By Brian Howey, Spotlight on San Jose

September 23, 2022

When Santa Clara City Council candidate Larry McColloch bought a home in Santa Rosa nearly two decades ago, he promised the lender he would live there for at least a year, which could net him a low interest rate.

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But just three months later, McColloch sold the house. He never lived there. He pocketed a profit of $40,000 from the sale.

Now that McColloch is seeking to unseat an incumbent council member – who is a political opponent of Mayor Lisa Gillmor – this transaction raises questions.

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“It looks like mortgage fraud, but can you really see a local district attorney prosecuting a crime like this?” Dana Sack, an Oakland attorney who specializes in real estate law, told San Jose Spotlight. “The seller got paid, the lender got paid, who got hurt? Where is the crime?

While the move may not be illegal — or difficult to prove as a case of mortgage fraud — it could raise questions about McColloch’s character and ethics.

McColloch, a political newcomer, is in the spotlight after filing for the District 2 council seat held by council member Raj Chahal. After his election in 2018, Chahal became Santa Clara’s first minority council member in recent history and helped wrest power from Gillmor. The the mayor then lost its majority on the board in 2020.

If McColloch ousts Chahal, that could change — as the mayor and McColloch appear to be politically aligned.

McColloch said he had good reason to sell the house just months after buying it.

“I bought a house in Sonoma but never moved in,” McColloch said in an email to San Jose Spotlight. “I had a change in my work situation which disrupted the move before it happened and we put the house back on the market.”

McColloch did not respond to follow-up requests asking for documentation of his job change.

Deliberately misrepresenting intentions during the mortgage process can be called fraud, according to State Law. But there’s a high bar to prove McColloch’s sale was criminal, the lawyers say.

McColloch breached his contract, said Soquel real estate attorney Pamela Simmons, but it’s not illegal. Proving fraud would require showing that the mayoral candidate intended to breach the agreement at the time of the sale, of which there is currently no evidence.

Potential legal issues

According to documents obtained by San Jose Spotlight, McColloch and his wife bought the home for $790,000 in March 2004, aided by a $632,000 loan from — a now-defunct lender — with a rate of adjustable interest of 3.87%. It was a “really good” interest rate in 2004, Simmons said, and likely the result of McColloch agreeing to live in the house for a year.

They sold the house in June 2004 for $830,000.

McColloch’s voter registration history shows he voted in Santa Clara County 21 days before buying the home in March 2004, and again in the November general election, five months after he sold.

Buyers who promise to live in their newly purchased property can get smaller down payments and benefit from lower interest rates on their mortgage. By affirming that they will live in their new home, borrowers can save tens of thousands of dollars in a matter of months. But when landlords falsely claim they will live in a home on mortgage applications, they are committing what is called occupancy fraud.

A 2016 study by the FDIC found that mortgage fraud was “pervasive” nationwide and may have been a factor behind the 2008 recession.

While this money-saving tactic may be tempting, it comes with significant risks. If the lender discovers the buyer’s deception, the buyer may be found in immediate default on their loan. Fraudulent claim statements can also lead to legal problems for mortgage holders, including fines, lawsuits, and jail time.

In a related caseformer US congressman Terrance John Cox of Fresno has been charged with multiple counts, including occupation fraud, after he made false statements to a lender that he intended to live in a property he had purchased, then rented it to someone else instead.

“Lying about it is a federal crime,” Sack said. “I wouldn’t make it a habit.”

Contact Brian Howey at [email protected] or @SteelandBallast on Twitter.

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