Former President Donald Trump recently accused Federal Reserve Governor Lisa Cook of mortgage fraud, igniting discussions about the complexities of proving such allegations. The basis for the accusation stems from misrepresentation of the owner-occupancy status, an essential trait in calculating mortgage eligibility and appropriate interest rates.
Mortgage interest rates on investment properties are usually 0.5%-1% higher than primary residences. This unfairness forces millions of borrowers to lie about whether they’ll live in a new home to get lower rates. A 2023 report from the Federal Reserve Bank of Philadelphia uncovered a shocking find. It identified at least 22,000 of these “fraudulent borrowers” who actively misrepresented their owner-occupancy status from a subsample of more than 15 million loans issued between 2005 and 2017.
Beyond the upgraded mortgage rates on investment properties, the exchange rates for homeowner’s insurance don’t even compare. For one, homeowners usually pay less in premiums for their residential insurance policies when those homes are their primary residences. Landlords already pay around 25% more for insurance than regular homeowners. This expense disparity incentivizes many people to lie about where they live.
We have some exciting news from the U.S. Sentencing Commission. During fiscal year 2024, federal courts sentenced only 38 offenders for mortgage fraud. The total sentenced offenders is a small uptick from 34 in 2023. This figure still represents a huge decrease from the 426 offenders listed in 2015. The commission has missed the mark in defining or classifying mortgage fraud. This creates a bit of a black box regarding what exactly these cases entail.
Jonathan Kanter is an expert in legal matters pertaining to fraud. He pointed to the challenges in successfully litigating claims of fraud related to mortgages. As to lawful backing of their prosecution, he explained, “In the court of law, this is small ball and really difficult to confirm.” Kanter made clear the difficulty in proving intent for any falsehood.
“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
Beyond legal liability, the consequences of inaccurately representing owner-occupancy are significant. Another major player in this crisis are the tax benefits. As an illustration, single filers currently can benefit from a capital gains exemption up to $250,000. Meanwhile, married couples filing jointly are exempted up to $500,000. To be exempt from this income cap, a person must demonstrate owner-occupancy for at least two out of the last five years.
Says Kanter, primary residence status is determined based on facts and circumstances. This complexity adds another layer of difficulty to allegations of mortgage fraud. Federal and state tax benefits are only available for one primary residence per individual or couple, which may incentivize some individuals to misrepresent their living situations.
The complaints and discussion around these allegations point to a larger discriminatory practice with our housing and regulatory market. Mortgage fraud is still a hot bed concern for authority figures. Policymakers are currently engaged in a robust debate about the best way to address this problem. They are questioning how to distinguish good faith errors from blatant fraud.