A new report from the Federal Reserve Bank of Philadelphia has ignited contentious debates over mortgage fraud. Former President Donald Trump has publicly rebuked Federal Reserve Governor Lisa Cook for participating in these practices. This serious accusation begs a number of pressing questions. As HUD accurately points out, mortgage fraud is difficult to prove, particularly in cases where owner-occupancy status has been misrepresented.
This year’s report included the most shocking figure yet. Of 584,499 originations between 2005 and 2017, more than 22,000 borrowers lied about their owner-occupancy status. This shocking number is based on a subsample of more than 15 million loans. More fundamentally, it raises a serious problem with the mortgage industry as a whole. This is because mortgages for primary residences usually have lower interest rates and less expensive homeowner’s insurance. Investment homes tend to run into higher interest rates, as much as 0.5%-1% over the average. On top of that, their insurance costs are generally 25% higher than conventional homeowners policies.
The disparity in financial penalties exposes a serious temptation for mortgagors to falsify their ownership type. Homeowners automatically receive a capital gains exemption of up to $250,000 for single filers and $500,000 for married couples filing jointly. To qualify, though, they need to closely adhere to IRS regulations on owner occupancy. In order to receive this tax relief, homeowners need to actually reside in the home. They must have occupied it for at least two of the last five years. Challenges over a single declaration of primary residence for tax purposes raise contentious issues. Figuring out which home gets to qualify inevitably pits one homeowner against another.
Experts point out that proving mortgage fraud, especially in such egregious cases, can be incredibly challenging. As Jonathan Kanter, a legal expert, wrote, it will be inherently difficult to prove such accusations.
“In the court of law, this is small ball and very difficult to prove.” – Jonathan Kanter
Per Kanter, intent is the key element here. He stressed that proving that an applicant completed an application improperly is insufficient. You have to show that the individual had the intent to defraud lenders, not simply the free play of the human mind.
“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
Given all of these complexities, the difference between legal standards and what the public expects is more important than ever. Kanter remarked on this dichotomy, stating,
“There is a difference between the court of law and the court of public opinion.” – Jonathan Kanter
The intensity and incidence of mortgage fraud has ebbed and flowed throughout the years. In FY 2024, the federal system sentenced only 38 mortgage fraud offenders. That’s up slightly from the 34 criminals sentenced in 2023. This number pales in comparison to the 426 offenders sentenced in 2015, indicating an overall decline in prosecutions for mortgage fraud over the past decade.
The U.S. Sentencing Commission must be wondering when the numbers will stop falling. Even that doesn’t break down the different kinds of mortgage fraud being pursued. The absence of such granular data has led to a difficulty in identifying any concrete trends or patterns in such mortgage fraud cases.
Debate continues over the charges leveled at Cook and the larger issue of borrower misrepresentation. Yet, many people are still wondering how these issues will play out within the evolving legal landscape. The complex nature of proving intent and misrepresentation are formidable obstacles for regulators and law enforcement at all levels.