Embattled Federal Reserve Governor Lisa Cook faces allegations of mortgage fraud – especially owners occupying mortgage fraud. Claiming that she took out two mortgages in two states in two weeks, while designating the two properties as her “primary residence.”
If it is true, it is a horrible look for those sitting at the Fed, which is responsible for maintaining the rules and integrity of our banking system. It’s like the referee is secretly betting in the game. That is, we all think we are innocent until proven guilty. It is hard to believe that people so high in the banking system, with so much eyes on them, would commit fraud. But something strange happened.
Since the site is all about saving, making money and investing more money to achieve financial freedom, let’s use this latest controversy as a springboard to better understand mortgages. After all, most of us rely on them to buy the homes of our dreams. The lower the interest rate, the more wealth we have to keep.
Mortgage fraud fines can be serious
The penalties for owners of fraud that belong to the wider range of collateral fraud are also surprisingly harsh, even if law enforcement is very little. Technically, mortgage fraud is a federal crime of USC §1344 (bank fraud) of 1844 and can be sentenced to up to 30 years in prison and fined up to $1 million. However, in reality, the largest sentences are usually reserved for mass fraud rings, dark broker or lender games.
Nevertheless, lenders have the right to immediately approve loans through accelerated terms, which will require the borrower to immediately pay off the entire balance or risk foreclosure. They can also reprice the loan retroactively as an investment property mortgage, which means higher interest rates and fees and cut off opportunities to obtain favorable refinancing or future loans.
In addition to financial blows, reputational losses can be serious. While the average borrower may fly under the radar, it is possible for public figures, brokers and real estate professionals to suffer credibility if caught. That might be what Lisa Cook is dealing with now.
But here’s the reality: Owner occupation fraud may be much more common than regulators acknowledge. Economic incentives are obvious, law enforcement is weak, and the dirty little secret is that many borrowers quietly bent over to save money to save mortgages.
Requesting the benefits of two main residences
The main reason someone asks for a rental property or a vacation property is their primary residence because the lender offers Reduce mortgage rates for major residential borrowers. Whether you are refinancing a mortgage or buying a new property with a mortgage, the average mortgage rate for a primary residence is usually 50 basis points (0.5%) lower than an investment property or a vacation property mortgage.
Save $5,000 in interest per year on a mortgage of one million dollars. For a 10-year period, if the same balance is maintained due to interest-only collateral, it is $50,000.
Since the 2009 global financial crisis, their reputation is the credit of lenders, and they have been making mortgage applicants struggle by twisting to prove their income, wealth and reputation are good. Since 2009, lenders have been more stringent and do not want to suffer huge losses anymore. It usually takes two or three months to get a new mortgage.
The lender will ask you to sign a document that you are refinancing or taking out a new mortgage. You may also have to share a utility bill, but this is easily retained in your name.
However, in my more than 15 mortgage applications, there has not been a single mortgage official who came out in person to verify that I was taking out my primary residence mortgage. Even if they do, how can they prove that I won’t if I show up in an empty rental property or an empty rental property? They can’t, unless they hire private deceptiveness to watch my every move for months.
Obviously, the mortgage industry has no resources or incentives to crack down on owner occupation fraud. Loan officials focus on earning commissions, while banks are eager to book profits and transfer to the next borrower.
Why are primary residence mortgages cheaper
From the borrower’s point of view, paying a 0.5% premium for a mortgage on a vacation home or leased property is unnecessary. If you are rich (or reckless) buying a vacation property that you only use for a few weeks a year, you obviously have cash flow. Why do banks solve the problem with higher interest rates?
With investment property, you can get income and rental income from your tenant to pay your loan. Shouldn’t this make the mortgage interest rate the same as the primary residence loan or even lower than the primary residence loan? Given that you earn rental income, you are less risky.
Unfortunately, borrower logic is not lender logic.
- Holiday home: From a bank’s perspective, these are luxury goods, not necessary. When the economy gets sour, vacation properties are the first foreclosure property, as we saw in the 2008-2009 financial crisis. People abandoned the lake’s houses before their main roof. Banks hate holding foreclosure properties, so they can prevent losses from rates. Since the buyer pool is larger, it will be easier to cancel collateral and sell the main home.
- Rental Features: The lender assumes you need The income of the tenant that bears the mortgage. But turnover, vacancies and delayed payments have made rental income unstable. That’s why banks usually discount rental income by about 30% when calculating what you can borrow. You look like unreliable income to your bonus cash.
Meanwhile, a stable W-2 salary used to qualify for the primary residence is considered safer. This is why major residence loans are best priced.
In short, the bank considers the second home and rent as “want” rather than “need”, This makes them more risky, and riskier loans always come with higher prices.
Legal solutions to obtaining major residence rates on rent
The cleanest way to get a primary residence mortgage rate on a rental property is simple: Comply with the law. Take out the loan as the primary residence or refinance and then actually live for at least one year. After that, you are free to rent it out and you will still enjoy cheaper prices.
This is one of the biggest advantages of the US mortgage system. For decades, you can lock in low fixed speeds. For example:
- one 10/1 arm Provide you with 10 years of fixed payment. Reside there for one year and then rent it out while retaining it for another 9 years at the main residence rate.
- one Fixed for 30 years Work the same way – live there for one year and then rent out with 29 years of cheap debt.
This fits with one of my favorite real estate wealth building strategies: buy a primary residence, live in it for two years, and then sell tax-free for free (up to $250,000 if single, or $500,000 if married), or keep it for rent. Do it a few times in your life and you can comfortably build 3-6 properties that fund pensions –At the same time, follow the rules 100%.
This is very different from applying for two “primary residence” mortgages in two states in two weeks. One is strategic, patient and legal. Another one seems to be computational and fraudulent. Yes, timing apps are together in different states, making it harder for lenders to catch, but if you are in a high-profile seat, there are risks.
Loans can’t control your life after closing
It’s about owner-occupancy fraud: Sometimes it’s not fraud at all, but just life. You can sign documents that guarantee a year of residence on the property, but things have changed. Maybe you lost your job three months later. Instead of bleeding cash, you move into a friend’s basement and rent out the property to stay alive.
Is that fraud? I don’t think so. You try to cash out the agreement, but the economy handed you a crap sandwich and you did what you had to do. Frankly, no lenders sent someone to knock on the door to check if you still live there. They were too busy trying to end their next loan.
Or imagine the following picture: You bought a home in San Francisco and lived there for six months. Then, dream jobs offered land in New York City – double salary and promotion. You plan to return to San Francisco one day, so you rent out the property at a market price when you leave. Which bank has the right to tell you to empty it or worse, reject the opportunity? No bank.
Life is unpredictable. That’s why there may be thousands of cases every year that look like frauds on paper owner occupation, but it’s really just the reason people adapt to changing situations. The real difference is the intention: is the borrower intentionally distorting himself, or is his life forcing their hands?
You can’t really blame the borrower for thinking ahead, either. Many people want to climb the property ladder if financially or environmentally permits. If the ideal breadwinner appears, then the temptation is to seize it.
Bottom line
There is a big difference between working within the scope of the law and lying a lender thoroughly. One is strategic. The other is fraud.
If the allegations against Lisa Cook are real, it not only embarrasses her, but also embarrassing the Fed. At the same time, the case highlights a reality that few people discuss: owner-occupation fraud is much more common than people think. Incentives are strong and enforcement is weak.
Yes, many lying borrowers are just trying to save money. But if too many unlimited buyers take on mortgages that they cannot comfortably have the risk outweighs the individual. The next downturn, it makes the housing and loan industries even more shaky.
Reader, what do you think of owner occupation fraud? Should lenders address rental and vacation properties at a premium of 50 benchmark points (or higher)? Do you think the Fed governor intends to commit mortgage fraud just to save money?
Invest in real estate without mortgage
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