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FLIPPING HOUSES IS
NOT
ILLEGAL or IMMORAL
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. Surely 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."
•-•-***************************
Respectfully Submitted
Josie
Cory
Publisher/Editor
TVI Magazine
TVI
Magazine, tviNews.net, Associated Press, Reuters,
BBC, LA Times, NY Times, VRA's D-Diaries, Press
Releases, They Said It Tracking Model, and
SmartSearch were used in compiling and ascertaining
this news report.
John Adams is a broker and investor. He hosts
the "John Adams Radio Show," a call-in program
dealing with home ownership and real estate, airing
from 1 to 3 p.m. Saturdays NewsRadio 640 (WGST).
For more real estate information or to make a
comment, visit www.money99.com.
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