Monday, November 06, 2006

Stopping Mortgage fraud

When credit tightens:

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:
http://thehousingbubbleblog.com/?p=1770

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:
http://www.dailybreeze.com/business/articles/4566126.html

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.

Neil

2 comments:

beebs said...

20% down would cut out a lot of this fraud. When my wife and I got our 20% down mortgage eighteen years ago we had to do everything but give a DNA sample and promise our firstborn.

Jack Olson said...

The escalation of Mortgage Fraud and the brazeness of the parties doing it is because of the Do Nothing FBI! Mortgage Fraud is already a Title 18 federal felony with up to $1m fine and 30 yrs prison per occurence. Mortgage Fraud is also Bank Fraud, Wire Fraud, Mail Fraud. Yet the FBI does not investigate, indict nor convict even when confronted with the preponderance of clear and convincing public record evidence of a continuing series of fraudulent loans from a Reno Realtor with the blessing of his Broker who braggs "everyone's doing it" and has admitted in the public records offering bribes to a loan officer to do the fraudulent loans for him and his clients - which the loan officer refused, then the Reno Fraudster Realtor and his Broker (of a well known nation wide brokerage) both threatened to the loan officer, the sales manager, the branch manager and the area manager they would get the loan officer and the lender blackballed by every Realtor in Reno, then closed the fraudulent loans with other lenders - 8 of them for more then $2m. The Reno Fraudster Realtor even wrote a threatending letter to one of the witnesees threatening to sue her if she didn't mind her own business as his production was the only thing he and his broker were concerned about. It's the Do Nothing National Association of Realtors, State Association of Realtors, local Reno Sparks Association of Realtors who don't hold their fellow Realtors accountable, even when they know who the Fraudster Realtors are and that honest Realtors can't compete against the Fraudster Realtors. It's the Do Nothing NV State Mortgage Division who evidently took a bribe 2 yrs ago from the Fraudster Realtor and covered his and his clients Mortgage Fraud up. Money buys a very large Conspiracy of Silence. It's the Do Nothing NV State Real Estate Division and NV State Attorney General who also cover up the Mortgage Fraud even when presented with a preponderance of clear and convincing public record evidence by several complaintants against this Reno Fraudster Realtor. It's the Do Nothing Lenders who want that short-term quarterly profit to show Wall Street they made off the origination of the fraudulent loans who don't call the loans due when confronted with the evidence the loans are fraudulent. It's the No Nothing Nationally Known Brokerage who is ethically challenged when they allow their agents and Broker to threaten to blackball the loan officer and bank who refuses to take the bribes offered by the Reno Fraudster Realtor for the fraudulent loans then closes the fraudulent loans with other lenders while threatening to get the loan officer fired for not "doing what everyone does." It's the Do Nothing Mortgage Bankers Association Fraud Committee Members (many presidents of their banks)who refuse to take action on the fraudulent loans their companies originated because they don't want to lose the Realtor business. So naturally their local managers nationwide do the same. It's the Do Nothing Freddie Mac and Fannie Mae who refuse to act on the fraudulent loans when presented with the Mortgage Fraud because they're worried Wall Street will find out how at risk they really are. Integrity in the quality of the loans purchased by the secondary market? Ha ha. Now that's a house of a trillion cards. There is no quality in those loans - it's all smoke and mirrors. In a falling tide, all the garbage (Mortgage Fraud) is revealed. The IRS has described perpetuators of Mortgage Fraud as "economic terorists" and profits from Mortgage Fraud as Money Laundering. Which is probably what this Reno Fraudster Realtor was doing. Due to Mortgage Fraud being the fastest growing white collar crime, all these Do Nothings mean the trillions of dollars in the American real estate market is a House of Cards rapidly crumbling down and makes the S & L Crisis look small in comparison which each one of us ended up paying for. Suck it up my fellow Americans as the Perfect Storm of Mortgage Fraud is upon us and the lenders and Realtors will soon find a way to make us pay again rather than Do Anything now to avoid it.