The facts uncovered in fraud investigations are often shocking, revealing stories of both tragedy and comedy. And those stories inform how we help our clients to navigate the landscape of risk, regulation, and management.
Stories about occupancy fraud, until very recently, never made the news. Then in the Spring of 2024, a top producing loan officer in New Jersey made headlines for falsifying occupancy. And in 2025, stories about occupancy fraud are everywhere, as allegations of it are the cudgel-du-jour in and around Washington, DC.
The baseline
The standard Fannie Mae mortgage provides that the borrower must move in within 60 days, that the home must be their primary residence, and that they live there for a year “unless extenuating circumstances exist which are beyond Borrower’s control.”
That “extenuating circumstances” clause is weighty.
When special investigations units do their job, they look for these “extenuating circumstances.” If they exist, the borrower’s “non-occupancy” is excused.
If extenuating circumstances don’t exist, this article will detail your bumpy road.
Checking for extenuating circumstances
Long ago I was a loan officer in Southern California and originated an owner-occupied loan to a young couple in Riverside. The escrow closed on Wednesday, and on Friday, the wife jumped from a freeway overpass into the windscreen of an oncoming semi. The death certificate listed the time between injury and death as “simultaneous.” The borrower/widower moved back to family in Michigan and never moved into the subject property.
I know this because the lender that I brokered the loan to called me after the close, wanting to grill me about “Did I know the borrowers were not going to occupy the subject property?”
I then tracked down the borrower in Michigan, got the story of the suicide and, unbelievably, the death certificate. With that, the lender calmed down.
Life’s “extenuating circumstances” can come from any direction – from doctors, from employers, from spouses. Suddenly you are moving, or commuting, or hospitalized, and you never saw it coming.
These are the contingencies that are countenanced in the standard mortgage obligation, and they can excuse you from occupying the subject property.
Intent is key
Mortgage investigators, we look for these contingencies as well as any indications of a borrower’s intent. That’s the key word, intent. Without it, you simply don’t have fraud.
Proving intent can be tough. Unless you get ahold of incriminating email chains, the evidence is mostly circumstantial.
One investigation I conducted involved a 40-year-old marketing executive who had two houses – one, a mansion near UCLA, in the tony area called Cheviot Hills, and the other was a junker in Van Nuys about 15 miles away.
The borrower had taken cash out of the junker, which he said was his primary residence. I called him and he was well rehearsed, perfect actually, about why he lived in the junker – it was nearer his clients, the mansion was too big for one guy, he was happy living in the junker and he just bought the mansion as an investment.
He was a sophisticated borrower with a good cover story, and he was expecting the call.
The circumstantial evidence is the comparison of the two properties – one a lovely colonial with a white picket fence, the other a starter-home with bars on the windows.
Fallout – fixing the problem
Long ago I originated a cash-out, owner-occupied refinance on house A for a woman who was, in my decade as an originator, the most difficult client I’d had. Sixty days after closing I got a call from the lender saying the borrower lied about occupancy, that she’d bought house B and moved into it. What followed was a month of “fixing” this loan, with lawyers and the borrower in a continuous back and forth. The borrower had to fix the LTV by getting money from her dad to buy down the loan amount, and the lender adjusted her rate up a full point. For her it was miserable. For me, it was a month of schadenfreude, where yielding to my baser instincts, I thought “couldn’t happen to a nicer person.”
This kind of fallout results from an intentional misrepresentation of occupancy, which was clear in this case.
Conversely, if you can’t find “intent,” you can’t conclude it’s fraud. If you couple “no fraud” with “extenuating circumstances” then you don’t have breach of contract either.
You have life. A vicissitude. No harm no foul.
Default judgment: The public doesn’t care
When I was a practicing attorney, I sued a borrower for, among other things, misrepresented occupancy. He failed to answer the complaint or respond in any way, and when that happens, the law says I’m entitled to a default judgment in my favor. I went to see the judge to get his signature and was ushered into his chambers, literally hat-in-hand.
He took my papers from me and read the complaint and my allegations of occupancy fraud. He took a long time to read it, every line. And let me inject here, as it is relevant to this story, that the judge was Japanese-American.
He finished reading, set my complaint down on his desk, and he said, “Occupancy. Did you know that in the 1940s, my Japanese grandfather was not permitted to purchase property in the United States, so the family had to rely on a white friend to act as the borrower?”
After an awkward pause, he then signed my judgment.
I prevailed, but his message was loud and clear – don’t bring this kind of weak nonsense to this court again and certainly not without other more serious allegations.
Conclusion
Occupancy fraud has made the news lately because of its use as an offensive weapon. Getting to actual fraud, however, is a high bar – it requires that you find “intent” and that you understand the bumps in your borrower’s road.
Under the direction of BSA Officers, lenders investigate both tragedies and comedies. You know, life. You investigate and find divorces and job losses, home invasions and cancer. And suicide.
All to determine the borrower’s intent. And when you find that there are extenuating circumstances, it means that not only is there no fraud, but there’s no breach of contract either.
Confronted with the unpredictability of life’s turns, it falls on the BSA officer to make that call. Tough job.
Bob Simpson is the president of DaylightAML.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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