Sunday, August 31, 2008

Homeowner fraud exacerbates mortgage crisis

This timely article in the Press Enterprise speaks of an issue I wrote about as to why the market is doing so well right now. It's about the "buy and bail" and how those folks are both helping the sales numbers and adding to the foreclosure numbers. What I would like to know is HOW MANY of the current crop of sale are of this type. These are people who are obviously not scared to roll the dice and take a risk (After all this is clearly fraud) . Much like many of the buyers over the last few years. Those folks were not afraid of risk. They were not worried about taking on far more debt than they could possibly pay. So how much of the market is going to vanish when the new anti "buy and bail" rules take effect?

From the PE,

Some homeowners tempted to buy a more affordable house in a declining market have committed fraud to ditch the supersized mortgage they no longer want.

This month, Fannie Mae, the giant government-sponsored enterprise that buys and guarantee mortgages, began enforcing new guidelines that could help stop the practice, called "buy and bail.
The abusers are homeowners who could afford their (current) mortgage payments but didn't want to keep a house whose value had dropped below what was owed on it.

If they just walked away, their shattered credit would prevent them from buying again. Instead they continued making timely payments on the first home. On the loan application, they led the lender to believe they intended to put a tenant in the first house so they could afford the two mortgages. But once escrow closed on the new house's purchase, they stopped making payments on the first house, letting it go into foreclosure.

"This adds an element of fraud to a market that is already out of control," said Inland economist John Husing.

Phony 'Short Sales'

In another scam on lenders, homeowners have been lowering their mortgage payments by arranging fraudulent "short sales" at prices less than what they owe their lenders. The buyer whom the seller chooses, who may be a relative or friend or a "straw buyer" paid for his service, agrees to transfer ownership back to the seller, who winds up with a smaller mortgage on the same house and never has to move.

In such a short sale, the seller commits fraud by having a side arrangement with the buyer that he does not disclose to the lender. When lenders accept short sales, it is because they think the price is the best they can get. Mortgage industry officials say lenders would reject a sale in which there was a special relationship between seller and buyer on the grounds that the selling price most likely was not the best one available.

Putting License at Risk

But real estate agents and brokers can be held liable, said John Giardinelli, a lawyer who represents nine Southern California real estate associations.

"I am telling them, 'If you put your handprint on something deceptive or fraudulent, then you could lose your license or conceivably be brought up on criminal charges,' " he said.

Joe Cusamano, broker/owner of Pro-One Investments in Riverside and president-elect of the Inland Valley Association of Realtors, said he knows he has clients who have lied to lenders to "buy and bail" and done short sales between parents and children.

He said he tells them what the law requires but still works with them because he believes they are good people caught in a collapsing market who are not getting sufficient help from either lenders or the federal government.

Cusamano described one client as a young law enforcement officer and family man who was buying a bank-repossessed house next door to one he already owns in Moreno Valley.

The client could afford his current $1,900-a-month payment for his mortgage, taxes and insurance, but he saw "buy and bail" as a way to improve his family's lifestyle. He had bought his house in June 2005 with a $294,000 mortgage, and since then, its value had fallen to about $155,000.

He noticed that the bank-owned house next door was bigger and had more upgrades, and he put in a winning offer of $145,000.

The client's plan is to let his original house go to foreclosure, Cusamano said, and probably the only adverse consequence he will face is having bad credit for the next five years. Meanwhile, he will save $700 a month on his house payments.

7 Money Orders

A 55-year-old man said he let a house in southern Corona go to foreclosure and bought another in Lake Elsinore, lowering his monthly payments from $5,200 to $2,100. He wanted to remain anonymous because what he did "could be construed as fraud," he said.

He had seven money orders for $500 apiece made out to himself and asked a friend to sign a rental agreement so he could deceive the lender into believing he had rented out his first house and therefore could afford to buy a second one, he said.

His Christian beliefs told him lying was wrong, and his parents had taught him to pay his debts, he said.

"The only way I can justify it (lying to his lender) is that I think a lot of people made a lot of money selling bad mortgages to anyone who walked in the door," he said.

Sandra Gloshen said after her husband, an airline baggage screener, was transferred to Boise, Idaho, by his employer, they were unable to sell their house in Lake Elsinore, which was then worth less than they owed on it. But they had no trouble buying a home in Boise after they told the lender they would rent out the Lake Elsinore property, she said.

In actuality, she said, it would have been impossible to charge enough rent to cover the mortgage payment, which had ballooned when their interest-only loan reset. She said their original lender ultimately seized the Lake Elsinore home.


nmoerbeek said...

This just means that it will take the market longer to correct

Martin Burtin said...

This means that there is an opportunity for a new career. If you help lenders to prove fraud and recover funds, you might charge a percentage commission. Maybe put a bounty on the ones that you can't recover money from and send them to jail or free public service.

jennalee ryan said...

technically, the lenders on the first homes can go after these peple for the balance that is owed after the house goes to auction. Then they would have no equity in teir new homes, other than a $75,000 homestead, if they file bankruptcy.

I'm Not POTUS said...


This is the only loan modification program that is working.

The banks don't give a rats arse for yesterdays loan. All of those will be dumped on the government.

They only worry about tomorrow. And the sooner everyone gets back to buying and selling, the happier they will be.

jennalee... do you think any bank wants to go to court over fraud? Pre-trial discovery is a two way street. They have zero incentive to get blood from a turnip if they risk more by letting lawyers dig through their lack of paperwork.

As far as banks are concerned every transaction in the last 8 years has happened in Vegas, and that is where it will stay.

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