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.

7 comments:

Curious said...

Great post, I've been telling people for years that this is one of the reasons that contributed to the bubble, and with the the rising foreclosures and tons of people pocketing their HELOCs/Loans and walking away, its more apparent than ever

golfer_X said...

I was cruisin around this morning and saw another post over on the BMIT site about the exact same article. Ocrenter has a great post on the exact same thing with a perfect example of how the fraudulent sales affect the comps.
http://tinyurl.com/6omta7

Martin Burtin said...

LMAO @ "Equity Fairy"! I bet the dust is more like PCP than stucco powder.

Maurice said...

golfer_x, I am thinking about buying a house in the Eastvale area pretty soon. I do believe that prices will fall further, however I think that the government bailout bill might stabilize the housing market when it does pass, but am not too sure. Do you think that the housing bill will cause the housing market to recover, or do you think that prices will keep falling?

Cause I Said so Daddy said...

I'm curious why we never hear about mortgage ins companies. Shouldn't they be getting creamed as well?

golfer_X said...

The bailout bill wont do anything for severe bubble markets like California. The primary "feature" that is supposed to help is the one that allows borrowers to refinance into a federally guaranteed 30 year fixed. Now here's why it wont help. The LTV is 85% from their current loan balance on the Refi AND you have to qualify full doc. Most of the borrowers are in loans making teaser payments. Even if they are put into a loan for 85% of the previous one they still will not be able to afford it. When people are buying homes 3x their income then the market will stabilize. Until then it's all downhill!

The gov is trying to bail out the lender, not the borrowers. This might help people in low price areas like Michigan or Kansas but it's not going to help much in Ca.

Maurice said...

Very good explanation... Thank you.