Recovery of Housing Market still plagued with Fraud

The Housing Market is still plagued with Mortgage Fraud and it threatens the very recovery of the economy and the housing market itself. The housing boom during the last seven years was been plagued with Mortgage Fraud which anyone associated with the mortgage industry will attest too. The difference this time around for the Mortgage Industry is that fraud in the industry has taken on a new shape.

Interthinx, which is a firm that tracks mortgage fraud and provides prevention services to mortgage lenders, has reported that fraud is up by eleven percent in the third quarter of this year. Interthinx gathers data from around the nation to analyze the risks involved and where the fraud is happening in the nation.  The fraud is different this time around from the previous inflated appraisal values and fraudulent wage on mortgage applications. The risk of fraud is happening to bank owned foreclosed homes and in the short sales involved prior to homeowners going into foreclosure. Interthinx is now reporting as well that more real estate professionals are among the offenders of mortgage fraud schemes than previously reported. The increase in real estate agents and other mortgage professionals is growing due to the increased volume of foreclosures that do not require appraisals in order to sell the depressed properties involved.

Everyone is paying a price for the mortgage fraud in this country. The value of property has increasingly declined especially in hard hit communities; leaving the communities stick with empty homes and depressing the communities that were already struggling.

Short sales schemes have become more affluent among the new fraud that is emerging.  Property owners who are struggling to make payments and who are over under on the principal verses the property values often tend to use Short Sales to get out of the debt. A Short Sale is arranged often with a friend or relative as the purchaser of the property. The relationship between the friend and relative with the property owner is not disclosed to the mortgage lender.  The property is sold via the short sale for a value that is well below market value. The property, deed or title is then gifted back to the original property owner sometime after the sale is completed. The original property owner then sells the home for a higher purchase price to a seller that has been waiting on standby.  The reason this scheme amounts to fraud is because the purchasers and the sellers involved are lying to the mortgage lender about the true nature of the transaction. The mortgage lender losses money based on the fact that the mortgage lender would have received more capital had the actual market value been used had the short sale occurred without the low purchase agreement value agreed upon between the property owner and the relative or friend. The scheme is considered flipping and the profit from the flip goes to the original property owner.

The used of a friend or relative in the course of a Short Sale often leads to the original property owner still not being able to afford the property and the property falling back into foreclosure. Several of these properties are flipped again causing the mortgage lender to end up stick with a property that is over-valued and in some cases back on the foreclosure table.

Flipping is not new but has increased in popularity due to websites that promote how to make large profits on distressed properties. Modifications efforts across the nation are wavering  and property owners who are in distress are looking for other ways to relief, which leads them right into the Short Sale; expect to see an increase of Short Sales coming down the pike. Interthinx is reporting that straw buyers are increasingly used as the standby in these questionable transactions.

Interthinx has suggested that the increasing get rich quick schemes as seen on TV and websites that target Short Sales and REO investors have increased the popularity of the short sale process. The numbers are increasing when it comes to participants willing to be straw buyers. Interthinx believe the damage cause by just investment clubs, websites and other short sale profiteers will be significant if left unchecked.

The issues that arise for neighborhoods when properties become distressed is that the investors that purchase them often flip them and cause further distress to the neighborhood. The distress comes from the lack of property maintenance and that some investors will simply walk away from the property entirely.

The Federal Housing Administration is increasingly affected by the schemers in the mortgage industry as the schemers are finding new ways to finance their mortgage loans through The Federal Housing Administration Programs. The Mortgage Asset Recovery Co. which is based in Irvine, California and analyses mortgage fraud has report that The Federal Housing Administrations volume of mortgage loans has quadrupled since 2006.

The Federal Housing Administration which insures mortgage loans has seen increasing numbers of mortgage loans going into default and The Mortgage Asset Recovery Co. believes this is setting the already at risk agency to be at prime for yet another tax payer bailout. The Federal Housing Administration and Freddie Mac currently insure over ninety percent of all mortgage loans in the United States and all are backed by the taxpayer. The fraud is shifting to The Federal Housing Administration and Freddie Mac and it is crucial that these agencies have measures in place to combat the new wave of mortgage fraud or the damage maybe irreversible.

Mortgage fraud previously centered on borrowers qualifying for the mortgages they could not afford as inflated incomes were used as well as inflated appraisals. The issue now has evolved into the mortgage transaction itself. The transactions surrounding distressed properties involve short sales and real estate owned. The mortgage industry is also seeing more Foreclosure Rescue and loan modification fraud resulting from short sales. The loan officers that once sold subprime loans are out in the market looking for employment and new ways to make money suggesting that more likely to fall into the short sale market.

The Treasury Department is expected to release guidelines to streamline short sales and thus will create a push to process more short sales. The push for mortgage lenders to reduce the every growing inventory of foreclosed properties will also increase the risk of more fraud resulting from short sales and Real Estate Owned flipping.

A study in Florida showed that mortgage lenders lost millions as a result of flipping where short sales, fraudulent appraisals, and lack of discloser to the lender regarding arrangements to sell at higher purchase prices were involved. The study revealed a small army of flippers purchasing properties and selling the properties within days. Real Estate Agents and Mortgage Professionals dealt with both the purchase and the sale of all the properties.

Flipping properties is not illegal; however when the seller does not disclose that he has a buyer who has agreed to purchase at a higher price red flags should be going up. The borrower is essentially renting someone else’s funds for a day in order to appear on paper that they have a stronger financial position.

Land Trusts are not illegal; land trusts are organizations that purchase and hold real estate. Short sale websites and get rich quick schemes are advising investors to set up land trusts in order to evade The Federal Housing Administrations anti-flipping rules, which can conceal the borrower’s true identity and can lead to fraud.

Mortgage lenders are starting to require everyone involved in the mortgage transaction from the Real Estate Agents to the Mortgage Broker to sign affidavits that swearing they are not involved in flipping and that no one else is involved in the sale.

Fraud is still going on however The Federal Bureau of Investigation has increased its fight against the scammers.