MortgageFraudBlog Conference - Day 2

By
Real Estate Agent with 1st Action Real Estate
11-6 fraud day 2
fraud

I've gotta say right up front, I'm not used to attending seminars where other attendees are packing heat. While it might come in handy at some of the real estate conferences I've been to (especially when what's his name heads for the microphone yet again), we're a pretty tame bunch considering our reputation. However, as I mentioned yesterday, at Rachel Dollar's MortgageFraudBlog.com Conference, the audience is heavy with law enforcement and a few heaters are much in evidence. It does make you a little wary and you don't nod off as much when the guy next to you is sporting a small canon on his hip and pepper spray.

However, thankfully Day 2 was lacking in events that might lead to gunplay and the agenda was more slanted toward the schemes and trends rather than the enforcement strategies of yesterday. Many of us have been exposed to one or more of these schemes but I'll do a quick run-down for those of you who may have been blessed to live in an area that has thus far been spared the fraudsters arrows.

First you need to understand there are only two kinds of markets in the U.S. - those that have already experienced real estate fraud and those that will. Breaking that down further, there are two main categories of real estate fraud:
  • Fraud for Property - by far the most prevalent and previously unprosecuted. This category includes all the little 'fibs' buyers tell to qualify for a house. Mis-statements of income or employment, work history, whether they plan to reside in the property of not - things like that. Everybody knew it went on, frequently with the encouragement of an agent or a lender to 'help'  somebody get that loan. As long as the market was on high-speed cruise everything was capacetic and nobody got hurt but, as the saying goes, the minute the tide started going out it exposed all the people who weren't wearing their bathing suits. As these people increasingly default on their loans, lenders and prosecutors are increasingly likely to go after them to recover the damages from the fraud. If the lender or an agent was culpable, they'll be brought into the mix as well.
  • Fraud for Profit - this has been the most pervasive and damaging on a large scale. This category encompasses the major scams and network operations resulting in 1000's of homes lost and billions of dollars in damages. This is where the pro's play and the serious money changes hands. This is why some of the attendees wear guns. I'm going to cover only the first 3 or 4 of these schemes tonight in  the interest of space and because I just flew into Orlando from Miami and I'm dog tired. These scams include:
    • The Classic - where a home is listed for sale for $300,000 and a 'Buyer' comes in offering $450,000 with the overage being returned to some 3rd party at close of escrow. This was extremely popular during the big price run-up prior to 2006 and typically involved the collaboration of lenders, appraisers, agents and escrow/closing agents to perpetrate. While still out there, it is becoming much more difficult to pull these inflated sales prices in our deflating markets although I just had a Realtor send me 14 recent cases of this occurring in her market within the past 90 days. In addition to the others involved, the success of this scam often includes a - 
    • Straw Buyer - typically someone who does not exist at all but has been created from whole cloth by the ringleader to act as a buyer. That's why you rarely ever meet the 'buyer' in these transactions, their signatures may not match from one document to the next and they never move into their new home. More often a straw buyer is someone the ringleader has hired to play the part. They may even lend their true identity including their good credit for fees ranging as high as $10,000 to enable a ringleader to purchase one or more properties using their identity. Initially viewed as another victim in the scheme, law enforcement is increasingly prosecuting these individuals either as co-participants to the fraud or to leverage their testimony to bring down the ringleaders.
    • Air Loans - are becoming more prevalent right now. An air loan involves a lender industry insider making a loan typically to a straw buyer for a non-existent property. This type of scam is usually initiated as a short-term cash flow fix by a lender to cover another bad debt or non-performing asset. The revenue generated from this loan covers the deficit in the first loan in hopes that the first loan will start performing again in the next month or two. Of course we know in this market they rarely do so a couple months later the fraudster has to float another air loan to cover that 2nd loan, leading to another and another and... In addition to paying off part of the prior loans, there's usually a little bit that sticks to the fraudsters fingers on the way past. If this sounds sounds like a classic Ponzi it's only because it is except it's usually just one inside guy at a bank generating loans on forged documents to someone who doesn't exist for a property that isn't there.
    • Double Sales - is pretty much what it sounds like. A lender will sell a loan twice - say once to a Countrywide and a second time to a Fannie Mae, for example. This actually happens by accident more often that you might expect but it's usually noticed within a couple days and the lender calls one party or the other and cancels one of the transactions. But sometimes it isn't an accident and the lender simply pockets the proceeds from one of the transactions. That might net you a few hundred thousand and may go undiscovered until the buyer starts getting mortgage bills from 2 different companies in 7 or 8 weeks. Now imagine you're a lender that pulls that trick on a few loans a day for 3 or 4 weeks until you pack up one afternoon with the little redhead from HR and head off to a small beach house in Belize. Or maybe the blond from accounting to Costa Brava? Heck, why not both?  
Well, there's more but that's all I'm going to talk about today. There's easily another half dozen or more major categories that we know about today. By tomorrow there'll be more. Because unfortunately as soon as we - Realtors, Lenders & law enforcement - figure out what they're up to and how to crack one scam, the perpetrators have moved on to another, and another. Right now there are people out there working out the details of how to lay their clammy little hands on as much of that $1 trillion bail-out money as they can.

And Realtors are on the front lines of this battle. Law enforcement only learns about it after the fact - usually after it's been done several times and they can pick up a pattern and follow the paper trail. Lenders usually come to the party late too. Oh, they're out in fron on some of the deals like the air loans and double sales, but as with The Classic, Realtors knew something was amiss years before the lenders suffered their first loss.

Realtors - we're part of the solution - not part of the problem. Make it so.

Gene Wunderlich - Selling Southwest California Homes including Temecula, Murrieta & The Southern California Wine Country
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Remember, Don't wait to buy real estate - Buy real estate and wait.
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' MortgageFraudBlog Conference - Day 2'
THE OPINIONS IN THIS COMMENTARY ARE STRICTLY GENE WUNDERLICH's PERSONAL OPINION. WHILE ANY REASONABLE &/or RATIONAL PERSON SHOULD AGREE, THESE VIEWS MAY NOT REFLECT THOSE OF ACTIVERAIN, COLDWELL BANKER RESIDENTIAL BROKERAGE OR ANY  LOCAL, STATE OR NATIONAL ASSOCIATIONS.

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Rainer
26,226
Chris Montz
Network Funding, LP - Birmingham, AL

Interesting Blog.... You going to see alot more of this with this tight market and people get desparate

Nov 06, 2008 02:53 PM #1
Rainer
45,729
Jeff Engle
Neighborly Realty - Lincoln, CA
PlacerAreaHomes.com

By far one of the more interesting topics & blogs.  Do you have any idea what percentage of mortgages are fraud?  Is it increasing?  Are recent events making it more difficult to get away with?  Dozens of questions, I guess I should have gone to the conference.  Thanks for the post.

Nov 06, 2008 03:02 PM #2
Rainmaker
101,110
Dona Reynolds
Berkshire Hathaway Home Services Stein Summers - Saint Joseph, MO
St. Joseph MO

Gene

Very interesting blog.  I am sure this happens in bigger markets where there was rapid housing appreciation, rather than in smaller markets where there is a smaller housing appreciation. However, as Realtors, we have no control what lenders do, after the sale..... 

Nov 06, 2008 03:27 PM #3
Rainmaker
227,776
Gene Wunderlich
1st Action Real Estate - Murrieta, CA
Realtor & Legislative Liaison

Jeff - I do have those numbers somewhere - it's something like 20% overall but estimated to be as much as 60% of subprime mortgages written during the past 5 years. It's a staggering amount. What we're seeing is the tip of the iceberg because as much as we hear about all the foreclosures, still something like 70% of subprime and alt a mortgages are performing and people are paying their notes on time and will remain homeowners. We only find the inaccuracies when somebody defaults or applies for a short sale, refi or relief and the inconsistencies on their original application become evident. There simply isn't the time, manpower or will to evaluate all the mortgages - and as long as they're performing, who cares?

Dona - It might surprise you to know that this happens in ALL markets. I first heard about this at an FBI seminar at NAR about 5 or 6 years ago. At that time it was still a farily new phenomenon in California but I'll never forget the old hayseed Realtor from a small town in Virginia (no disrespect - he was a true old hayseed in overalls) who was almost in tears describing how it had decimated his small community of about 16,000 people. Median home value was only about $60,000 but the fraudsters moved in and started 'investing' in places and paying $90,000 to $110,000 for the homes. In less than a year they started going into default, the banks wouldn't lend money for people to buy them at their former prices, the median fell to around $45,000, the towns revenue dried up and they went BK - it was a sad story of a small town. I actually talked to 2 lenders from Ohio today who said they had to be extremely vigilant in their small community because it would actually take a much smaller scale scam to wreck their economy - no cushion.

While we don't have control over lenders after the sale, we are the ones who are often on the front lines when these scams show up. I remember when the overpriced offers started showing up in our community of 100,000 people - Realtors were the first to see it and the first to cry foul. We couldn't get law enforcement or lenders to do anythng until millions of dollars had already been lost. We truly are the front line for much of this - not that we're involved, we're just in a position to see it first. And unfortunately some of our members are also involved. 

Nov 06, 2008 04:15 PM #4
Rainmaker
227,776
Gene Wunderlich
1st Action Real Estate - Murrieta, CA
Realtor & Legislative Liaison

Jeff - By the way, yes it is getting more difficult to pull some of these scams but not impossible. That's why they're constantly working new angles. The elimination of 'liar loans', NINA loans (no income, no assets) & NINJA (no income, no job) makes it tougher. The entire lending industry is in a state of flux right now with nobody knowing exactly where they're going to end up. The short term knee-jerk solutions will probably be too prohibitive so we'll get back to more 'old-fashioned' kind of lending for awhile - down payments, jobs, things like that. Then people will figure out how to game the new system, politicians will put a new type of community reinvestment act in place and in another 16 years or so, we'll repeat the whole cycle.

Nov 06, 2008 04:28 PM #5
Ambassador
2,703,589
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

"Realtors - we're part of the solution - not part of the problem. Make it so."

Thanks for that.  I do tend to get more than a little exercized when Realtors are gratuitously tossed into the mix of the perps. 

BTW, I see some of the same creatures crawling out from under the slimmy rocks that I recall back in the late 89s and early 90s.  The "lease-option" scammers are out in full force to buy low priced distressed properties in good condition to use for stock in their "lease-purchase" scams.  I can smell them. 

I wish the consumers who think they're getting a good deal with a "rent with option" search had the ability to recognize these "deals".

 

 

Nov 06, 2008 11:21 PM #6
Rainmaker
949,340
Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

Very enlightening and increasingly depressing...the fraud itself is bad enough, but the bigger picture is how many folks are out there that have absolutely no compunctions about committing fraud. 

Nov 07, 2008 12:04 AM #7
Rainmaker
227,776
Gene Wunderlich
1st Action Real Estate - Murrieta, CA
Realtor & Legislative Liaison

Lenn - part of pur obligation as Realtors is to educate our own  members as well as the public. Unfortunately we can't count on anybody else to do this so we have to rely on people like you in every market - people with integrity and who can recognizxe or smell these scams and the slime that perpetrate them. A lot of these people have been around for years just moving opportunistically from scam to scam & giving our industry a bad name. In CA may of the same people who were doing the pyramid buying scams have now switched over to become short-sale and pre-forecklosure consultants. It's handy because they have a ready made clientel - all the people they screwed getting them into these homes, they can now screw again on the way out.

Susan - that's is the scary part. You can do all the education you8 want but there are people that will sell their soul for $50 bucks. One of the things I'll be posting about later is the 'affinity scam' where these people target certain groups like their church groups, their own minority groups, a senior community etc. Just too many slime to keep up with and too many people who don't consider what they're doing to be fraud. It's just a little white lie and everybody else is doing it so how wrong can it be?

Nov 07, 2008 04:53 AM #8
Rainmaker
101,110
Dona Reynolds
Berkshire Hathaway Home Services Stein Summers - Saint Joseph, MO
St. Joseph MO

"Realtors - we're part of the solution - not part of the problem. Make it so."

Gene, Thanks again for the great post, we will discuss your blog at office meeting on Tuesday.

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Nov 07, 2008 12:08 PM #9
Rainmaker
227,776
Gene Wunderlich
1st Action Real Estate - Murrieta, CA
Realtor & Legislative Liaison

Thank you. In our area of SoCal, we have formed a Realtor Fraud Task Force with the mission to educate the public and our fellow Realtors. We know we can't eliminate the problem - there are always scammers and always people willing to be scammed, but if we can help a few honest people avoid getting taken advantage of - we will feel vindicated. Plus it gets the Realtor name out there in a very positive light in our community - and that kind of positive press is a real good thing to have right about now.

Nov 07, 2008 02:54 PM #10
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Gene Wunderlich

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