Let's say that you've just gotten engaged and that you and your fiancee find your dream house. But since you're just getting started on the rest life, you can't get a reasonably-priced mortgage.
Your parents have a pretty good credit score and a strong income, so you ask them to buy the house for you and then transfer ownership to you using a trust deed. You promise to pay them on the mortgage that you couldn't qualify for yourselves.
Your parents are acting as a "straw" through which you are getting ownership of a house. This scenario seems relatively innocent, but it's illegal and leaves your parents on the hook for mortgage payment responsibilities on the house you now own. You are now a straw scammer.
There's another class of straw scammers that causes real estate bubbles all over the country and you can stop them dead in their tracks.
"They Want to Offer Me W-a-a-a-y Over Asking Price!"
More sophisticated straw scams require a different kind of team work and at least one unknowing participant.
I was reminded by a posting on Craigslist (no direct link because posts are only valid for a week) where a "for-sale-by-owner" home seller had been offered well over asking price if he would refund part of the difference back to the buyer.
Above-asking price offers aren't uncommon in Northern California, particularly with Bay Area and Silicon Valley real estate, but this one was more than anyone would have reasonably expected.
Taking the Deal Makes Him an Accomplice
This scenario requires an unethical team comprised of an agent, a knowing straw buyer, loan officer, and appraiser to attack an unknowing seller.
The seller is made an above-market offer which is accepted. The difference between the market value of the property and the price agreed to is the bounty that the seller, buyer agent, buyer, loan officer and appraiser split.
The lynchpins in the deal are the knowing straw buyer and the appraiser. The straw buyer must have credit good enough to not look suspicious purchasing --- or even applying for a mortgage on --- a house of that value.
The appraiser is critical because the appraisal report is what is used to get the deal past the lender's underwriting department. Once the risk management folks sign off on the deal, the mortgage can fund so that all parties get paid. The agent, buyer and loan officer obviously know what's going on and cooperate in telling a story to the seller.
For-sale-by-owner properties are good targets for this type of scam because the seller's priority is more often maximizing the value of the property than being a student of the details of real estate transactions. An ethical listing agent will alert the seller about a possible scam.
Straw Scams Hurt Regular Folks: The Bubble
Sounds like a win for all parties, right? Everyone in the deal gets paid and the only loser is the investor in the secondary market who bought the mortgage the straw scammer took on, and even they knew the risk in buying mortgage-backed securities.
Unfortunately, the market comparables are now skewed because of a house that sold ostensibly for a much greater amount than the market would usually bear. Market values for houses rise artificially because preceding houses sold for so much. And as people in the neighborhood refinance, they do so against inflated property values, often cashing-out this artificially built equity.
What Causes the House of Cards to Come Down?
Being the straw buyer often works during up-markets because they can refinance against the appreciated value of the house and take cash out of the loan. But if they can't refinance, the straw buyer has to walk away from the mortgage, or flee, leaving the mortgage unpaid and the house in foreclosure.
You know from all those real estate infomercials that many foreclosed houses don't sell for at or above market value, so people banking on the equity in their homes --- or folks who cashed out on the equity --- are now in a lot of trouble.
Identity Theft Makes for Unknowing Straw Buyers
There are criminal straw buyers who know what the deal is going in. Other times the buyer is just a sucker and agrees to this deal voluntarily and may even agree to deed the house to a third party after the transaction is complete, similar to the parents in the example above.
But identity theft plays a critical role in this type of scam because it eliminates the need to meet and convince a straw buyer to take the risk of applying for and then leaving a mortgage. It's not uncommon for mortgages to be done sight-unseen and by the time an unknowing identity-theft victim finds out about their "application," the mortgage might have already been funded.
While most of these cases are eventually resolved so that the identity theft victim is not responsible for the mortgage, please don't underestimate the amount of time and inconvenience this causes. An event like this is a major life disruption.
One small way you can help yourself is to slow the proliferation of your information by opting-out of pre-screened credit card offers. It alone won't keep your identity from being stolen, but it does keep create a bottleneck for sharing your information or selling it to third-parties.
Related Reading:
- Opt-Out of Pre-Approved Credit Card Offers
- How to Lose Your House
- Don't Assume Your Mortgage Broker Is Out to Get You
- Silicon Valley Home Buyer's Guide
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