Want to invest in a new condo with a guaranteed cash flow? Sound too good to be true -- it may be and it could be you're looking at the latest loan fraud scheme on the market.

Freddie Mac calls it the condo conversion bailout scheme. It involves several parties -- and they're not the usual suspects of seedy eyed, cigar smoking guys working in low-rent, back alley office space. It may be the condo developer itself.

Freddie Mac, one of the country's largest providers of mortgage money to banks and lenders, says the way these schemes work is that a promoter of these deals will typically target investors with excellent credit who are seeking out a "no risk" investment opportunity, with no or little money down.

As a condition of the sale, the buyer agrees to a contract that provides a mortgage more than the property is worth. The excess money is then credited back at settlement to the buyer who uses it for whatever he wants, even to make monthly payments.

Another party to the scheme is an appraiser who then provides an appraisal with ample value to substantiate the mortgage amount.

The investor may or may not understand what's going on, but it's all designed to fraud the lender or bank of money they would not otherwise loan to the borrower on a property that's not worth the value being proposed.

The birth of the scheme came from the period when many apartment buildings were being converted from rental units to condominiums, then the market sank, leaving the developer with too many units, and no buyers. Instead, he then creates this paper castle to fund the incentive plan, provide more cash than what the condo is worth, and then draw renters to start paying for the mortgage payment.

For more information on this emerging fraud or other schemes, visit FreddieMac.com and enter keyword: condo bailout.

Published: July 2, 2008

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