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Thursday, December 29, 2016

Reverse Occupancy

As a result of an internal audit, we just found out about two reverse occupancies. It turns out that our investors were already aware of this happening and were about to send us repurchase requests. We received the repurchase requests and it seems we have no way out but to do the repurchases. What could we have done to prevent this from happening in the first place?

To some extent, this situation can be avoided. However, when it comes to mortgage fraud, nothing is foolproof. A “reverse occupancy” occurs where a borrower buys a home as an investment property and lists rent proceeds as income in order to qualify for the mortgage, but instead of renting the home the borrower occupies the home as a primary residence.

Typically, these schemes have certain markers. Here are the most salient:
  • Subject properties are sold as investment properties;
  • Purchasers are first time home buyers with minimal or no established credit;
  • Purchasers have low income but significant liquid assets that are authenticated by bank statements;
  • Purchasers make large down payments;
  • The appraisal has a comparable rent schedule (to show expected rental income from the subject property);
  • Purchasers present “rent free” letters stating they are not paying rent to live in their primary residence.
  • Ethnic commonality among the purchasers and other parties to the transaction; and
  • Transactions occurring in a specific geographic location. 

Just because one or more of these are present in a mortgage loan transaction does not necessarily mean that the transaction is a reverse occupancy scheme.

If the financial institution is going to prevent this type of mortgage fraud, the best approach is to ensure prudent origination, processing, and underwriting practices, with an emphasis on “Red Flags” that may occur in the loan documents. For instance, closely reviewing liquid assets as compared to income and the source of qualifying income can identify a potential reverse occupancy scheme. I would further recommend that training be given not only to the operations staff but also to loan officers. In our training on Identity Theft Prevention and Anti-Money Laundering – such training being statutorily required of financial institutions – we discuss many Red Flags.

Ultimately, if this kind of mortgage fraud is to be prevented, the following initiatives would be advisable:
  • Periodically conduct vendor compliance procedures of third-party originators
  • Train, Train, and Train, either through in-source or out-source
  • Establish a “Zero Tolerance” policy for preventing mortgage fraud
  • Share information through sales and operations meetings
  • Report all suspicious activity through established channels
  • Perform a quarterly audit of loan transactions of investment properties
  • Ensure that quality control does audits for investment property transactions 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group