Could today's seductive conditions in the housing market — severely marked-down prices, record low interest rates and hundreds of thousands of foreclosures waiting to be resold — be breeding new generations of the very practices that led to the crash?
In an ironic twist, there are signs that the wreckage left over from the housing bust may be reigniting dubious real estate schemes and fraud. According to researchers:
•Property flippers are back in action in places like south Florida and Las Vegas, where condominium prices crashed but are now appreciating again in some areas.
•So-called floppers are defrauding banks by hijacking short sales at prices below what legitimate buyers are willing to pay. In these schemes, realty agents obtain fraudulent appraisals to persuade banks to sell houses at below-market prices to investor groups. The investors then flip the houses at fair market prices to ordinary home buyers and split the quick profits.
•Creative "credit enhancement" companies are "renting" investors the bank account balances they need to demonstrate to lenders that they have the financial wherewithal to qualify for a mortgage. The accounts are real, but they don't belong to the loan applicants who claim them. Account names are assigned to applicants — who pay for the service — but they are never allowed access to the money. When mortgage underwriters check to verify the deposits, which are in reality fraudulent sub-accounts, they are told the money is in the name of the loan applicant.
•Investors are hoodwinking lenders into giving them low down payments and rock-bottom interest rates by lying about their intentions to occupy the property they plan to buy as a principal residence. Some investors consider such dissembling nothing more than a fib, but in reality it's bank fraud. Researchers at the Federal Reserve Bank of New York have documented that widespread falsehoods by investors about occupancy played a major but previously unrecognized role in the real estate bust.
To Ann Fulmer, a former white-collar crime prosecutor who is now a vice president with mortgage fraud analytics company Interthinx, this amounts to a "past is prologue" situation. The market conditions are ripe for a reprise of some of the worst behavior of the boom and bust. Her firm's latest study of mortgage fraud nationwide, covering loan origination and other data from the third quarter, found that applicants' dishonesty about their employment and income was up 9% from the same period a year earlier and 50% from the third quarter of 2009. The reason: Borrowers increasingly are falsifying W-2s and other records to meet the tougher debt-to-income thresholds lenders adopted after the bust and recession.
Interthinx works with major mortgage lenders to spot fraud and has access to vast loan application databases, credit bureau data and other information, and runs it all through proprietary models to establish estimates of fraud risk. For example, when an applicant claims to be buying a home as a principal residence, Interthinx pulls credit bureau files and public records and may find that the applicant already has other homes listed as principal residences. The anti-fraud systems also spot cases in which buyers apply to multiple lenders for the same property.
For the sixth straight quarter, the states that Interthinx ranked riskiest for mortgage fraud are the same that experienced the most explosive booms and the most crushing busts between 2004 and 2008: Nevada, Arizona, California and Florida. California alone accounted for half of the 10 riskiest metropolitan areas in the most recent rankings. Miami-Fort Lauderdale and Cape Coral-Fort Myers, Fla., are high on the list as well. Metropolitan Washington, which had been ranked sixth in fraud risk earlier this year, dropped to 24th place in the most recent study. San Jose saw a 16% jump in "identity fraud" schemes, in which loan applicants get new identities and credit histories good enough to qualify them for mortgages.
Distributed by Washington Post Writers Group.