On Thursday, August 17th, Freddie Mac rates surpassed 7%, reaching 7.09%. While this is unfavorable for borrowers, it is particularly burdensome for individuals seeking financing for an investment property. A study conducted by the Federal Reserve Bank of Philadelphia in January shed light on the issue of owner-occupancy fraud and its impact on mortgage performance. The study examined mortgages from 2005 to 2017, including those from Fannie Mae and Freddie Mac, as well as bank portfolios and private securitized mortgages. It revealed that one-third of investors were engaging in occupancy fraud, misrepresenting their occupancy status as owner-occupants instead of investors. This deception has significant implications.
Within the study’s data, I uncovered a pattern that confirms a suspicion I’ve long held. Mortgaged properties that are owned by legitimate investors tend to carry lower risk. Despite this lower risk, Fannie Mae and Freddie Mac impose exorbitant fees on mom-and-pop investors. The process works like this: mortgage originators package loan applications and associated documents, while mortgage lenders underwrite and fund the loans. Fannie and Freddie have the option to purchase the closed loans from the lenders. In such cases, they provide pricing to the lenders, which they have cleverly branded as “risk-based pricing.” This notion is disingenuous at best.
To illustrate, let’s consider a hypothetical scenario where a $750,000 single-family property is being purchased with a 20% down payment, resulting in a $600,000 loan amount and a 740 middle FICO score. In this scenario, an owner-occupied mortgage with a 7.5%, 30-year fixed rate would cost the borrower $966 in loan origination points. However, the same 7.5% rate for an investment property purchase would cost an additional $21,000, totaling $21,966 in loan origination points. Fannie Mae charges $21,000 more for the rental property, despite their usual practice of offering nearly identical pricing. This price discrepancy seems unjustifiably high.
If we examine the missions of Fannie Mae and Freddie Mac, it becomes apparent that their actions contradict their stated goals. Fannie Mae aims to promote equitable and sustainable access to homeownership and affordable rental housing across America. Likewise, Freddie Mac seeks to lead the U.S. housing market forward, making homeownership and rental housing more accessible and affordable nationwide. However, by imposing excessive fees on small landlords, they fail to make rental properties more affordable for tenants or fulfill their missions.
The prevailing belief among mortgage loan originators is that rentals pose more risk for entities like Fannie Mae and Freddie Mac. The rationale is that tenants do not provide the same level of care for the property as owner-occupants, making it more expensive to restore the property to sellable condition in the event of foreclosure. Additionally, if an investor faces financial difficulties, they are more likely to abandon the rental property before handing the keys back to the lender. These factors supposedly justify charging investors higher fees.
As for the competition, other sources for investor mortgages include so-called exotic mortgage lenders or non-qualified mortgage lenders. These lenders may use alternative income documentation, such as bank statements, whereas Fannie Mae and Freddie Mac require W-2s, paystubs, and tax returns. Non-QM mortgages often come with significantly higher rates compared to the rates offered by Fannie Mae and Freddie Mac for non-owner properties. Depending on factors such as loan size, loan-to-value ratio, and FICO scores, these rates can be up to 2 points higher.
Returning to the enlightening Philadelphia Fed working paper, which examined a broad range of borrowers and mortgage sales to Fannie Mae, Freddie Mac, and other institutions, we find that at least a third of investment borrowers misrepresent their occupancy status as owner-occupants. The study reveals that occupancy fraud allows riskier borrowers to obtain credit at lower interest rates. However, these fraudulent borrowers perform significantly worse than investors who accurately declare their status, with default rates 75% higher.
Despite the presence of occupancy fraud, the data shows that investors defaulted within two years of loan origination at an extremely low rate. During the period examined, which includes the tumultuous mortgage years of 2005-2007, default rates were as high as 11%. However, in the more recent period of 2008-2017, default rates were only 0.04%. This suggests that the risk posed by legitimate investors is minimal.
To better understand the justification for charging investors higher fees, I reached out to Fannie Mae, Freddie Mac, and the California Attorney General’s Office to inquire about mortgage fraud allegations. Unfortunately, none of them responded. However, the FBI did respond, stating that recent indicators and industry reporting do not suggest that occupancy fraud is prominent or widespread. According to the FBI, occupancy fraud represents around 2% of suspected mortgage fraud instances in 2023, slightly down from 2.3% in 2022. Overall, there have been no notable changes in reporting mortgage fraud in recent years, remaining relatively stable.
It’s worth noting that the Veterans Affairs (VA) does not offer investor loans, while the Department of Housing and Urban Development (HUD) deserves recognition for its diligence in preventing ineligible parties from participating in FHA programs. Although there are limited exceptions allowing investors to have FHA mortgages, HUD employs various exclusionary lists and internal controls to combat occupancy fraud. Over the past three years, HUD has referred approximately 320 cases of suspected occupancy fraud to the HUD Office of Inspector General.
If you’re considering purchasing an investment property, it may be advantageous to explore options like pulling cash out from your current residence or paying cash for the rental property. These alternatives can lead to more affordable pricing.
In terms of current rates, the 30-year fixed rate averaged 6.96%, while the 15-year fixed rate averaged 6.34%. The Mortgage Bankers Association reported a 3.1% decrease in mortgage applications compared to the previous week. To provide some perspective, assuming a borrower obtains the average 30-year fixed rate on a conforming $726,200 loan, this week’s payment would be $4,812, which is $815 higher than last year’s payment. For well-qualified borrowers, various fixed-rate mortgages are available, including FHA at 6%, conventional at 6.125%, conventional high balance at 6.625%, high balance conventional at 7%, and jumbo 30-year fixed at 6.875%.
In conclusion, the issue of occupancy fraud and its implications for mortgage rates and fees is a complex one. While legitimate investors pose minimal risk, they are subject to exorbitant fees from Fannie Mae and Freddie Mac. Non-qualified mortgage lenders offer alternatives but at higher rates. It is crucial to stay informed about these dynamics when considering investment property financing.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
