The recent accusations against Federal Reserve Governor Lisa Cook regarding mortgage fraud bring attention to the complexities surrounding owner-occupancy claims in the housing market. Mortgage interest rates for non-owner-occupied investment properties typically are at least 0.5% to 1% higher than investment properties. This is an important difference that further highlights the notable distinctions between these three categories. This case underscores the challenges in proving fraudulent intent in mortgage applications, a sentiment echoed by legal experts in the field.
Mortgage loans for primary residences usually represent a lower risk and are offered at a lower interest rate than mortgage loans to purchase investment properties. Insurance rates are a shining example of this difference, with higher premiums for renters—homeowners have much cheaper homeowner’s insurance. Landlords now deal with an estimated 25% insurance premium uplifts compared to average homeowners’ policies. Such economic subtleties render the differences between primary and investment properties very important to owners and mortgagees.
This year, the Federal Reserve Bank of Philadelphia produced a report. It held accountable approximately 22,000 fraudulent borrowers who engaged in fraud through misrepresentation of owner-occupancy. This data was based on our analysis of a subsample of over 15 million loans that were originated between the years 2005 – 2017. These overall patterns point to serious concerns about the mortgage application process itself as well as the potential for systemic fraud in the industry.
The problem of mortgage fraud isn’t merely hypothetical. The U.S. Sentencing Commission reported that 38 mortgage fraud offenders were sentenced in fiscal year 2024, a slight increase from 34 offenders in 2023. This is a dramatic decrease from the 426 offenders in 2015. While the overall trend shows a decline in mortgage fraud offenders, the increase in recent years highlights ongoing concerns regarding compliance and enforcement within the mortgage industry.
Even as the claims circulate widely, experts caution that mortgage fraud is notoriously difficult to prove. Jonathan Kanter, a prominent legal scholar, said it’s “notoriously difficult” to prove intent in these cases.
“In the court of law, this is small ball and very difficult to prove.” – Jonathan Kanter
This complexity is compounded by the reality that primary residence status is largely a matter of proof—most heavily relying on “facts and circumstances.” Consequently, each case turns into a unique and usually complicated animals.
“You’d have to establish not only that she filled out the form incorrectly, but she had the specific intent to deceive, to defraud banks, as opposed to just making a mistake.” – Jonathan Kanter
For a variety of policy reasons, including tax treatment, the legal system treats primary residences very differently than investment properties. Conversely, to qualify for capital gains exemption, one must prove owner-occupancy for two of the last five years. This exemption can go as high as $250,000 for single filers and $500,000 for married couples filing jointly. Only one primary residence can be declared for taxation, making ownership claims that much more complicated.
Kanter pointed out a critical distinction in how allegations are perceived:
Accusations against powerful men in media and entertainment have dominated the news cycle. It’s important to grasp the legal standards required to successfully prove fraudulent claims. The confusing relationship between public perception and legal realities can create a distorted image of what truly constitutes fraud in the context of a mortgage application.
“There is a difference between the court of law and the court of public opinion.” – Jonathan Kanter
As accusations against high-profile individuals circulate in media narratives, it is crucial to consider the legal standards required to substantiate claims of fraud. The interplay between public perception and legal realities can lead to misunderstandings about what constitutes fraud in mortgage applications.