It is really a shame to see what has happened to the FHA. Prior to the subprime bubble, the FHA has a good record with providing low down payment loans to borrowers. Before readers scoff, it had a simple secret: it screened borrowers. And the old-fashioned process was sufficiently time-consuming that the prospective homeowners also had to grapple with whether they could make the payments.
The FHA’s experience of yore is not unique. Not for profits that provide loans to low income borrowers also have shown default rates in line with prime borrowers. It is possible to make sound loans to homebuyers who look risky on paper…provided you do real due diligence.
But now the FHA has been assigned a role in the “save the housing market” game plan, which means notions of prudence get compromised. A story in Washington Monthly details some of the side effects. And the troubling bit is that while this activity isn’t wide scale, the Treasury proposals to streamline the short sale process will play right into this particular type of fraud.
From Washington Monthly:
Interthinx, which analyzes mortgage fraud nationally….found a continuing shift to schemes involving bank-owned foreclosed homes, and short sales…The firm also reported that real estate agents and other professionals increasingly are involved in the schemes, which are growing in popularity due to the abundant supply of foreclosures, and the fact that appraisals frequently aren’t required in order to sell distressed properties.
As fraud picks up, a typical scheme increasingly works like this: A homeowner underwater on a mortgage, owing more than the home is worth, arranges a short sale ….The home then gets deeded back or gifted to the troubled borrower shortly after the sale. Or, the bank unwittingly accepts a lowball short sale offer, allowing the new owner to quickly flip the property to a buyer already on standby, willing to pay a higher price. Such schemes amount to fraud because buyers and sellers lie to the bank about the true nature of the transactions…
Flipping foreclosures and short sales is taking off as the latest real estate craze, with numerous web sites popping up to market advice on turning quick profits on distressed properties. And short sales also are expected to only increase as loan modification efforts continue to falter, and borrowers facing foreclosure have few other options. Interthinx expects fraud involving a “straw” borrower – a deceptive stand-in used as cover for a questionable transaction – to also become more frequent as a result….
increasingly, people involved in fraud schemes are finding ways to finance them through taxpayer-backed Federal Housing Administration loans, an agency already dealing with delinquency problems and and mortgage fraud, said Robert Simpson, president of Investors Mortgage Asset Recovery Co. in Irvine, Calf., a firm that analyzes mortgage fraud. The FHA’s loan volume has quadrupled since 2006, and FHA-backed loans have been beset by rising defaults…
“Anytime there’s money out there, someone will begin trying to figure out a way to get to it,” Simpson said. “Right now, the fraud gets shipped over to the FHA. We’ve got to hope they are being very diligent, because if they are not, the damage will be irreversible.”…
Short sales at first seem an unlikely target for fraud, because they can be a lengthy and difficult process, with banks often taking months to approve sales, if they do at all. For that reason, Cecala said, he believes short sales – at least for now – comprise only a small piece of the mortgage fraud picture. But the Treasury Department is expected to issue guidelines soon on streamlining short sales and offering financial incentives to borrowers and lenders. The push for more short sales, combined with a backlog of foreclosed homes, distressed homeowners, and banks anxious to get foreclosures off their books, will likely make short sale and REO flipping fraud more prevalent.
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On one of the ‘watch how easy it is to buy’ television shows recently there was a young woman in Atlanta that was completely gamed by one or more of these schemes.
She was looking for a house with an RE agent. She took her time and finally put an offer in on one house, just after another was accepted.
This goes through 3 houses, same story, she finally puts a bid in and, even though the house has been listed for a long time, she gets denied, supposedly outbid.
Then, after 2 months, she sees the last property on a web site listed at about 30k under her bid. Confused, she calls the RE agent and gets a line of BS. The RE agent ‘does her a favor’ and renegotiates an offer from the first, still 10k over what they were asking in the ad. She ended up buying it at that price. The house was ‘bank owned’. There were few specifics given on the transaction itself.
I couldn’t believe I was watching it. It was clearly fraud by one or more of the RE agents involved. They are all on tape somewhere.
“Or, the bank unwittingly accepts a lowball short sale offer, allowing the new owner to quickly flip the property to a buyer already on standby, willing to pay a higher price. Such schemes amount to fraud because buyers and sellers lie to the bank about the true nature of the transactions…”
Baloney! Since when did a buyer become a fiduciary? I there is no seller kick back, there is no fraud.
People who are falling for such fraud need to do more research before they bid.
Hi Lithographer,
Some states have enacted strong laws regarding this type of transaction. For example, in WA State, the law is called Distressed Property Law and indeed the buyer may, in some cases, become a fiduciary of the seller.
In the case mentioned in the article above, the flipping problem is that the folks involved in the original transaction are hiding material facts from the lender and the real estate agents owe duties (prescribed by each state’s laws) to their home buyer or seller clients.
a real estate agent participating in a short sale flip might not be taking care of his/her client with regard to the client’s obligation to repay the lender.
Licensed agents who fall for this type of short sale scam are walking on thin ice. Attorney Generals in many states are on the watch.
That the buyer’s culpability, knowledge of deception in facilitating a short-sale transaction is immaterial to the larger question of whether collusion to deceive a bank (i.e. the taxpayer) and other “flopping” practices are in fact a significant problem (or criminal act), which is the gist of this post.
From the land of sun, who has seen a good share of schemes for personal enrichment through questionable real estate transactions:
http://www.news-journalonline.com/NewsJournalOnline/Opinion/Editorials/opnOPN12112509.htm
and this from the Sarasota Herald Tribune:
http://www.heraldtribune.com/article/20091115/ARTICLE/911151083?Title=The-new-flipping-short-sales&tc=autorefresh
and from the Orlando Sentinel on a mortgage fraud sting:
http://www.orlandosentinel.com/news/crime/os-feds-crackdown-mortgage-fraud-20091104,0,3828806.story
What’s sinister about this whole thing is that is somewhat a repeat of the practices that created problems in the first place; contrived appraisals, large profits for ‘middlemen’ on quick turn-around, insider collusion; difference here-n-now being the federal government is to be guarantee in greasing the crinkling wheels of progress.
I hope the FBI, et al. have hired additional staff skilled in mortgage fraud. (and hope my links take).
clearly the writer of this article has a bias! I buy and resale real estate short sales. My contract that GOES TO THE LENDER says that i intend to resale the property for a profit and that find a buyer might be necessary for me to close. Whose fault is it when they don’t read the contract? Get real…i realize there is some fraud in short sales but the majority of people doing them aren’t doing anything wrong…sounds kinda like every other business out there doesn’t it?
Well there may be some fraud but I feel that it’s the banks responsibility to sell the property for what ever they want. They own it!. If not they are GOING to own it and they are big boys right? They are so big in fact that they play incredible games with the borrower. Why should it take months to let someone know if they qualify for a short sale? Why should they just not modify the mortgage? Why do some banks try to flip the property themselves? A profit motive? They sell assets in bulk for penny’s on the dollar knowingly to investors they know will profit from them. They risk real capital and if they make a mistake it’s their money at risk. The asset managers in banks are not fools (if they are we need better regulation)and many times several layers of management approval are needed to approve the sale of an asset.
If a speculator purchases a property at a good deal and can rehab and flip the property what’s the real harm if it’s disclosed. It should get disclosed during the appraisal process (buyer now gets a copy) and new lending guidelines further protect the buyer as they have rules about undue enrichment in them. Does the new sale appraise properly (with new HVCC rules?)? The lender usually wants a 24 month “Chain of Title” which will inform them of flips.
I don’t believe there are any guns to anyone’s heads. This may sound a bit oversimplified but it’s true!
There are too many frauds in mortgage situation. People who can’t handle the bill tries to fraud to escape from foreclosure. Good that these operations are putting them on their places