Recognizing Real Estate Fraud – Day 3

Final series from the MortgageFraudBlog Seminar with reference to a variety of frauds.

Last blog I started a list of fraud schemes covered in Rachel Dollar’s MortgageFraudBlog Conference held in Miami. We started the list with The Classic, The Straw Buyer, Air Loans and Double Sales. Here’s a few more:

  • Affinity Fraud – where the perpetrator looks to specific groups for victims. They will recruit ringleaders who have contacts at a church group, within ethnic groups, senior groups and professional groups like nurses or teachers. By virtue of the fact that they are already part of that group, they are more readily accepted and after making sure the first couple victims are treaty like royalty – the rest fall like dominoes.
  • Soliciting Investors – you’ve seen the signs by the side of the highway – ‘We Buy Houses for Cash’, ‘Investors Needed’ that sort of thing. By and large they are looking for people to act as Straw Buyers and while we can’t say with 100% certainty that these are ALL scams, in some counties in Florida, Code Enforcement is directed to confiscate these signs. In some cases, law enforcement have called the numbers on the signs and set up stings for illegal operations.
  • Builder Bail-Outs – Increasingly common in some areas where builders have large sitting inventories. By offering incentives like cars and vacations, together with inflated appraisals, they entice buyers (sometimes using straw buyers) to purchase their inventory of homes. The buyer then defaults and keeps the car but the builder has gotten another home off their inventory.
  • Buy & Bail – sometimes referred to as ‘Borrowers Revenge’ has already been discussed in other posts in this section. Basically it involves a homeowner who is upside-down in a property. They owe $400,000 on their home but they can now buy the identical place for $250,000 down the street. They qualify for a new loan by providing fraudulent rental papers showing their current home will be leased. They get into the new place and immediately bail on the old one. Often times they will actually rent the old place for the few months until it goes into foreclosure, pocketing the rent and deposit and leaving the renter twisting in the wind when they get evicted. 
  • Flipping – not in and of itself fraudulent. Many people have successfully and legally purchased properties over the years that are in  less than ideal condition, invested a little sweat equity and sold the resulting home for a tidy profit. However, there is a whole subculture of illegal flipping involving fraudulent appraisals & straw buyers. Sometimes these scams take the form of ‘investor groups’ who buy several houses in a neighborhood and then re-sell them to each other several times at ever inflating prices. While the first few sales will involve inflated appraisals, after 3 or 4 times, they create their own microcosm of appraised value within that neighborhood. After running the sales prices up significantly, they simply pocket the gains, bail on the neighborhood and start over in another area. 
  • Foreclosure Rescue Scams – the newest addition to the genre. I know in our area of SoCal we are seeing some of the same people who ran the kiting scams coming back into the market as ‘foreclosure specialists’ to help people avoid losing their home. They have a ready made clientel because all the people they screwed getting them into a predatory loan or inflated value home, now they can screw them again on the way out by promising miracles and delivering doo-dah. Whether it’s a Foreclosure Rescue Scam,  a Loan Modification Scheme or a ‘Payment Assistance Scam’, it’s the same principle. These perpetrators are catching homeowners at their most vulnerable, when they have already made one bad decision and are about to lose their home. Almost every one of these cases involve the homeowner transferring or deeding the property over to the fraudster to ‘avoid foreclosure’. The fraudster will tell them they can make minimum payments to them until they’re back on their feet while the fraudster will make the full payment to the lender and then deed it back to the original homeowner once the default is caught up. Of course they don’t actually do this. Instead they pocket the payments from the homeowner, make no payments to the lender and typically take the deed and use it to refi the house using a fraudulent appraisal (and without the original homeowners knowledge). By the time the homeowner starts getting the NOD’s, the fraudster is long gone with their money and the home is encumbered for even more than the owner originally owed. They have also learned a valluable (and costly) lesson that there is a significant difference between having your name off the deed to the house and having your name off the mortgage loan. They still owe the money,  their credit is shot and there is no recourse.
  • Rental Property Scam – I’ve written about this one before. In it’s simplest form somebody owns a home, maybe in a buy & bail, maybe a legitimate owner. They rent the house out collecting first & last plus a deposit. Then they quit making their payments to their lender and just pocket the monthly rent from their tenant. Some months later the tenant is leaving for work one morning and sees the Notice of Trustee Sale tacked to their front door. Even if they immediately stop making payments to the owner (and there’s some legal issues there in the owners favor), they are still likely to be out at least a months rent plus the deposit which they will never see and they get to move their family again paying for the move and a new series of first & last & deposits. 
  • Rental Property Scam II – even nastier. A perpetrator gets the combination for a bank owned home and runs an add in the newspaper or Craigslist offering the house for rent. They get to the property and take the ‘For Sale’ sign down and then  meet the prospective tenants, showing them through the property like everything’s legit. They sign the papers on the spot taking first & last plus a deposit and give the new tenant a set of keys. Next day the tenant shows up with their moving truck and discovers the keys don’t work and the phone number for the ‘owner’ is disconnected. In the worst local case I’ve heard about, 14 people were snared by one perpetrator to the tune of $3,400 each. They discovered the hoax when multiple families started showing up with their moving trucks a couple days later. 

Well, that about covers the major scams. If you hear of something happening in your area, please feel free to post it here as a caution to the rest of us. These scams have a way of showing up in more than one area and in slightly different forms. The perpetrators who pulled off The Classic in our area with over 128 homes, pocketed over $12 million dollars over a 2 year period and left lenders holding the bag on about $70 million in foreclosed houses. They had already been busted for pulling the same scheme in Pennsylvania but were not prosecuted, paid a small fine and headed to California, where they learned from their mistakes and lived the high life for several more years.

There’s only one way to head these schemes off early and that’s for Realtors to communicate. Law enforcement often doesn’t find out about many of these scams until they’ve already cleaned house and left. Lenders often don’t find out until their risk management teams notice patterns of losses but by then it’s usually to late. Realtors are frequently in the front line and see these things develop. If you see something fishy or something doesn’t quite pass the smell test – let your Broker know. Talk to others in your association to see if they’ve experienced the same thing. Talk to your Board Counsel or a good real estate attorney and bring it to the attention of your local law enforcement, your District Attorney, U.S. Attorney, Department of Real Estate, Attorney General, Securities and Exchange Commission and FBI. Most will ignore you but this has become such a high profile issue that sooner or later someone will listen.


MortgageFraudBlog Conference – Day 1
MortgageFraudBlog Conference – Day 2

Realtors are part of the solution – not part of the problem. Make it so.

Visit the Mortgage Fraud Group and post your experiences. We learn from one another.

 

‘Recognizing Mortgage Fraud – Day 3’

 

The opinions in this commentary are strictly Gene Wunderlich’s personal opinions. While any reasonable and/or rational indivdual should agree wholeheartedly, the opinons reflected herein may not necessarily be those of SRCAR/GADBLOG, ActiveRain, The Valley Business Journal or any local or state government or other mental institution. 

Recognizing Real Estate Fraud – Day 2

Day 2 of the MortgageFraudBlog conference cites specific fraud schemes.

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 are part of the solution – not part of the problem. Make it so.

Visit the Mortgage Fraud Group and post your experiences. We learn from one another.

 

‘Recognizing Mortgage Fraud – Day 2’

The opinions in this commentary are strictly Gene Wunderlich’s personal opinions. While any reasonable and/or rational indivdual should agree wholeheartedly, the opinons reflected herein may not necessarily be those of SRCAR/GADBLOG, ActiveRain, The Valley Business Journal or any local or state government or other mental institution. 

Murrieta Five Year Housing Summary: # Sales / Median$

Five year housing summary for Murrieta, California including sales volume, median price and price/SqFt.

A copy of this report was recently provided to our local officials for the City of Murrieta. We hope this information may prove helpful in determining city budget forecasts for the coming year as they evaluate the impact the downturn in our housing market has had on their revenue stream. 

Of course property tax revenue is just one source of income for the city but a major one. As the state continues to wrestle with a budget that may or may not include some trade-off between property taxes and vehicle license fees, a city like Murrieta that is approaching residential build-out needs to know where current property values are. 

As you look at the attached chart and graphs, you will notice that the number of sales has declined steadily through 2007 while median values continued to grow through 2006. Total home sales value peaked in 2004 at more than $812 million dollars with 1,661 homes sold, a number that fell to just $325 million in 2007 with just 687 homes changing hands. 

Spurred by declining values, a surplus of inventory to choose from and attractive interest rates, sales rebounded in 2008 to post a higher sales volume than ANY year during the previous five years. But the decline in the median price of a home will leave the city nearly 30% off the peak revenue pace of 2005, nearly $200 MILLION. Couple that decline with the reduced revenue from Proposition 8 mandated property tax reductions for existing homeowners and you understand why Murrieta is looking at alternative revenue sources and holding the line on expenses for 2009.

By tracking these numbers an investor or prospective homebuyer can determine where they think the market is. As I pointed our last August, one month of sales increase doesn’t mark a trend. But as sales volumes continue to grow that will lead to the continued absorption of our excess inventory, the return to a more stable market and the end of the rampant price declines – 35% in just the past year. I am expecting to start seeing that stability develop by late 2nd to early 3rd quarter this year in our local market, possibly sooner depending on mortgage interest rates and federal stimulus incentives.

Please feel free to add your own comments and outlook to this post.

Remember…

If you’re not at the table, you’ll probably be on the menu

‘ Five Year Housing Chart for Murrieta, California’

The opinons in this commentary are strictly Gene Wunderlich’s personal opinions. While any reasonable and/or rational person should agree, these views may not reflect those of SRCAR, ActiveRain or any local or state government or other mental institution.

What’s a GAD? Why now?

What is a GAD and why has our Association chosen to hire one now?

Now that your Association has hired one, many of you are probably wondering – what the heck is a GAD and why do we need one?

Well, the first part is easy. A GAD is your Government Affairs Director. Simply put, a GAD is like a local lobbyist for the Association who works with city, county and state legislators to make sure LOCAL Realtors interests are represented. A GAD tries to make sure local private property rights are not trampled through a citys use of eminent domain, for example, or that punitive business license fees are not placed on Realtors or that sign ordinances are fair and provide our clients with the opportunity to have their homes marketed effectively.

And if that’s all a GAD did it would still be important to have one. In my case, I will be going beyond the simple definition of a GAD, as many GAD’s throughout the state do, to provide outreach to our members as well as members of the community. I’ll be providing updates to our Board of Directors on a regular basis, updating members at our Tuesday morning marketing meeting, keeping our Brokers apprised of new issues that could impact them and attending office meetings to answer questions when invited. I’ll also be doing more community outreach by writing pieces for local newspapers about LOCAL market conditions, LOCAL opportunities, LOCAL news & views, not that canned national A/P crap that bums everybody out. If you’re interested in more detail I’ve got a nifty PowerPoint presentation I’ll be happy to forward to you summarizing an array of services that will be provided.

The next part of the question is – why do we need one or why do we need one now? With our housing market in the tank and many local businesses tightening their belts or going under, why has the Association chosen to expand their presence now? Precisely because now is the time we need it most. We’ve actually budgeted for this position in each of the past two years but never got around to hiring one. We decided the timing was critical this year. 

The coverage region of our Association has grown to include 5 cities. Of those, two of our cities are approaching build-out. That means they will be doing final tweaks to zoning and land-use regulation that will have lasting impact on the remaining property. They will be deciding on in-fill projects, making ‘smart-growth’ decisions and other density and mixed-use rulings. Because our cities are also facing significant revenue impacts from the downturn in taxable revenue from housing, they will be looking at ways to improve their revenue flow. In spite of our current depressed status, the housing market and Realtors in particular remain an easy target for these schemes.

Our region is also home to the two newest cities in California. They will be looking at putting General Plans in place that address land use and zoning, they will be evaluating point-of-sale mandates, green building codes and transfer taxes. They will also be looking at ways to increase their coffers at a time when the existing residential and commercial markets are not providing the revenue the city may have planned for during their incorporation. New revenue sources will be identified and it’s important again that private property, housing and Realtor interests are represented in those discussions. 

If those brief explanations answered your what and why questions, you may still be asking who? Why Gene Wunderlich? If you’ve been active in real estate in the Valley for any length of time you already know my passion for politics. You may have heard me speak during your Realtor orientation, as I have done for more than a decade. You may have read my rants in the Realtor Report Newspaper or one of the other local papers over the years. You may have caught my act before one or another of the local city councils or known that I have the majority of local legislators phone numbers in my speed dial. As a long-time state and national director of your Association, I have also been very involved in committees for Local Government Awareness, Legislation and Land Use, Property Rights and Environment. And I’m not just involved in those things – I’m passionate about them.

So when you hear me say, as I frequently do, that as a Realtor if you’re not involved in politics you may as well get out of the business – I mean it. When I claim that if we’re not at the table when these decisions are made, we’ll be on the menu – I believe that with all my heart. I will do my best to represent the interests of our Association and our Members throughout Southwest Riverside County and as you have questions or concerns, my mailbox is always open.   

Just because you don’t take an interest in politics doesn’t mean politics won’t take an interest in you. (Pericles  500 B.C.)