Liar loans at the mortgage GSEs

Investment Analysis Clubs Macro Economic Trends and Risks
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The mortgage GSEs, Fannie Mae and Freddie Mac, had a massive impact on the 2008 Financial Crisis. Even though the GSEs were publicly owned companies which had their own stocks and bonds, the government took them over and made the bondholders whole at taxpayer expense. Over time, U.S. taxpayers ultimately injected approximately $187.5 billion into Fannie Mae and Freddie Mac.

There’s a lot of politics here because the Trump administration is weaponizing mortgage fraud against Democrats. But on a Macroeconomic scale there’s plenty to be worried about even without politics.

https://www.wsj.com/opinion/bill-pulte-fhfa-mortgage-loans-fannie-mae-freddie-mac-lisa-cook-ken-paxton-88a9b475?mod=hp_opin_pos_1

Bill Pulte and His Book of Liar Loans

Fannie Mae and Freddie Mac, the giant companies he regulates, apparently can’t track mortgage fraud.

By The Editorial Board, The Wall Street Journal, 8/29/2025

…

Interest rates are typically between 0.25% and 0.50% higher for mortgages on second homes, and 0.5% to 1.0% higher for investment properties, than for primary residences because they are riskier. FHFA also requires Fan and Fred to charge higher guarantee fees for such mortgages, which are passed on to borrowers….

A 2023 Philadelphia Reserve Bank analysis of credit bureau files suggests broader GSE lapses. The researchers found that about one-third of investors misrepresent themselves as occupants. The study also found these borrowers “perform substantially worse than similar declared investors, defaulting at a 75 percent higher rate.” [Note that this is a relative default rate. The editorial doesn’t say what the actual default rate is. - W]

If a GSE finds that a mortgage doesn’t meet its loan rules, the lender can be required to repurchase it, meaning it loses its taxpayer guarantee. This means lenders have little incentive to enforce mortgage-agreement terms even when they become aware of defects.….

Congress created Fannie and Freddie to spread home ownership, but these days they service the affluent. Second homes and investment properties that are stated as such on applications make up 8% to 9% of the GSE portfolios. [Not counting the ones that are fraudulently stated to be primary residences.] Fannie and Freddie also guarantee single-family mortgages as large as $1.2 million….[end quote]

Everyone knows that home prices only go up, right?

With all our super-fast, super-smart computers why can’t the GSEs compare names/ Social Security numbers to list duplicated “primary residences”?

The current administration has expressed a clear interest in privatizing the GSEs but the issue is super-complicated.

Wendy

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As far as I am aware, when declaring “primary residence”, nowhere is it specified for how long it must remain a primary residence. In theory, you can buy a new place as a primary residence, live in it for a month or two, and then rent it out, and immediately buy a new primary residence.

If they want to solve this problem once and for all, simply say that you can get a government guaranteed primary residence mortgage once every X years. Perhaps once every 2 years to match the amount of time a residence has to be a primary residence to qualify for the capital gains tax exemption. If you by more often than that, you have to get your mortgage on the regular private market … probably at slightly higher rates (unless you are a very low risk borrower and someone is willing to give you better rates).

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I have read that the time period is one year. However long it is, one can have only one primary residence. A change (such as a move due to a new job in a different city) should then be reported to one’s bank/mortgage holder.

DB2

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Okay. And then what? Do they raise your rate? Do they cancel your mortgage?

Where did you read that? I searched and couldn’t find anything about it. How could it be one year? What if you move for a job, lose that job after 6 months and then move again? In the 90s, I worked with a guy that was relocate dby the company twice in a one year period, that’s two moves within 12 months!

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In this Age of Data they create a Residence Database. To issue a mortgage they check the applicant’s residence status.

Each mortgage seller can have his own database and AI can search them all. No need for a centralized database. Sounds rather low cost.

You don’t need the actual residence, only the time stamp to prevent issuing a new mortgage before the year is out.

The Data Processor

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You get to pay a higher mortgage rate if it’s not your primary residence. And higher again if you rent it out.

When you obtain a mortgage to purchase a primary residence, the rules are dictated by the terms of your loan agreement, not by tax law. Lenders offer more favorable interest rates and terms for owner-occupied homes because they are considered lower risk than investment properties. To ensure the borrower intends to live in the home, lenders require the signing of a legally binding document at closing, often called an Occupancy Affidavit.

The standard requirement is that you must move into the home within 60 days after closing and live there for at least one year. Failing to meet this obligation can be considered mortgage fraud…While lenders may grant exceptions for extenuating circumstances, such as a sudden job transfer or health crisis, this requires written permission from the lender.

DB2

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