To commit mortgage fraud, you have to do something you promised not to do or to have told the mortgagee information that you knew was false.
If I recall correctly (been a looooong time since I filled out a mortgage app!), there's a question on the form that says (sort of) "Do you intend to live on the premises as your principle residence?" This is asked to determine if the loan qualifies for owner-occupied status and all the perks pertaining thereto. At the time they refinanced, no doubt that was their intention, as evidenced by the fact that they did actually move in and live there.
Again, if I recall correctly, there is nothing that says you have to stay there. Double check the paperwork.
I get it. A lot of folks will tell you, "They'll never find out." So is someone never finding out a good reason to break your promise? Nope. That's a bad way to go thru life, lying to people whom you know (or hope) won't find out. Sounds like gutter-tenant behavior or an adulterer. "I'll sneak my pet/ex-con boyfriend in the home....the land lord will never find out." "I'll cheat on my spouse on business trips....he/she will never find out."
Do whatever the paper work says. We make the world a better place when we honor our promises to the best of our abilities, not whenever it is most convenient for us personally. My guess is though that they are probably okay to turn this current property into a rental, because the loan docs don't require them to stay put for a year.
Find out the truth and act on it with full good faith.