San Diego Housing Market News and Analysis
North County Times Mortgage Fraud Article...
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Submitted by JWM in SD on June 4, 2007 - 8:45am
AFter readting this, anyone who still wants to buy a house in SoCal right now is a complete fool...you will be paying a fraud layer that is still too steep. Read and Enjoy...this one is for you Alex buddy.
Real estate scam emerges -- 'Crash and inflate' method generally leads to foreclosure
By: WILLIAM FINN BENNETT - Staff Writer
SAN DIEGO ---- Real estate appraiser Todd R. Lackner's second job as mortgage fraud investigator began when he stumbled onto a suspicious-looking transaction while online one day last March, he said last week.
Within weeks, he was chest-deep in dozens of investigations of suspected mortgage fraud, and was helping federal investigators get the goods on real estate scammers who commit what are known as inflated-sale and-crash schemes, Lackner said.
The term refers to a scam in which a buyer ---- with the help of dishonest real estate agents and appraisers ---- purchases a home for more than market price, receives cash at the closing of escrow and then lets the property fall into foreclosure.
Lackner has uncovered more than 400 such cases, he said.
"I'm trying to nail (them,)" Lackner said. "Some of these people made well over a million dollars in a couple months time." He said he remembers well the day the first case came to light. He was doing an appraisal of a home in San Diego and was checking the sales information on comparable properties, Lackner said.
While checking comparable home prices in the same area, he said, he noticed that one of them had sold for $70,000 more than the listed price. So, he did a drive-by to check out the property, he said. There was no one living there, he said, and the house was run-down, with an overgrown lawn.
He realized immediately that something was wrong, so he went back to the office and began doing research on the real estate agent who had represented the buyer, Lackner said.
It turned out, he said, the man had been involved in the purchase of 17 properties over a period of just a few months. All of the sales were suspicious, because the sales prices were significantly higher than the list prices, Lackner said. Ten of the properties later foreclosed, he said.
"Then, I knew I was onto something," Lackner said. "I said, 'how can people get away with this?' " Those who are caught, tried and convicted will face many years in prison ---- as they should, said Lackner, who has worked as an appraiser since 1989.
Lackner added that he has turned all of the documentation on several real estate agents and their transactions to federal and state investigators or regulatory agencies.
Mortgage fraud 'becoming a problem'
In an e-mail to the North County Times on Friday, an FBI official did not provide information on any specific cases, but said that "mortgage fraud is clearly becoming a problem, requiring the FBI to partner with other law enforcement agencies, regulators and industry.
"Combating significant fraud in this area is a priority for the FBI, because mortgage lending and the housing market have a significant overall effect on the nation's economy," wrote special agent Darrell Foxworth, who works out of the agency's San Diego office.
He wrote that nationally, between 2004 and 2006, the number of reported cases submitted to the FBI and other law enforcement agencies has doubled, going from 17,127 to 35,617. Those cases reflect nearly $1 billion in losses to lenders, Foxworth wrote.
Lackner said he wants to see justice served. The average bank robbery nets the robber about $5,000, and why should crimes that involve much more money be any different, he asked.
"If you look at some of these (mortgage fraud) cases, on one day alone, someone did the equivalent of robbing 10 or 20 banks in one day," Lackner said.
The real estate scams involve unscrupulous real estate agents who conspire with appraisers to fraudulently declare artificially high market values for homes.
Under an inflate-and-crash scheme, for example, an appraiser fraudulently declares the value of $500,000 property to be $600,000. Based on that appraisal, a lender agrees to a $600,000 loan.
The seller agrees to the higher sale price and agrees to give $100,000 cash back to the buyer at close of escrow. Then, when the lender pays the money to the seller, he or she keeps the $500,000 and gives the $100,000 difference back to the buyer and the money is split between the buyer and those who cooked up the deal, Lackner said.
Default follows purchases
Buyers in such schemes typically stop paying their mortgages after a few months, the bank declares default and after a few months forecloses, taking the property back. The buyer's credit may be damaged, but he or she is tens of thousands of dollars richer, Lackner said.
Typically, Lackner said, a buyer will purchase between three and six properties at once.
So, the damage to his credit is the same with four foreclosures as it is with one, he said.
When homes are sold at higher-than-market rates, property values in the neighborhood can increase. But foreclosed homes inevitably are sold at lower-than-market prices, Lackner said. And that has just the opposite effect on real estate values in the area.
A November 2006 FBI report on mortgage fraud said, "appraisal fraud has a snowball effect on inflating real estate values, with fraudulent values being entered into real estate multiple listing services and then used by legitimate appraisers as comparable values for determining market values for neighboring properties." According to the U.S. Department of Treasury's Financial Crimes Enforcement Network, in 2006, California had more than one-third of the nation's suspicious loan activity at federally insured lenders.
Federally insured financial institutions are required to file annual Suspicious Activity Reports that document suspected acts of mortgage fraud.
Officials with the enforcement network recently provided the North County Times with data showing that nationwide in 2006, 37,614 such reports were filed by federally insured financial institutions. Of those, 13, 768, or 36.6 percent were filed by lenders operating in California. By comparison, California's share stood at 33.8 percent in 2005 and 29.9 percent in 2004.
Deals surfaced in last year
Lackner said many of the fraudulent deals surface in mid-to-late 2006, as the real estate market cooled.
He ruffled through a sheaf of papers on a San Diego real estate agent who Lackner said conducted more than a dozen such transactions. The paperwork is in the hands of FBI investigators, he said.
The string of deals stretches from Chula Vista to Escondido, to Temecula and Murrieta. In every case, after sitting sometimes for months on the market at a lower price, transaction records provided by Lackner show the homes were suddenly sold for a price that was higher than the asking price.
An Escondido home that was listed at $495,000 in November 2005 sold for $565,000 in March 2006 and foreclosed 11 months later, sales records show. A Temecula home that was listed for $485,000 to $530,876 in June 2005 sold for $549,000 in March 2006, sales records show. The house went into foreclosure last month.
According to Irvine-based RealtyTrac Inc., the number of foreclosures in San Diego and Riverside counties has mushroomed over the last few years. The company, which tracks foreclosures in the state, reported 13,116 foreclosure related filings in Riverside County between Jan. 1 and the end of April.
Data provided by the company showed that by contrast, the number of foreclosures in that county stood at 4,448 for the first four months of 2006 and 1,940 in the first four months of 2005.The numbers include the initial default notices and recordings of actual auctions and seizures by lenders, a company official said.
Company data showed that San Diego County had a similar rate of growth in foreclosure-related filings. In the first four months of this year, there were 8,922 such filings, compared with 3,587 in the same period in 2006 and 1,340 in the same period of 2005.
Contact staff writer William Finn Bennett at (760) 740-5426 or wbennett [at] nctimes [dot] com.
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