The Pinnacle of Mortgage Fraud

Hat tip Chris, who sent me this Reuters article that highlights the rampant fraud that took place within the mortgage industry as a result of the recent housing boom.  The story highlights the fate of a particular downtown Miami condominium building where nearly 1/3 of the building 640+ condos are now in foreclosure.  The reason?  Straw-buying, cash out at close, mortgage loans that have been abandoned.

First, a primer on how these cash out at close deals work with a straw buyer.  First, you find someone with great credit who is willing to go on the loan in exchange for some money (say $5-10K).  Then you have an appraiser inflate the value of the property as much as possible so that the loan size is as big as possible.  Then you buy the property for the actual listing price and pocket the difference.  Finally, you pay the straw buyer, and then walk away.  The money in your pocket, the unit empty, the loan unpaid, and the time to start all over again.

As the head of funding in our mortgage banking operation is was my job to watch out for these types (and other) schemes that could send a loan repurchase back our way.  I’m sure most banks will tell you that these loans come in from shady brokers, which is probably true; but I am sure a fair deal went through the retail channel as well.

From the article:

“It’s an epidemic,” said Nancy Hogan, a veteran realtor and former head of the Florida Real Estate Commission.

“The cash back, the fraud for profit, is what has been so rampant,” she said.

Florida leads the nation when it comes to mortgage fraud, according to the Virginia-based Mortgage Asset Research Institute, a group that works closely with the U.S. Mortgage Bankers Association.

Ken Thomas, a Miami-based banking expert and lecturer at the Wharton School at the University of Pennsylvania in Philadelphia, said there was little surprise Florida led the country in mortgage fraud.

It stems, at least in part, in the way lenders plowed “easy money” into the local condo market before Florida’s recent housing boom turned to bust, Thomas told Reuters.

“We’re going to see a lot more of this fraud being exposed, especially as these units go into foreclosure,” Thomas said.

“We were the poster child of the housing bubble … maybe we should have expected more of this.”

While subprime lending is going to take its share of foreclosures watch for the Alt-A segment especially in Florida, Vegas, California and other over-heated condo markets to see similar action.  Cash back at close is what fueled Casey Serin’s run and many other ‘investors’ businesses.  When the merry-go-round stopped many of them just walked away.  We’ll be hearing a lot more about this as these properties fall in to foreclosure.