Trump officials are accusing another one of the president’s political targets of mortgage fraud, highlighting a long-running issue in the housing industry.
President Trump on Wednesday publicly called for Federal Reserve governor Lisa Cook to resign following a claim on social media by one of his housing officials that she committed fraud by designating two properties as her primary residences.
The Justice Department is probing similar claims against two of the president’s most vocal Democratic critics, New York Attorney General Letitia James and Sen. Adam Schiff of California.
The allegations center on what’s known as mortgage occupancy fraud, or when a borrower says he or she plans to use a property as a primary residence, even though it’s a second home or an investment.
A spokesman for the Fed’s board of governors had no immediate comment. A lawyer for Schiff has called the allegations “transparently false,” while a spokesman for James has called them a “weaponization of the justice system.”
Lenders typically offer better terms on mortgages for a primary residence, and let people borrow more than they would for a second home or an investment property they may rent out.
For a primary residence, for instance, the down payment can be as low as 3% to 5%. For a second home, typically 10% to 20%. For an investment property, it’s usually at least 20%.
Mortgage rates for a second home are also typically 0.25% to 0.50% higher than the rate for a primary residence, said Garth Graham, senior partner at STRATMOR Group, a mortgage advisory firm. The rate is usually 0.50% to 0.75% higher for an investment property.
The average rate on the standard 30-year fixed mortgage was recently 6.58%.
It’s hard to pin down. In the past, lenders could check the distance between a new property and a person’s workplace to see whether that individual was likely to live there. But the growth of remote work has made that vetting method less effective, Graham said.
The share of borrowers misrepresenting their occupancy status peaked at 6.8% during the housing bubble in 2006, then fell to between 2% to 3% in the post-bubble period, according to a Federal Reserve Bank of Philadelphia paper published in 2023.
Not everyone who has multiple mortgages for primary homes intended to cheat the system. Some people might initially plan to live in a home, but end up renting out the property because of a change in their life circumstances, like getting a new job.
Mortgage lawyers say prosecution of mortgage applicants is rare, but lying on a loan application is a serious crime.
A conviction can lead to a prison sentence, with federal offenses carrying a maximum sentence of up to 30 years and fines of up to $1 million.
If your lender finds out your mortgage application contains false information, it may demand immediate and full repayment of the mortgage balance.
Mortgage occupancy fraud could obscure the amount of risk in the housing market.
Borrowers who commit this fraud tend to have lower credit scores and larger loan amounts compared with those who say they’re investors, the paper by the Philadelphia Fed found.
They also default at a far higher rate, the paper found. Their defaults are more likely to be “strategic” as well, meaning they are more sensitive to declines in home prices and less likely to be driven by an inability to pay.
This explanatory article may be periodically updated.
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