Mortgage Fraud May Flip Congress
Peter G. Miller
OurBroker®
In real estate, flipping is the entirely legal practice of buying a property and quickly re-selling. But now the illegal side of flipping is coming under greater scrutiny, something likely to make big headlines in the next few months.
The Senate's Permanent Subcommittee on Investigations has been looking into illegal flipping and how it may impact FHA lending. To this point, says a top staffer, there has been no decision regarding whether or not to hold full-blown public hearings, however if hearings were held they would occur no earlier than next year because the Congress is in recess until January 24th.
In the usual case, flipping is nothing more than a legal and lawful speedy re-sale. For instance, Smith buys a package of five houses from an estate and immediately sells one at a fair market value. Or, Jones buy a property knowing that Green is willing to pay a higher price.
Where flipping becomes illegal is when the re-sale relies on inflated appraisals, fake documents, sales to straw buyers who represent original sellers, and phantom second loans. In some cases, illegal flipping involves a series of instant sales and re-sales with a single property and an inside group of buyers and sellers. The insiders move the title back and forth among themselves, in each case raising the sale price and thus creating a fictional basis for larger loans.
In recent weeks, flipping has received attention in a number of markets, according to various media reports:
In Ohio, the state Organized Crime Investigations Commission has warned brokers to avoid illegal flips and to report such deals to state authorities, according to the Ohio Association of Realtor Association. (See: "Organized Crime Commission looks into financing scams in Ohio," Ohio Realtor, Nov. , 1999)
More than $100 million was lost to illegal flipping and other tactics in Los Angeles, claim federal prosecutors. One HUD official, reports the Los Angeles Times, allegedly received not only $80,300 in bribes, but also a Ferrari. (See: "39 Charged in Crackdown on Fraud in FHA-Backed Loans," December 16, 1999)
In south Florida, says The Miami Herald, loans worth $29 million were allegedly created by defrauding lenders, according to a federal indictments. The federal allegations claim more than 200 properties were involved. (See: "U.S. alleges $29 million fraud," December 10, 1999)
Tennessee's 1998 Small Business "Entrepreneur of the Year" has reportedly filed for bankruptcy. One lender alleges the award winner used improper flipping to obtain mortgages worth $15 million, according to the Memphis Commercial Appeal (See: "Browns, business file to go bankrupt," Dec. 15, 1999).
So, do we have a deluge of fraud and flipping?
Not hardly.
In the past year some 6 million new and existing homes were sold, and millions of properties were refinanced. Mortgage fraud, whether by flipping or otherwise, is a statistical rarity. We have more-than-adequate laws in place to deal with such problems, illegal flipping leaves reams of evidence, the penalties are severe, and the protective systems evolved by the lending industry work enormously well -- and therein lies a potent problem.
In the past few years there has been a studied effort to produce "paperless" loan applications and instant loan approvals. Such goals surely seem attractive, but in practice they may be either unattainable or attainable only with increased lender risk.
Based on a credit check and complete sale agreement a lender can provide an instant loan approval -- subject to a few verifications. For instance:
Is the house there? Does it rest on someone else's land or is someone else encroaching on the property? Not sure? Do you want to bet $200,000 or do you want to get a survey?
Is the home really worth the sale price? If it looks good on the outside are you certain the inside has not been demolished? To answer such questions you need an independent appraiser -- one who actually visits the property and spends time making a thorough evaluation.
Is the property filled with wood-eating bugs? How do you know without a proper inspection?
Who owns the property? Yes, you can check the local records, but what if the owner is a bigamist, or a deed from 20 years ago is a fraud? Should buyers give up both title inspections and title insurance?
And what about the buyer? Is that W-2 form accurate? Given the potential for abuse, should lenders not review tax returns and speak with employers?
The "problem" with such checks is that they take time and require both paperwork and legwork. Alternatively, the current loan application process keeps both lenders and buyers from being easily swindled, and prevents the very forms of mortgage fraud which are now getting so much attention.
Follow Up
Last week I wrote that HUD was terribly out-of-line in trying to sue gun manufacturers, a conclusion now echoed by an editorial in The Washington Post (See: The HUD Gun Suit, Dec. 17, 1999)
"HUD," says the Post, "is organizing plaintiffs -- the federally funded authorities that run public housing around the country -- for a national class action in which the government itself has no direct role. HUD is doing so with the aim not of winning the suit but of pressuring the industry into pre-litigation settlement. What business does the federal government have, if it is not willing to file a suit on behalf of the United States, ginning up surrogate plaintiffs with a clearer cause of action?"
Not to be outdone, Daniel Mitchell, writing in The Washington Times, says that "The stated reason for the proposed lawsuit is that HUD spends $1 billion yearly on crime control in nearly 3,200 public housing projects and that gun violence contributes to this expense. The administration claims they are not after money, incidentally, but instead are seeking to stop "irresponsible marketing practices" on the part of gun makers. HUD also hopes that the menace of federal litigation will convince manufacturers to throw in the towel and settle the dozens of lawsuits filed by local governments." (See: Trampling the rule of law, December 17, 1999)
"As a practical matter," says Mitchell, "HUD's arguments are absurd."
And, as a nice reminder, Mitchell notes that "HUD is the nation's biggest slumlord, and it is HUD that should bear at least some of the responsibility for the dangerous conditions in public housing projects."
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Question Of The Week
Q: Our lender has provided us with some paperwork explaining how to cancel PMI. We think the lender is wrong. Can our broker tell us whether the lender is acting legally?
A: Brokers assist others in the purchase and sale of real property and certain other tasks, depending on the state where they are licensed. However, it is not within the province of brokerage to evaluate the legality of lender actions or writings. This is a question to be discussed with a knowledgeable real estate attorney.
Weekly Resource
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