Lisa Cook(soon to be Crook)
"Why You Can’t Oops into Mortgage Fraud
With the recent news of another public servant being referred to the Justice Dept. for suspected mortgage fraud, I thought it would be interesting to review how a certain type of fraud is committed, and how you can’t accidentally check a wrong form by mistake and face jail time.
Too much fraud these days involves a specific type of fraud called Fraud for Housing. Fraud for housing is a type of mortgage fraud where a borrower intentionally misrepresents or omits key information on a mortgage application to obtain loan approval or better loan terms. Unlike Fraud for Profit (which often involves industry insiders), fraud for housing is typically committed by the borrower themselves, aiming to secure housing under false pretenses.
A good example of fraud for housing is when the borrower fraudulently claims an occupancy type to better their rate or program. There are checks made within the mortgage process to review in detail each answer on a mortgage application along with a review of all the documentation provided by the applicant. Because of the numerous forms and disclosures generated as part of the process, an applicant can’t make a mistake by checking one box wrong – and that constitutes mortgage fraud. When one attempts fraud within their application, it takes specific conscious steps.
Here are the 3 occupancy types available on conventional mortgages.
Owner-Occupant (Primary Residence):
This is where you live and work. It’s pretty simple to understand. You generally can’t work in one area of the country and live in another. There are exceptions, but for today’s discussion let’s stick with the majority of how people live. In general, the address you use on your tax returns will be your primary residence.
Second Home:
A property you own and spend a portion of your time living there. Think of the family cabin at the lake. Or as with many from the mainland, they own a condo here to use when they vacation. It is important to note: Second homes are not a property you can rent out when not there. Second homes are to remain for your exclusive use. You are allowed to have friends or family use it when you’re not there.
Investment Properties:
This one is simple. At any point in the year you receive income for the use of that property, it is an investor property. Before you say ah ha, I got you! An owner-occupant is allowed to rent a portion of their home – so long as they continue to live there. There is also no such thing as a second home/investment property. As I stated in the definition for second homes above, second homes cannot be rented out when you’re not there.
Everyone wants to get the best rate available when obtaining a mortgage. Owner-occupant rates are the best. In addition, certain programs are only available to owner-occupants. But that wasn’t always the case.
In January 2022 (this is a very important date for this article), President Biden’s newly appointed head of FHFA, the agency that oversees Fannie Mae and Freddie Mac, announced huge changes to the mission and goals of the two mortgage giants. Fannie and Freddie were originally created as a clearing house for lenders to easily sell mortgages they originated to investors on Wall Street, then recapitalize to originate more loans. Fannie and Freddie purchase all three occupancy types of loans. Rates offered for each type of occupancy are based on risk analysis. But in 2022 the Biden administration wanted Fannie and Freddie to shift their focus on owner-occupant loans. To accomplish that goal, Fannie and Freddie artificially increased internal pricing adjustments for second homes and investor properties significantly, which caused second home and investor rates to be much higher than owner occupant loans. Prior to that change in 2022, second home rates were identical to owner-occupant rates. Investor rates were just slightly higher than the two other occupancy loans. This created a huge incentive for people to try and beat the system.
Prior to the changes in 2022 the most common form of Fraud for Housing were people buying a property as a second home, with the full intention of renting it out. If I went back through the hundreds of second home loans I provided over the past almost 3 decades, I am sure a majority – if not most, ended up as rentals. This is probably the easiest form of fraud for housing to get away with. Once your loan is in place, there’s no mortgage police that will knock on the door to see if you or a tenant answers. Since the 2022 changes at Fannie and Freddie, second home rates are virtually the same as investor rates. There’s no longer a major incentive to cheat for a better rate. Investor loans do require a higher down payment, so this type of fraud still exists.
There’s an update to this article regarding second home fraud I added after writing this section above.
What does remain is the huge difference in rates for second home and investor loans in contrast to owner-occupant loans. That’s why in most cases today of fraud for housing, applicants try to con their way to obtain owner-occupant rates. But obtaining an owner-occupant loan is not as easy as you think.
In the case of Fed Governor Lisa Cook, she refinanced her Michigan home as an owner-occupant, then two weeks later purchased a home in Georgia, also claiming owner-occupancy. The big question is how was she able to obtain an owner-occupant loan for a home in Georgia when she lives and works in Michigan? When underwriters look at your application, they not only review the figures to confirm the amounts listed for income, assets, and liabilities, but they also step back from the numbers to see if the transaction makes logical sense.
How could a college professor that teaches in Michigan claim owner-occupancy to live in Georgia? There are only 3 possibilities:
1) The application was completed fraudulently, and the underwriter had no reason to doubt her occupancy claim.
2) The lender was complicit with the fraud.
3) Here’s my guess. In 2021, and in the middle of COVID, schools and colleges were on remote learning. In theory, one could claim they didn’t need to be in Michigan to teach. But that doesn’t work either, because remote learning was only temporary. This would fall under scenario #1 of fraud on the application.
It is important to add to the story that in both loans, Ms. Cook signed an affidavit affirming her use of each property as her primary residence. That form falls into possibility #1 above.
The story the underwriter needs to accept when one lives in one location, yet works in another, must make sense. Commercial pilots have the ability live where they want. Many who fly mainland routes live here or in other desirable locations. Since they don’t fly every day, they can easily jump on a plane for free and commute to work. I’ve originated many loans for those that are not pilots that live on one island here in Hawaii, but work on another. The story just needs to make sense. If your work keeps you away from your home overnight, where will you sleep? And if you are employed, does your arrangement have the approval of your employer?
Late Update….
On Friday FHFA Director Pulte, the person who initiated the original criminal referral to the DOJ on Ms. Cook, sent a second referral to the DOJ for a third transaction. That transaction concerns a mortgage loan acquired by Cook in April of 2021 – two months before obtaining the mortgages in the initial referral to the DOJ. For this third transaction, Ms. Cook is alleged to have purchased a condo in Cambridge, Massachusetts and declared it would be a second home (see the definition above). 8 months after acquiring the condo, Cook reported rental income for that property on a federal ethics disclosure form and listed the condo as an investment/rental property. One last note on these 3 transactions. All three occurred prior to the change in 2022 when second home rates were the same as owner-occupant rates and investor loan rates were just a little higher. I can only speculate, but the motivation to claim fraudulent occupancy type was due to down payment requirements. With investor loans, you have to put a larger down payment.
As I mentioned earlier, this type of fraud, fraud for housing, is rampant. And as I explained earlier, there’s no mortgage police to check if your second home is being rented out. So how are people found out? In almost every case, the fraud is uncovered if the property goes into foreclosure. That’s when the lender investigates and finds that either the borrower never truly lived at the property or the property was a rental from the beginning.
In the case of Ms. Cook, Pulte said he was acting on tip he received. That could very well be, or as many will believe, the Trump administration investigated the members of the Fed for wrongdoing. Even if politically motivated, Fannie and Freddie have a right to investigate and have an obligation to us taxpayers – who currently own the two mortgage clearing houses.
As with everything today, politics will slant each person’s view of the day’s news events. Knowing what I know about mortgages – and I am required to get reeducated each year specifically on fraud, I believe Ms. Cook committed fraud. And I would say the same if the facts were identical for someone in Trump’s cabinet.
Ms. Cook has sued the President to regain her job at the Fed. In all the statements issued by her attorneys this week, they never stated she didn’t do what she’s accused of. Their argument is that she should not be fired until charged or convicted. For them, suspicion is not enough. But in the world of finance, employers can, and do fire people on mere suspicion. When other people’s money is at stake, the employees need to be beyond approach.
Mortgage fraud is serious. How serious? One can be sentenced to 30 years in jail and face a fine of $1,000,000. Here’s some good advice: If the only way you can make a transaction work is to fraudulently apply, maybe it isn’t worth doing the transaction at all." |
