Friday, April 27, 2007

Loan fraud out of control

From today's Bakersfield Californian:

Loan fraud cases rising

Officials confirm that mortgage scams occur in Bakersfield market

BY RYAN SCHUSTER, Californian staff writere-mail:

Local law enforcers and real estate professionals say mortgage fraud litters Bakersfield's housing market, confirming allegations disclosed last week.

No numbers were available to quantify the extent of the problem and no agencies would confirm having ongoing fraud investigations. But police and industry insiders say they are seeing more local instances of various types of mortgage fraud.

"It is very prevalent and it will become more prevalent," said Detective Frank Wooldridge, who handles real estate fraud cases and other financial and white-collar crimes for the Bakersfield Police Department. "There is real estate and mortgage fraud going on in this town. To say it is not, you are just missing the boat."

Last week, local appraiser Gary Crabtree told The Californian that he has documented about 20 suspicious local home sale transactions in the last year -- and that the number has since grown to more than 50 as news of his allegations spread. He has referred some of them to the FBI, California Department of Real Estate and California Office of Real Estate Appraisers.

Mortgage fraud varies wildly and can include anything from inflated appraisals, falsified documents and identity theft to schemes targeting homeowners headed for foreclosure.
Crabtree said typical cases of potential fraud he has seen involve a property that has been on the market for a while without selling.

Then a buyer, sometimes a real estate agent or an investor, submits an offer for more than the asking price. The buyer asks for money back at closing, sometimes $30,000 or more, often under the guise of making repairs such as installing a pool, landscaping, a new roof or new carpeting.

"We've been presented with offers for well in excess of the sales price, asking for us to cut back to the buyer large amounts of cash," said J.R. Lewis, sales manager with Watson Realty ERA. Lewis said his agents are required to bring all offers to the sellers, but then he said the agents have to tell the sellers they cannot accept the offer because it would constitute fraud.

The buyer or a so-called "straw man" buyer, whose identity and credit history are used on paperwork but who has no other role in the transaction, typically secures loans totaling 100 percent of the sale price, which has been inflated to include the amount going back to the buyer, Crabtree said.

The sale records at the higher price, the seller gets the amount originally requested, the buyer gets money back at closing and the real estate agents and loan brokers pocket their commissions, Crabtree said.

The buyer sometimes rents the property out or makes mortgage payments for a while, but Crabtree said often the properties end up in foreclosure, leaving the lender left holding the bag.
"The lenders are totally unaware they were defrauded until the property goes into default," Crabtree said. He added that mortgage fraud has contributed to foreclosure activity that is now five times as common as it was last year in Kern County, and which is helping to drive many so-called subprime lenders out of business.

Many of the buyers, often investors recruited to participate in the scheme, are qualified for loans they cannot afford to repay and end up losing everything, Crabtree said.

Crabtree said the "cash back scheme" can involve real estate agents, appraisers and loan agents using falsified documents.

"They are actually making offers on properties that are higher than the list price," Crabtree said. "Buyers in collusion with real estate agents, loan agents and appraisers are falsely inflating the price, representing it as something higher than it is selling at."

A recent survey by the Appraisal Institute found that 90 percent of appraisers nationwide reported being pressured by brokers, lenders and real estate agents to inflate appraisals, and 75 percent reported "negative ramifications" for not cooperating by inflating appraisals.
"We get calls from a lot of people asking if we can do an appraisal and 'hit' a number for them," said local appraiser Michael Burger of Michael Burger & Associates. Burger said he tells the callers his business won't participate in such activity and they go elsewhere.

Several local real estate professionals said scheme perpetrators also contract with inexperienced or out-of-town appraisers who are not familiar with the local market and take advantage of them by giving them incorrect comparable properties.

One example of potential fraud Crabtree cited involves a house that sat on the market for four months last year listed at $260,000 before being taken off the market. It was re-listed at the same price and sold earlier this year.

The deed showed a sale price of $300,000, with the buyer receiving 100 percent financing on a loan for the amount. Crabtree said the sales price was inflated, allowing the buyer to qualify for a bigger loan.

Crabtree said the buyer bought another house in similar fashion last year from the same real estate agent.

Tom Pool, a spokesman for the state Department of Real Estate, said Bakersfield was a haven for investors because of its quick appreciation and prices that remain more affordable than most of the rest of the state. Pool said it also left the area more susceptible to these types of schemes.
Greg Harding, chief of licensing and enforcement with the Office of Real Estate Appraisers, said he started to see more potential cases of inflated sales prices late last year, and that the number of complaints is still on the rise.

"This is a new way of doing business because we are in a declining market," Harding said.
The true scope and effect of mortgage fraud on the real estate market may not be known for some time. But more fallout is expected.

"It is so widespread that the masses don't realize it yet," said Mike Colpitts, founder and editor of the Web site "When it really hits the fan, it is going to have devastating impacts on the real estate industry."


Realestateslasher said...

You lose your Bond, Lose your
No Seat at Bakersfield Round Table
of Business Professional

Cow_tipping said...

Isn't that whole cash back at closing one of that idiot Charlatan Cheats's "first technique" for generating cash flow.

xs10shell said...

Keep up the good work, Ryan Schuster. I think your reporting is on the way to a well deserved award.

xs10shell said...

Oh yeah - can someone please tell me under what conditions PMI is supposed to kick in? Maybe those insuranc companies would have a much bigger interest than the FBI, etc. in investigating these fraud complaints.

ZINGO77 said...

The listings on for Bakersfield just went over the max for 2006! max 2006 4782 max for 2007 as of today 4817. Not good, considering this should be the strongest point of the year.


ZINGO77 said...

The listings on for Bakersfield just went over the max for 2006! max 2006 4782 max for 2007 as of today 4817. Not good, considering this should be the strongest point of the year.


ZINGO77 said...

The listings on for Bakersfield just went over the max for 2006! max 2006 4782 max for 2007 as of today 4817. Not good, considering this should be the strongest point of the year.


Sittin' Out This One said...


We got it.

beebs said...

I never understood how you can get cash back at closing.

I found our old escrow papers which were generated by the title company.

To get this scheme to work, you need the bank, the mortgage broker, and the title company in collusion.

I can see one bad actor, but not three.

Adam said...

To get this scheme to work, you need the bank, the mortgage broker, and the title company in collusion.

I can see one bad actor, but not three.

Believe it. Greed is a strong motivator, and makes people do things they might not consider otherwise. When there's hundreds of thousands of dollars at stake, ripe for the taking as easy pickings, most people will not resist. They'll rationalize that everyone else is doing it, and seemingly getting away with it, so why not me, too?

To paraphrase Hillary, it takes a village to raise an "EZ money get rich quick" scheme.

xs10shell said...

Then there are the work arounds such as this reported in the NY Times business section today:

Anonymous said...