I received the following email from Eric Budish, the Chicago market designer:
"I came across a neat investigative journalism feature on a form of mortgage fraud called “house flipping” .
The newspaper reviewed 19mm Florida real-estate transactions, and found that 50,000 involved appreciation of 30%+ in less than 90 days. They investigate one fraud circle in depth, and have features on the local police, lenders, etc.
What makes the fraud tick is that the buyer can finance at the new price. So if A legitimately buys a house for 100, then immediately sells it to his buddy B for say 150, B can get a mortgage against the 150 (especially if his buddy C is a real-estate appraiser). Even if B makes a small down payment on the 150, together A and B have extracted 50 minus downpayment minus fees in cash from the transaction. B never intends to repay the 150, and B’s mortgage lender is severely under collateralized.
The reason I think this is all so interesting is that the fraud is only possible because houses are idiosyncratic, but not too idiosyncratic. If houses were perfect substitutes, then A, B and C couldn’t trick the mortgage lender about house values (50,000 flips is a lot, and likely an underestimate, but still less than 1% of transactions). If houses were substantially more idiosyncratic, then banks would never have gotten in the habit of financing 90%+ of the purchase price in the first place: in the event of foreclosure they’d have to worry about whether the right types of buyers would be in the market. Put differently, the housing market is not too thick, but not too thin."
Sunday, July 26, 2009
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3 comments:
It's important to distinguish the legitimate business model for flipping from the fraudulent one.
In legitimate flipping, one buys a house with clear issues, and alleviates them. The keys are finding a house in a good neighborhood that has been neglected. The more cosmetic the problems and the shallower the required fix, the better. The goal is to beautify the front yard, upgrade the kitchen, as cheaply and quickly as possible. The banks usually require seasoning of 90 days, so it's a surprise that they found so many that were sold more quickly, but the flipper's goal is to get in and do the work quickly and get out, so short time frames fit the legitimate business model.
In fraudulent flipping, the repairs aren't as important, and the money is made on financing rather than sale. So I'd be looking for houses that weren't substantially undervalued at initial purchase, and a pattern of repeat second buyers in order to find fraud. In a real flip, the second buyer is unrelated and happy to get a house in decent condition in a nice neighborhood. In the fraudulent flip, the second buyer is a conspirator, and the banks should be scrutinizing them carefully when the timeframe between sales is short.
This is called "basis fraud" and is well-known to mortgage underwriters. Heck, Lawrence Sanders even wrote a mystery novel with this as a plot device...
SCORES OF HOMEOWNERS ARE EVICTED DESPITE HAVING NOT LAWFULLY LOST OWNERSHIP OF PROPERTY DUE TO NULL FORECLOSURES. Hopefully, Congress and all State Attorney Generals will launch probes about the scores of NON-LEGAL FORECLOSURES being filed DELIBERATELY in
courtrooms for purposes such as filing with the Internal Revenue form 1099-A's which are FALSE. (*1099-A's enable mortgage companies to receive just or unjust tax advantages). . .Ongoing USA news reports of court judges who are dismissing foreclosure filings because of "lack of standing" (no proof of owning the note) is NOT always a coincidence, NOR AN INNOCENT MISTAKE. Also sham foreclosures make possible repeated fraudulent real estate FLIPPING --which leads to blighted neighborhoods.
When those such attorneys deliberately file foreclosures naming defunct mortgage companies, or companies which no longer hold the notes, these attorneys also illegally affix Collection Fees far exceeding "Acceleration Clauses," which unfairly makes it even harder for people to re-pay arrears. If property owners sue for "Unfair Debt Collection Practices," collectors make more even $$$$ through protracted litigations --which Wall Street Investors often incur the tab. Thus, Investors, as well as homeowners loose while White Collar crime is rampant. Additionally, some collectors file in Bankruptcy Court falsified motions to "Lift Stay" pleadings for purposes of accomplishing SIMULATED AUCTIONS of illegally foreclosed properties.
A mere look at IRS form 1099-A's filed with the IRS (by mortgage companies such as WELLS FARGO) will expose various aspects of the silent White Collar collusion of real estate & foreclosure fraud that has been carried out for years. Likely, the true revelation of this crime will expose another S&L mess! For Prima Facie proof of Wells Fargo, Lehman Brother collusion with unscrupulous lawyers to cheat homeowners and the IRS, see:
http://www.lawgrace.org/2008/08/08/my-august-8-2008-statement-to-the-louisiana-secretary-of-state-office-of-financial-institutions-concerning-wells-fargo-irs-and-mortgage-frauds-sham-foreclosures-and-judicial-collusion-and-national-app/
http://www.lawgrace.org/2008/09/14/lehman-brothers%E2%80%99-mortgage-troubles-nationally-evidence-of-foreclosure-fraud-deception-and-conspiracy-with-wells-fargo-deceptive-judicial-filings/
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Barbara Ann Jackson
Law & Grace, Inc
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