Federal Reserve Scrutinized for Mortgage Fraud Allegations

The Federal Reserve has previously disclosed over 22,000 mortgage loans suspected of fraud, a situation similar to that involving a Federal Reserve Board member. The issue came to light when President Trump and his administration called for the resignation of Federal Reserve Board member Lisa Cook, citing allegations of owner-occupier fraud. This type of fraud involves individuals obtaining multiple owner-occupier mortgages within a short period, falsely claiming that the properties are their primary residences to secure more favorable loan terms.

The Philadelphia Fed's researchers, in a 2023 report, evaluated the number of "fraudulent investors" in the mortgage market. These investors are defined as those who hold multiple owner-occupier mortgages within four quarters of the first mortgage being issued. Federal Housing Finance Agency Director Bill Pulte alleged that Cook had obtained a mortgage for a property in Ann Arbor, Michigan, claiming it as her primary residence, and just two weeks later, she obtained another mortgage for a property in Georgia, making the same claim.

The report covered 584,499 loans issued between 2005 and 2017, with 22,431 of these loans identified as potentially fraudulent. The proportion of loans where borrowers falsely claimed to be owner-occupiers to secure better mortgage terms peaked before the 2008 financial crisis but remained steady at 2% to 3% for most of the subsequent decade. The actual number of loans meeting the Federal Reserve's definition of fraud could be higher, as the study was based on a partial data sample. Researchers also noted that some instances of owner-occupier fraud might be unintentional, such as when borrowers are unable to sell their existing homes due to a weaker-than-expected real estate market.

The scrutiny of Cook's mortgages appears to be the latest move by Trump and his administration to pressure the Federal Reserve into lowering interest rates. Trump demanded that Cook "resign immediately," while Pulte claimed that his allegations provided a "reasonable basis" for her dismissal. If Cook were to resign, it would give Trump the opportunity to appoint a new Federal Reserve Board member who might support more aggressive rate cuts.

Pulte, in an interview, stated that anyone could review Cook's public records. He cited four criminal statutes and called on Attorney General Pam Bondi to investigate potential charges. No charges have been filed, and it is unclear whether Bondi will conduct an investigation. Ronel Elul, a senior economic advisor and economist at the Philadelphia Fed and co-author of the 2023 report, declined to comment beyond the report's findings when contacted by reporters.

Cook, in a statement, said she had "no intention of being coerced into resigning over certain issues mentioned in a tweet." She added that she was "gathering accurate information to answer any reasonable questions and provide facts." David Joffe, a federal criminal defense attorney in Fort Lauderdale, Florida, noted that cases involving owner-occupier fraud are relatively rare. However, he acknowledged that "if you look closely enough, you will find some issues."

Stephen Cazares, a former federal prosecutor and now a defense attorney, stated that mortgage fraud cases typically involve exaggerating assets and income rather than falsely reporting a primary residence. He noted that while cases based solely on misreported primary residences are uncommon, they do occur. The Philadelphia Fed's report found that approximately one-third of real estate investors falsely claimed to be owner-occupiers to secure lower interest rates and higher loan-to-value ratios.