True Lies

Reining in Reverse Occupancy

Reverse occupancy misrepresentation occurs when a borrower claims to be purchasing an investment property or non-owner-occupied home so he or she can use the rental income from the property to help them qualify for the loan.

The borrower instead occupies the home or one of the units as his or her primary residence, eliminating rental income without which the borrower may not have qualified.

Potential Indicators of Owner Occupancy

There are many potential indicators that a borrower intends to occupy a property and not use it as a rental.

One indicator is the use of tax credits intended to provide qualified homeowners with a tax exemption on a primary residence. Through our investigations, we’ve found that some borrowers who obtained investment property loans also applied for those tax credits, implying that they would occupy the properties securing those loans.

Another potential indicator is the type of insurance coverage obtained for these properties. Freddie Mac’s Single-Family Fraud Risk (SFFR) team confirmed with insurance agents and Servicers that, for many of these loans, the coverage in place at origination was owner-occupied, not rental.

Servicers of these loans further confirmed that these borrowers maintained that same type of homeowner’s insurance coverage for their purported investment properties since origination.

In other instances, the borrowers changed insurance coverage shortly after closing. In fact, one borrower changed coverage from rental to owner-occupied within 10 days of closing.

We’ve also seen an additional alert to possible occupancy misrepresentation when many borrowers called their servicers shortly after closing and requested a change of their billing/mailing address to the subject investment properties.

Borrowers Seeking Primary Residences

SFFR investigators have interviewed borrowers in connection with potential reverse occupancy misrepresentations.

While some borrowers recounted detailed conversations with their loan officers about the type of loan for which they were applying, others were not aware they had applied for investment loans.

Borrowers frequently stated that they had always intended to occupy the properties and reiterated that their loan officers knew it. One borrower even indicated that her loan officer encouraged her to apply for an investment loan to get her loan approved.

While reverse occupancy isn’t a new scheme, it still occurs − as recent SFFR investigations attest. Any time borrowers are qualified for loans they aren’t truly eligible for, whether through misrepresented income, occupancy, insurance or something else, they create substantial risk to Freddie Mac and our lenders.

If you spot or suspect fraud, let us know by contacting the Freddie Mac Fraud Hotline at 800-4FRAUD8.