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Owner-Occupancy Fraud and Mortgage Performance
We use a matched credit bureau and mortgage dataset to identify occupancy fraud in residential mortgage originations, that is, borrowers who misrepresented their occupancy status as owner-occupants rather than residential real estate investors. In contrast to previous studies, our dataset allows us to show that – during the housing bubble – such fraud was broad based, appearing in the government-sponsored enterprise market and in loans held on bank portfolios as well, and increases the effective share of investors by 50 percent. We show that a key benefit of investor fraud was obtaining a lower interest rate, particularly for riskier borrowers. Mortgage borrowers who misrepresented their occupancy status performed substantially worse than otherwise similar owner-occupants and declared investors, and constituted one-sixth of the share of loans in default by the end of 2008. We show that these defaults were also significantly more likely to be “strategic,” further highlighting the contribution of fraud in the housing bust.
AUTHORS: Payne, Aaron; Elul, Ronel; Tilson, Sebatian