Crooked buyers of foreclosed real estate cost banks hundreds of millions of dollars and play havoc with property prices, according to CoreLogic, a California real estate analysis firm.
Tim Grace, a vice president with the firm, helped organize a national conference on mortgage fraud in Atlanta this week. CoreLogic's analysis of more than 7 million loan applications and sales nationally from 2005 to 2010 flagged one in every 24 loans as suspicious, along with one in every 53 short sales [when a homeowner gets a lender to all a sale for less than what is owed on the house]. Fraudsters manipulate information about a home to unnaturally depress the price, then use tricks from using a straw buyer who does not plan to move into the home to more common scams of lying to banks about income or debt to buy foreclosed properties. Then the fraudsters quickly sell the house for its real worth.
Grace took a few minutes Thursday to talk to The Atlanta Journal-Constitution about mortgage fraud's growth and how fraud affects an average, honest homeowner.
Q: Your numbers show that mortgage fraud dipped after 2005 but rose 20 percent starting last year. What caused it to go up?
A: Remember, the number of subprime programs is where fraud was sitting initially. A lot of those companies went out of business, and lending practices changed substantially. ... What happens is when you change the lending program, the fraudsters need a bit of time to retool. What we saw with that dip was a change in lending programs, which deterred the fraudsters and reduced the amount of fraud in the industry. Once fraudsters are able to adjust and start doing fraud in prime borrowing mortgages, you saw it begin again. Fraud doesn't go away. Fraud just changes.
Q: Why should an average, honest homeowner care about mortgage fraud going on in their community?
A: Let's look at it from the point of view of someone by saying the house next to me is going into short sale, and one three doors down and one five doors down. If all three are subject to short-sale fraud, they are going to close at less than market price. So it is devaluing your home. And then when it sells again at a higher price, what happens is it increases in value suddenly. And comparables [comparing prices of nearby homes for tax and valuation purposes] are all over the place. And what is really happening is that the bank does not really know what the true value of your home is.
Q: What questions or topics came up at the conference this week that surprised you?
A: The hot topics, there were two. There was short sales. [The number of short sales has tripled to about 60,000 nationally in three years.]
So what typically causes fraud to increase is an increase in the product. So there are more short sales available, so fraudsters will target that. If business is driven to refinancing, they will target that.
The other thing that was a hot topic was settlement agent fraud. What they are seeing is when you have a house closing, you wire your money to a closing agent [typically an attorney], and the agent is responsible for paying off all the liens on the property. We are seeing a new phenomenon of the closing agents absconding with the funds. The lien on the house doesn't get closed. ... The lender is ultimately out the money.
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