, given the low % down payments, these are GSE loans through Fannie Mae or Freddie Mac. The type of Fraud are identified in the FNMA Selling Guide(1), page 134, which include:

...misrepresentation of occupancy

On page 1167, Verification of Owner-Occupancy, does indeed spell out post-closing review guidelines.

As a practical matter, Fannie Mae form 3034 (Uniform deed of Trust) requires the occupancy of the property as borrowers principal residence for "at least one year after date of occupancy." For all we know, the investor could very well be buying one property each 12 months, 1 day after the last closing. BTW, I have known people to do just that... although not literally 366 days later.

Also note that DU can easily detect OO violations. I believe (loan brokers help me out) this is flagged up front (or early) in DU entry as a 'red flag'.

(1) Source: https://www.fanniemae.com/content/guide/sel073013.pdf

Mark Ferguson · Answer

@Ed Wood great info!  I guess the question is whether the investor is buying homes as an investor in the owner occupant only period on HUD , Fannie or Freddie.  Or if he is getting owner occupant loans over and over.  Like you said it is hard to imagine a lender not noticing multiple owner occupant loans. I am guessing he is buying HUD or other types of properties as an investor in the owner occupant period.

I'm not sure it was mentioned, but this is also a felony.

David Krulac · Answer

@Sebastian Gast

Its 5 years in prison and a $250,000 fine for mortgage fraud on any mortgage that has anything to do with the Federal government.  that means HUD, VA, Rural Dev, or a mortgage through any lender who is Federally licensed like a bank.

It covers almost all mortgages except the ones from HML or your Uncle Louie.

And to quote that famous real estate investor Harry Callahan, "Do you feel lucky? Well do you?"

Mark Ferguson · Answer

mostly investors and realtors enforce it.  They don't want to be beaten out by investors cheating the system so they tend to watch very closely.

What is truly owner occupancy?

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