Market Conditions: Reuters: Mortgage Fraud Escalating in Back of the Yards
We have only briefly chattered about any properties in the Back of the Yards neighborhood which is not far from downtown on the Southwest side.
But like other city neighborhoods, it is seeing its cases of foreclosures.
With the foreclosures, however, has come a new breed- the mortgage fraudsters.
Reuters UK shows just how easy it is to steal over $300,000 from a bank in 2010.
The house on the 53rd block of South Wood Street in Chicago’s Back of the Yards doesn’t look like a $355,000 (227,200 pounds) home. There is no front door and most of the windows are boarded up.
Public records show it sold in foreclosure for $25,500 in January 2009, then resold for $355,000 in October. In between, a $110,000 mortgage was taken out on the home, supposedly for renovations. This June, the property went back into foreclosure.
To Emilio Carrasquillo, head of the local office of non-profit lender Neighborhood Housing Services of Chicago (NHS), the numbers don’t add up. He believes this is a case of mortgage fraud.
“There’s no way any property in this neighbourhood should sell for that kind of money,” said Carrasquillo, standing outside the house on Wood Street in this poor, predominantly black area of Chicago’s South Side. “Even if it was in great condition.”
Carrasquillo has identified a number of properties in Back of the Yards that sold for between $5,000 and $30,000 last year and then came back on the market for up to $385,000. He said property prices are being artificially inflated, allowing fraudsters to walk away with vast profits and making it harder for honest local people to buy a home.
Because these loans are all backed by Fannie, Freddie or the FHA, when the fraudsters walk away with the cash, it’s not the bank left holding the bag. It is the taxpayers who guaranteed the loan.
The neighbourhood has always been poor, but south of the old railway tracks at W 49th St, the housing crisis’ legacy of empty lots and boarded-up homes is evident on every block. There are few stores and services available — in four separate visits for this story, no police vehicles were sighted.
“This is what we refer to as a ‘resource desert,'” Carrasquillo said. “When no one pays attention to an area like this, it makes it easier to get away with fraud.”
Marni Scott, executive vice president for credit at Troy, Michigan-based lender Flagstar Bancorp, says there are virtually no untainted sales in the area. “There are no cases of Mr and Mr Jones selling to Mr and Mrs Smith.”
“We see cases of mortgage fraud around the country,” she added. “But there’s nothing out there that could match the mass-production, assembly-line fraud that’s going on here.”
In 2008 Flagstar instituted a rule whereby any loan applications here and in parts of Atlanta — another fraud hot spot — must be approved by Scott and the lender’s chief appraiser. In a Webex presentation, Scott rattles through a number of properties snapped up for pennies on the dollar in 2009 and then sold for around $360,000.
The property appraisal — compiled by an appraiser who Scott believes never visited the area — showed four nearby comparable properties of around the same age (100 plus years) sold recently for around $360,000. The trick to this kind of scheme is engineering the sale of the first few fraudulently overvalued properties to get “comps” — comparable values — to fool appraisers and underwriters alike.
“Miraculously, all of these properties were all within a very narrow price range,” Scott said with weary sarcasm. “This is a perfect appraisal for an underwriter. If you are an underwriter sitting in Kansas or California it all looks fairly straightforward so you can just hit the button and approve it.”
Using a $5 product called LoanIQ from U.S. title insurer First American Financial Corp called LoanIQ, Flagstar determined the application itself was fraudulent and there was a foreclosure rate in the area of nearly 60 percent. What is more, property prices here spiked 84 percent last year after 44 percent and 26 percent declines in 2008 and 2007.
“No neighbourhood should look like this,” said Scott, who declined the application.
Last April, however, another lender approved a loan application for $335,000 on the same property from the same people.
The FBI has 350 agents devoted to mortgage fraud fulltime out of 13,000 total agents. The FHA is also cracking down on mortgage lenders that do not enforce stricter lending standards.
FHA commissioner David Stevens was appointed in July 2009. Since then the FHA has shut down 1,100 lenders, after decades in which the government closed an average of 30 lenders annually. He says most lenders he deals with are of a “very high quality,” but that “there are still lenders that either don’t have controls in place or are proactively engaging in practices that pose a risk to the FHA.”
Stevens does not expect to shut down lenders at the same rate as the past year, but added “the number will be much higher than the historical average.”
CoreLogic’s Grace said most large lenders have the tools in place to combat mortgage fraud, but admitted he was concerned about some smaller lenders. “The next shakeout of weak lenders will take place over the next 12 to 24 months,” he said.
Flipping, flopping and booming mortgage fraud [U.K. Reuters, Nick Carey, Aug 17, 2010]
If any of these loans were approved by a reputable lender, then the person who approves these type of mortgages should be fired. I don’t care if they are in Kansas City, you could google map and streetview the address to see that its a dump. I hope these type of companies go bankrupt so that lenders that have their heads on straight can succeed.
On a related story Fannie/Freddie/FHA are now pushing back on lenders to make them take back a lot of these fraudulent loans:
Banks Face Fight Over Mortgage-Loan Buybacks
http://online.wsj.com/article/SB10001424052748703824304575435690444377332.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
The government should aggressively push these bad loans back on the lenders who originated them and NOT give any more bailouts to the financial sector. Many financial firms, integral to orchestrating this mess, need to liquidate and dismiss all employees.
and whoever at freddie/fannie who bought this without doing some due diligence should also be fired
the way fannie and freddie are run, this type of behavior will lead to a raise and/or a promotion.
just look at the trail of destruction that is Franklin Raines’ career.
When a fraud like that is your boss, what you see here will be par for the course.
Most underwriting is about fraud prevention and not credit risk. Fraud is a HUGE problem in residential real estate and is often the most overlooked/glossed over cause of the housing bubble.
When you get a mortgage and complain about how much of a pain in the ass it is with all the paperwork, etc just remember how much fraud goes on and then you will understand why banks act the way they do. They don’t care who you are and treat everyone with suspicion.
Regarding, Fannie/Freddie and buy backs; this is also why underwriting is such a pain. As I have stated before, banks do not make mortgages because they make sense, they make them because they can sell the loans off. Often times, what makes sense is not a loan that can be sold which is why you hear the stories of millionaires not being able to get simple mortgages over BS technicalities while Joe Sixpack working the cash register at 7-11 can get a loan with no issues. Those technicality makes the loan worthless in the secondary market for the millionaire regardless if the borrower could write a personal check for the mortgage, but Joe Six Pack’s mortgage can be sold for 400 basis points.
The banks are being bombarded with buy backs over the most inane reasons which is the issue. While there is some fraud all parts of the chain are trying to push the bad loans down the hill regardless if the originating entity was a party to fraud or not.
Basically, when loans go into default, everyone is looking for a way to blame it on someone else even if the default was just naturally occurring – ie, guy loses job, divorce, etc. When reviewing the file, they will find out that someone used blue ink instead of black ink and then use that as a reason to force a buy back even if it had nothing to do with the default in question.
Its too bad there are people in the world who turn to wholesale blatant fraud operations to make money. Who does this? Gang bangers? Russian mafia? Former mortgage brokers? White collar criminals?
HD:
It is everyone – loan officers, realtors, appraisers, attorneys, title agents, consumers, developers, etc. Usually, multiple people have to be involved to commit the type of fraud stated in the article.
Because real estate involves a lot of money and has relatively low barriers to entry, the propensity to commit fraud is very high. In addition, you would be surprised at willing borrowers will lie to get a mortgage. People who under most circumstances are honest god fearing folks will think nothing of lying to a lender to get a mortgage – occupancy fraud, over stating income, etc.
Well, someone on this blog finally wrote something about an area south of Cermak. Hurray! But, of course, it’s bad news … boo. I live in McKinley Park and have lived mostly on the near-Southwest Side for a good 13 years now. To me, it seems like your dollar goes a lot further down here, but no one on Crib Chatter seems interested too much in any properties not already in neighborhoods that have “arrived.”
“When you get a mortgage and complain about how much of a pain in the ass it is with all the paperwork, etc just remember how much fraud goes on and then you will understand why banks act the way they do”
Russ, I think what is frustrating is that these poor folk go through SO much (as you write) and there is STILL blatant fraud. The whole system is f#@cked up.
The same goes for credit scores – while I understand the way the score is calculated, the fact that they don’t take into account personal assets, income, etc. is ridiculous – I completely understand why they do what they do, but the consequences for the individual can be devastating.
watch this video to get your blood boiling this morning…
http://www.youtube.com/watch?v=hxMInSfanqg
Also, fraud has absolutely NOT increased, I don’t care what the studies or articles say. What is going on is that everyone paying more attention to fraud so they are catching it more often.
During the bubble, everyone turned a blind eye to mortgage fraud. People often complain about the stated loans (liar loans) products but they served a purpose and were good products for self-employed borrowers. However, what banks didn’t understand was how much people would take advantage of the system and use the products for fraud. Combine that with a lack of common sense underwriting, you have a recipe for disaster. They gave an inch and everyone took a mile essentially.
Banks tried to make underwriting easier for well qualified borrowers – stated products, AVMs, low doc, etc but what they got instead was a heaping of fraud. Now they trust no one.
It’s terrible to steal in this fashion from Freddie and Fannie. On the other hand, it’s perfectly OK and moral and, most importantly, “smart” to make the “rational” decision to simply walk away from a property that is underwater, regardless of whether one can afford it.
well played by the criminal, well played!
“Its too bad there are people in the world who turn to wholesale blatant fraud operations to make money.”
Given the risk/reward ratio just about anyone who was in the know who wanted to get rich quick I’d say. Seriously when the risk/reward is this skewed, it really is just a business decision.
You should NEVER rely on morality as a check for unsound business processes. That’s like blaming your dog for eating your burger while you stepped out for a few. Morality should never be substituted for good process discipline to prevent the fraud from occurring in the first place.
The way to ensure good process discipline is to allow those in the business ecosystem who did not exercise good judgment to deal with the fallout of their flawed business processes and pay for them. If they go out of business it will send a strong signal to the remaining players to get their collective houses in order.
Were it not for Fannie, Freddie, FHA and other government-sponsored and supported assists to “affordable” home ownership, we would have about 80% less fraud and we’d have been spared the incredible asset inflation of the past 30 years, as well as the rampage of bad lending and ensuing financial disaster.
Get the government out of the housing market altogether. Sunset HUD, FHA, and the GSEs. Home ownership is not an intrinsic good, or inherent right. Neither is a premium rental apartment for poverty rental rates. The whole smorgasbord of government housing programs, from low-income projects to Section 8 to FHA & VA, finally to FHA loans with 3.5% down for $3M apartments in Manhatten, have enriched mostly lenders, homebuilders, banks and other industries dependent on the housing market while incentivizing flipping, bad lending, and slumlords, driving up rents and housing prices beyond affordability for those who don’t participate in government programs or get government-backed lending.
“Get the government out of the housing market altogether.”
I couldn’t agree more…. now just wait. In about 5 years, people will be saying the exact same thing about healthcare (although they will be more passionate because of the consequences are obviously much more personal and important than housing).