One broker warns others to avoid temptation to use DSCR loans for primary residences
Debt service coverage ratio (DSCR) loans aren’t a new thing in the mortgage industry, but changing borrower demographics has caused their usage to skyrocket.
It’s not just non-QM and private lenders who are offering the product. Large lenders like UWM and Rocket are getting into the DSCR game, and as more potential customers bring a variety of income sources to the table, DSCR usage is likely to continue to increase.
Of course, wider product use also increases the risk of fraud. DSCR is an investor-loan product, and brokers know they’re not allowed to use it for customers looking to purchase a primary residence.
Occupancy fraud is one area that has received a lot of media attention. General mortgage fraud increased in Cotality’s most recent fraud data, in large part due to the higher percentage of purchase loans compared to refinances.
This type of fraud is straightforward. A borrower who cannot qualify for a conventional or government loan on a primary residence applies for a DSCR loan on the same property. They claim it will be an investment property, only to move into the property post-closing.
Jacy Bloom (pictured top), owner and mortgage broker at Bloom Mortgage Solutions, said the issue came to her attention when a real estate agent called asking for a DSCR loan for a client who was planning to live in the property.
"When I kind of started asking questions, I realized they're going to move into this place," Bloom told Mortgage Professional America. "She didn't really know the right questions to ask. So then I took that and made a Facebook post."
Why the temptation is real
The post became one of her biggest on Facebook, drawing accounts from other loan officers dealing with the same issue. She said the root cause is a combination of borrower confusion, inadequate education, and in some cases, originators actively guiding clients in the wrong direction.
"I don't think people actually realize that it is truly mortgage fraud, which is very illegal," Bloom said. "They're like, ‘Oh, we'll just kind of lie on this, and it's no big deal.’ But it is. It's a federal crime at the end of the day."
While she noted in the comments of the post that she didn’t believe the realtor or client was being malicious, she said there is a lot of misinformation which can contribute to situations like this one. Another issue is the rate difference between the loan types, which is why the temptation exists.
For a borrower who cannot qualify through any documented income path, the choice comes down to a no-doc primary loan with a rate closer to 9%, or misrepresenting the property as an investment at a DSCR rate closer to 6%.
"You're not talking half a point," she said. "You're talking, at a minimum, 1.5% to 2%."
How servicers are catching it
Bloom said the fraud is not going undetected, and her Facebook post produced two specific examples of servicers catching occupancy fraud after closing.
In one case, a borrower received notification from the servicer after mail was discovered going to the property, an address that was supposed to be an investment, and was given a set period to refinance into a different loan product.
In the second case, the servicer sent an inspector to verify occupancy, something the borrower had acknowledged at closing as a possibility, and an extra charge for the inspection appeared on the monthly statement.
"I never actually heard of it actually happening, but she said that actually happened to her client," Bloom said. "I think lenders and the government are just cracking down more on occupancy fraud."
She said underwriters are also paying closer attention to deals that raise red flags, and that many of these loans would not make it through the process even if a broker submitted them.
Bloom said some of the fraud is being driven by pipeline pressure. In a slower market, some brokers are looking for any way to close a loan, and the rate gap makes DSCR misrepresentation look like an easy solution.
"I've talked to people where they've literally told me that," she said. "They said, ‘Well, just do this.’ And I'm like, ‘No. Don't do this.’"
She said her own approach is to walk clients through the legitimate non-QM alternatives. Brokers who understand the full non-QM toolkit, she said, rarely need to push clients toward the wrong product.
"It's not the clients' job to understand mortgage guidelines," she said. "It's ours."
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