Once again I find myself blogging on a topic brought up (inpired?) on Ben Jones' excellent real estate blog. This one is the problems of mortgage fraud. If its not reigned in... credit will tighten so quickly that we'll see an economic train wreck. Ok, we will anyway. But I accept a recession. Please, lets not be stupid and start a depression part two. Ok?
The initial article that brought this up:
I bring your attention to the middle of that article.
The Grand Rapids Press from Michigan. “With ‘For Sale’ signs seemingly on every street, it may be surprising to hear bidding wars have broken out in the West Michigan real estate market. The bidding wars come most often with homes taken back by a bank, a result of the mounting number of foreclosures in the area.”
“Realtors say they see more of them, and the listing price is often below market value. ‘When I first started, foreclosures were one out of 10,’ said agent Ethan Dozeman, who has been in the business for five years. ‘Now they’re probably one out of four.’”
“Susan Kazma-Hilton, a (broker) in Grandville, said some homes are over priced for the market. ‘The homes are priced to get rid of debt, not priced to sell the house,’ she said. ‘I’ll bet you in 40 percent of the homes, the sellers owe more on the homes than they’re worth.’”
Yikes! Let's play out this scenario. Homes are "bought" with a refund. Almost certainly via identity theft. Maybe willing nieve identity theft ("Become a real estate investor apprentice!") . But not with the perpetrators real ID.
Maybe they use the house to make/grow/sell drugs for a few months (actually make payments) and then skip. Maybe they just skip out with the cash day 1. Either way, by mid 2007 mortgage brokers and more importantly MBS buyers will be onto this scam.
How to stop the scam?
1. Income identification.
2. ID identification (doesn't help the real estate "apprentice," but you can't stop stupid greed.)
3. Down payment
#3 is very important. Right now so few real estate buyers have enough "meat in the game." Can you imagine what this will do to prices if 20% down payments become required again? Perhaps allow 90/10 for conforming loans (but require PMI!). Yes, keep the starter home 3% loans, but those have low enough purchase prices that there isn't much money to be made from these scams.
I'm talking about the $500k+ homes where you can kickback a bunch!
Personally, I would also require as part of the loan origination process a "clear photograph of all persons involved in the transaction." I'm talking about legally requiring a photo of every person face on and from the side (mug shots) plus a body shot (standing or sitting, but enough to start gauging height. Maybe require a yardstick be in the shot?). With digital cameras as cheap as they are... This additional cost to the process is well worth it.
Fraud is plaguing home lending
A local paper:
What do they report? A 35 percent increase in suspected mortgage fraud!
"Mortgage fraud poses a growing risk to banks and other lenders, it says. Federal banking regulators have said that mortgage fraud is growing because it can be very lucrative and fairly easy to perpetrate, especially in areas where home prices have been rising rapidly."
"The regulators also found schemes in which borrowers signed multiple mortgages on the same property from multiple lenders and fraudulent bankruptcy filings to stall or prevent foreclosure."
Now that is clever. Solution? 72 hours before closing a national clearing database. If two or more mortgages show up for the same property... both are cancelled until resolved. But you say this prevents a 2nd for the down payment... Why yes it does. Welcome back to the requirement to put some of one's own "meat in the game."
The problem is mortgage fraud won't be stopped in time to prevent a further drop in prices due to the credit clamp down. Its part of the reason I do not believe home prices will revert to the mean but rather undershoot it. Let's not do a florida 1926 where homes started to sell for 50% of material costs. We also don't want Japan protracted deflation.
Please read my previous article on how Los Angles/OC is now the most overpriced real estate in the world. Why does this matter? Because that is where I want to buy. Those areas that overshot the most will undershoot the most. We'll be exporting population to "fly over country" until at least mid-2008. Possibly longer.
Do not buy until 2008 (at the earliest). Let this crap filter out of the system. But do have a large down payment ready. If you don't like my advice that's ok. Just promise me you'll create a spreadsheet and compare the cost of renting for your timeframe (assume 5 years if you don't know better, that's the average time between jobs). My calculations say buying costs me $400k more out of pocket for 5 years compared to renting the same place. Yours? Oh, and I assumed 7% per year rent increses (high inflation).
Real estate mortgage fraud is going to hurt us all. Sadly, the government is going to have to clean this up and I really don't want them involved (any more). Oh well.