Working Paper

Owner-Occupancy Fraud and Mortgage Performance

Abstract: We identify occupancy fraud — borrowers who misrepresent their occupancy status as owner-occupants rather than investors — in residential mortgage originations. Unlike previous work, we show that fraud was prevalent in originations not just during the housing bubble, but also persists through more recent times. We also demonstrate that fraud is broad-based and appears in government-sponsored enterprise and bank portfolio loans, not just in private securitization; these fraudulent borrowers make up one-third of the effective investor population. Occupancy fraud allows riskier borrowers to obtain credit at lower interest rates. These fraudulent borrowers perform substantially worse than similar declared investors, defaulting at a 75 percent higher rate. Their defaults are also likelier to be “strategic,” suggesting that they pose a risk in the face of declining house prices.

Keywords: mortgage default; consumer credit; household finance; misreporting; fraud;

JEL Classification: D12; R3;

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Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2023-01-31

Number: 23-01

Note: WP 23-01 supersedes WP 19-53R