Mortgage Fraud Accusations Highlight 2006 Housing Bubble Risks

The Trump administration has recently accused several political opponents of involvement in "mortgage occupancy fraud." This type of fraud occurs when homebuyers falsely report a property, which is actually a second home or investment property, as their primary residence to secure more favorable loan terms. In the United States, mortgage conditions vary significantly based on the property's intended use. Primary residences require the lowest down payment, ranging from 3% to 5%, while second homes typically demand 10% to 20%, and investment properties usually require 20% or more. Interest rates are also lower for primary residences, with second homes averaging 0.25 to 0.5 percentage points higher, and investment properties being 0.5 to 0.75 percentage points higher. Additionally, investment properties often incur higher property taxes and insurance costs. These disparities motivate some borrowers to misreport the property's use.

Legally, there are situations where borrowers can legitimately own two properties financed as primary residences. For instance, if a homebuyer purchases a property in one location and later buys another for personal use in a different city due to a job relocation, and rents out the original property, this arrangement is legally permissible. However, the risks of being caught in such fraud are severe. Under U.S. law, providing false loan information can result in up to 30 years of imprisonment and fines up to 100 million dollars. Lending institutions may also demand full repayment of the loan. Despite these penalties, legal experts note that criminal prosecutions against individual buyers are relatively rare.

From a market perspective, this type of fraud was most prevalent during the 2006 housing bubble, peaking at 6.8%. Since then, the rate has decreased to 2% to 3%. Studies indicate that those who misreport their property's use typically have larger loan amounts, lower credit scores, and higher default rates. They are also more likely to engage in "strategic default" during periods of declining property values. Consequently, this behavior can obscure the true market risks and exacerbate instability in the housing finance system.