Q: Is it
illegal to buy a house and then
sell it quickly at a profit? I
heard that it's against the
law.
A: No, it's
certainly not illegal. It's
called free enterprise. But to
your government, it might look
like flipping.
••--acquired
property is resold for a
considerable profit with an
artificially inflated value,
often abetted by a lender's
collusion with the
appraiser."
•-•-This
fraudulent scam is indeed
illegal, and typically involves a
secret agreement between a
lender, an appraiser, and a
"straw buyer." And it has cost
all of us millions of tax dollars
through fraudulent loan losses
covered by FHA and other loan
insurers.
•-•-Here's
how it works:
••--A
crook buys a house that is worth
$100,000 in a neighborhood of
homes that are all worth about
$100,000. He offers an appraiser
a bribe of $5,000 if he will
produce an appraisal of the house
showing a value of $165,000.
There is a new subdivision nearby
where the houses are selling for
$165,000 and more.
••--The
appraiser selects comparable
sales from just outside the
neighborhood which appear to
confirm that the house has a
value of about $165,000. This can
be done with relative ease,
especially in fast growing
counties.
••--The
crook now calls himself an
"investor" and finds a gullible
person to be his "partner." The
scammer convinces the partner
that if he will use his good
credit to buy this house, the
investor will take over
responsibility for the loan at
closing, and that the investor
will rent the house at a profit
from then on. The scammer makes
it even more attractive by
agreeing to buy the house from
the partner immediately after
closing by giving the straw buyer
a check for $10,000 as a
bonus.
••--This
"straw buyer" applies at a
conventional lender for a 100%
owner occupant loan based on
their existing good credit. The
loan is approved based on the
buyer's credit and the appraisal
of $165,000.
••--The
closing attorney checks title and
finds that the seller does,
indeed, own the property. The
sale is closed, and the scammer
gets a check at closing for
$165,000.
••--He
pays off the appraiser, pays off
the straw buyer, reimburses
himself the hundred grand he
spent to buy the house, and is
left with $50,000 fraudulent
profit on the illegal
transaction. Since the loan is
not in the crook's name, he never
makes a payment.
••--After
several months, the loan goes
into foreclosure, and the lender
later sells it at a discount to
its' true value of $100,000.
••--In
a bizarre twist, the straw buyer
tells several of his friends
about the so-called "investor"
and his ability to produce quick
profits. They all call and want
in on this special opportunity.
The scammer is only too happy to
oblige.
••--A
clever criminal could handle
several of these illegal deals
simultaneously, and close a dozen
or more before the first
foreclosure begins to draw
attention. And if the scammer
were to use some of the illegal
profits to make a few mortgage
payments, this scheme could go on
almost indefinitely.
••--Eventually,
this criminal house of cards
collapses, the scammer moves to
another part of the country with
his illegal profits, assumes a
new identity, and starts all over
again.
••--As
I said, HUD calls this practice
"property flipping." I call it
mortgage fraud.
••--In
an effort to stop the practice,
HUD has issued a new rule for
mortgage lenders effective late
last month. It currently affects
only FHA loans, but may have an
impact on the mortgage
industry.
••--The
new rule, set forth in Mortgagee
Letter 2003-07, forbids approval
of any FHA loan application to
buy a property where the seller
has owned the property for less
than 90 days. When a seller has
owned for less than 180 days,
certain profit limits are
imposed. In addition, any seller
who has owned for less than one
full year may be required to
submit additional documentation
regarding value.
••--The
rule is designed to slow down the
resale process, and make it much
more difficult for scammers to
find gullible buyers who are
looking to make a quick buck.
Unfortunately, the rule opens up
a pandora's box of related
problems, which HUD has chosen
not to address.
••--The
real problem here is not the
length of ownership, but the true
fair market value of the property
being purchased. Surindex.htmely
there is another way to determine
actual value.
•-•-It
appears to me that HUD could
better address the problem by
looking at the lenders and
appraisers who conspired to
defraud the system. A simple
requirement of a review appraiser
and a review underwriter could
stop this fraud dead in its'
tracks, but simple fixes are
rarely employed by
bureaucracies.
•-•-Next
week, we'll look at who gets hurt
by the new rule. We'll also see
who is exempt from it.
•-•-The
full text of HUD Mortgagee Letter
2003-07 can be found as a PDF
file on my website at money99.com
by clicking on "free
documents."
03h
/ Category
Define •
108
-
Money:TVI Magazine focuses its Business News
on currency, financial crimes, scandals,
bankruptcy, hype and personalities. All
are linked to the mechanics of creating a
cash flow and the accounting thereof.
•••
The
new world order for international banking
institutions include the following: a
television camera that records each
transaction, a centralized oversight
accounting board utilizing the EBITDA
accounting procedure, self-regulated quasi
governmental associations and union
establishments, and the laundering of
money via gambling zones O.K.'d by local
governments. United States currency will
change looks as well as its secondary
currency, food stamps and loan guarantees.
We say that Debit Credit Cards are here to
stay. It's good for international banking.
Today's
Puzzle:.
Will the Obama Administration's Stimulus
Package help only "the big boys" or will
it trickle down to the small businessman
and consumers.? Will CHASE stay around or
will your BLUE debit/credit card change
color again? We Preserve The
Moments.
Part
06h
• Acknowledgments ®™© /
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