The Lambs, Lions, and Vultures of Today's Real Estate Scams
by Hassan Nicholás
And so goes the scene...
We open to a flat, barren landscape. An unforgiving sun hangs high in a cloudless sky. The naked earth resembles an abandoned wasteland, except for the pockets of dusty shrubs and aged trees hunched over. From the left a herd of gazelles move mechanically through the terrain. They stride cautiously, often pausing to scan the incessant horizon. What do they know? Behind the dry shrub, peering from the thick trunk of the trees a lioness awaits. The sun paints her coat a golden orange as she quietly preys. Her clan positioned behind her, steadfast and also patient. And then, suddenly everything stops. The gazelles in their herd, bodies frozen in time, eyes staring blankly sense their fate approaching. Within seconds they are in full flight; scattered yet moving in unison, kicking up dust in their organized confusion. The lioness and her clan follow closely behind, several times hurling themselves at their fragile bodies. They escape with their lives, but leave one. And so it seems the lions have not yet lost their pride. The gazelle, a trespasser to his own land, committed the error of putting too much faith in his own kin. With all the tenacity he can muster, he fends off the feeding of the lions, but not before his blood is drawn. Many moments later we find him, far from his herd, still haunted and dazed by the ambush. With the sun quickly easing into the horizon, he collapses to the ground overcome by fatigue. Then we hear the sound. Against the backdrop of an orange tinged sky a wake of vultures hover, circling their next victim, until they descend upon him gently like leaves falling through the wind.
They are the Lions
The mortgage crisis has exposed the underbelly of an American dream. Real estate agents, lenders, and brokers - defenders, protectors of the homeowners' financial and emotional equity have handed in their integrity in favor of greed. By now we have all become familiar with their modus operandi.
In "Fraud for profit" schemes mortgage insiders such as appraisers, real estate agents, loan officers, and lawyers, like in the wild, often work in teams to take down their prey. After falsely inflating a home's value they obtain a large mortgage using false identities or a "straw buyer". Once the house is "sold" to the buyer, they split the profits and disappear. According to a recent report by TowerGroup, a financial consultancy in Needham Massachusetts lenders will incur nearly $2.5 billion in losses as a result of mortgage fraud this year.
Another type of mortgage fraud prevalent in the post-real estate market crash was the popular "Cash back at closing" scheme. Predatory buyers, such as a greedy real estate investor, locates a home on sale for...let's say $250,000. Then, after obtaining an intentionally inflated appraisal, the buyer receives $320,000 from the lender. The investor recruits a "straw buyer" (using someone else's identity to purchase property) whose name will appear on the deed and mortgage. The seller is paid $250,000 while the buyer (investor) pockets the $70,000 difference. And with profits secure, the buyer lets the home go into foreclosure. Though there is nothing illegal about cash-back-at-closing deals in which all details of the transaction are disclosed to the lender, the opposite is true; if the mortgage company is tricked into lending (far) more than what the value of the property is, it is fraud.
These are the Vultures
The lions came and they feasted. Look around and it's hard to over look the remainders of their gluttony. The increasing inventory of houses are swelling up local markets, driving down prices further from the artificially high ones set by the predatory investors, the lions. They have turned neighborhoods to graveyards, houses a mere skeleton of an American dream turned nightmare. So, no, the chase has not ended. Though the lions retreated to their dens, some to lick their wounds, they left what remained to the vultures. And it is them that lurk in the shadows looking to take advantage of the injured homeowner. Enter foreclosure scams.
Sales agents search for troubled homeowners, who appear on lists used by banks and credit agencies to show owners approaching foreclosure - usually attracting them through mailings and poor marketing (have you seen those bland flyers that look like they took 5 min. to put together?). The sales agent offers an arrangement that sounds too good to be true; the owners put an "investor" on the home's title. In exchange, the homeowner will agree to pay a rent much smaller than the original mortgage payment that they can't afford. The "investor" takes out a new loan, and through misleading paperwork, gives the investor the right to replace the homeowner's name on title. Shortly thereafter, the "investor" stops making payments on the loan, pockets the proceeds from the equity of the home, and allows the homeowners to get evicted or foreclosed upon.
Distressed homeowners targeted by what appears to be a faith-based organization, nonprofit, or any other entity that appears trustworthy targets soon-to-be foreclosed homeowners. Just as in the aforementioned scam, homeowners sign over their ownership rights to a "surrogate owner" who in turn continues to receive payments from the homeowner. Many times the homeowner enters an agreement from six months up to two years of making monthly payments, with the promise that their home would be "returned" in their name once their credit score recovers. Instead, the home goes into foreclosure anyways, the theif disappearing with months or even years of collected payments.
Here Are the Lambs
Starting in 2009 buying a home will get costlier. In a recent agreement with New York State Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac will only buy mortgages from lenders that use independent appraisers. Since these two companies account for more than 70% of all mortgage loans, pretty much all lenders will comply. As it stands, mortgage brokers are required to have only one appraisal for each deal. The broken can then include it with applications to as many lenders as they please. However, with this change a different appraisal will have to be ordered by each lender that the home buyer applies to. Because that is an extra cost to the lender, it will be passed down to the buyer. If the buyer is shopping around this would lead to multiple appraisals being ordered - potentially costing a buyer between $1,000 to $2,000. Now this puts the mortgage brokers business in jeopardy, because the buyer could save costs by dealing directly with a lender. Still, if you look at the numbers the costs of additional appraisals does not come close to how much money is lost when a home is over valued.
Another threat that I see on the horizon is down payment assistance scams. Unfortunately, there's another predator first-time home buyers should be aware of - and this one may not be feline nor carrion. I've seen several websites pop up advertising access to down payment assistance programs to potential buyers. And I've heard from clients who've attended free conventions at luxury hotels promising thousands upon thousands of down payment assistance program money and grants (free money in this this market? I think not!), all of which either don't exist or are obsolete, to the tune of $1,000. But, if you can't afford that, they will sell you a CD on how to locate these programs for just $25. And so the chase continues. Who will come when the vultures leave?
Perhaps the hyena...
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