Tuesday, July 8, 2008
Fraud and its effect on prices
Today I read another article about mortgage fraud in the SD Union Tribune. Last week there were loads of articles floating around because of the big FBI "crackdown". Many of these cases involve groups buying homes at inflated prices, pocketing the excess and letting the homes go to foreclosure. This scheme, it seems was quite common and very profitable. The thing that really pisses me off about all these articles is they fail to make the connection between the high prices and this fraud. Not one article has asked the question "would prices have shot up that high without these fraudulent sales?"
The answer is obvious, NO! It only took one of these inflated fraudulent sales in an area and "poof" every home was now worth what that one sold for. Do that 2 or 3 times and prices double in a year or two for no apparent reason. You can clearly see the pattern when looking at many of the new tracts build in 2005 and 2006. The homes would sell new for $600k then a few months later sell for a million. After that everyone in the tract is asking 1.2 million. 9 months later that initial million home is in foreclosure but everyone still thinks their home is worth bazillions.
The reporters seem unable or unwilling to make this connection, the banks have their fingers in their ears humming lalalalalalala and the government is trying to pass legislation to keep these artificially high, fraud driven prices in the stratosphere.
I wish just one investigative reporter had the ballz to make the connection and put it in print. Of course no one would believe it. It's easier and more palatable to believe the equity fairy dumped a gallon of pixy dust on their stucco Mcmansion and it's value doubled in 12 months.