We identify occupancy fraud — borrowers who misrepresen
t their occupancy status as owner-occupants rather
than investors — in residential mortga
ge originations. Unlike previous wor
k, we show that fraud was prevalent
in originations not just during the
housing bubble, but also persists thro
ugh more recent times. We also
demonstrate that fraud is br
oad-based and appears in government-sponsored
enterprise and bank portfolio loans,
not just in private securitization;
these fraudulent borrowers make up one
-third of the e
ffective investor
population. Occupancy fraud allows riskie
r borrowers to obtain credit at lowe
r interest rates. These fraudulent
borrowers perform substantially worse than similar decl
ared investors, defaulting
at a 75 percent higher rate.
Their defaults are also likelie
r to be “strategic,” suggesting that they
pose a risk in the face of declining house
prices.