Lender Fraud - A Significant Factor In The Sub-prime Lending Meltdown?
- Date: 2007-05-22 - Word Count: 393
Share This!
Appraisers throughout southern California are currently discovering hundreds of fraudulent real estate transactions. These transactions are all easy to spot because they're a matter of public record.
The most common type of fraudulent transaction recently is the ISAC scheme (Inflated Sale and Crash). This type of scheme involves cash back at the time of closing to a third party. To accomplish this, the purchase price has been inflated 10 to 30% above market value. When this type of transaction has been perpetrated it is readily apparent, for example you'll see a property listed at $500,000 for several months then sold with a final purchase price of $600,000, with no down payment. The seller is paying the difference, in this case $100,000, to the buyer at closing.
Now you may ask, "How can this be possible?" During the last year, with the number of transactions occurring declining many lenders relaxed their standards for borrowers (no secondary review of appraisal). This created an ideal environment in which these fraudulent transactions could thrive, since the key to these schemes is the appraisal. Every one of these sales required a fraudulently inflated appraisal.
Federal and state investigators have been overwhelmed during the last 15 months due to the sheer number of these types of transactions. The primary parties involved in these fraudulent sales are the selling agent, the appraiser, the buyer, and a third-party through whom the money is funneled. All of which will be subject to prosecution. In this type of investigation the listing agent and seller are also typically considered co-conspirators.
When a transaction of this type closes, the buyer has achieved their objective (cash back at closing). The end result of this is that once the transaction closes the buyer has no motivation to make any payments on the property because they have no money invested. The loan quickly goes into default and the lender ends up foreclosing on a home worth 10 to 30% less than the fraudulently appraised value.
In conclusion, there are new schemes consistently popping up to take advantage of changes in the real estate market. There are many victims, not only the lender but people unknowingly involved, as well as the stability of the real estate market and the communities in which these fraudulent schemes have taken place. The only defense is knowledge and relationships with professionals you trust to make the right decisions.
The most common type of fraudulent transaction recently is the ISAC scheme (Inflated Sale and Crash). This type of scheme involves cash back at the time of closing to a third party. To accomplish this, the purchase price has been inflated 10 to 30% above market value. When this type of transaction has been perpetrated it is readily apparent, for example you'll see a property listed at $500,000 for several months then sold with a final purchase price of $600,000, with no down payment. The seller is paying the difference, in this case $100,000, to the buyer at closing.
Now you may ask, "How can this be possible?" During the last year, with the number of transactions occurring declining many lenders relaxed their standards for borrowers (no secondary review of appraisal). This created an ideal environment in which these fraudulent transactions could thrive, since the key to these schemes is the appraisal. Every one of these sales required a fraudulently inflated appraisal.
Federal and state investigators have been overwhelmed during the last 15 months due to the sheer number of these types of transactions. The primary parties involved in these fraudulent sales are the selling agent, the appraiser, the buyer, and a third-party through whom the money is funneled. All of which will be subject to prosecution. In this type of investigation the listing agent and seller are also typically considered co-conspirators.
When a transaction of this type closes, the buyer has achieved their objective (cash back at closing). The end result of this is that once the transaction closes the buyer has no motivation to make any payments on the property because they have no money invested. The loan quickly goes into default and the lender ends up foreclosing on a home worth 10 to 30% less than the fraudulently appraised value.
In conclusion, there are new schemes consistently popping up to take advantage of changes in the real estate market. There are many victims, not only the lender but people unknowingly involved, as well as the stability of the real estate market and the communities in which these fraudulent schemes have taken place. The only defense is knowledge and relationships with professionals you trust to make the right decisions.
Related Tags: home loans, interest rates, real estate market, buying a home, first time home buyers, selecting a mortgage, adjustable rates, sub-prime lending
Co-written by Randy Nathan and James Dedolph, creators of the HomeSniffer website where you can find Homes for Sale in San Diego and the LoanSniffer website where you can find the best rate and terms for Homes Loans in San Diego . Both of these sites are a good resource for information about San Diego Real Estate . Your Article Search Directory : Find in Articles
Recent articles in this category:
- 5 Reasons to Buy Jasper Real Estate
Jasper is a small town in North Georgia and it is growing rapidly. Since North Georgia Foreclosures - Ellijay Real Estate
Ellijay Georgia has always been known for it's outdoor activities and seasonal festivals. Downtown E - How to Deal With Blocked Drains
A blocked drain is an occurrence that happens eventually to all households. You may have experienced - The Benefits of Hiring a Plumbing Consultant
Your dream home may not always be brand new, with fresh paint and home essentials. There are certain - The Worst Mistake You Can Make When You Apply to Rent a Home
A whole new class of people has become renters and potential renters in America during the last thre - State of Individual Real Estate Markets
Everybody is well aware of the hit that the real estate market has taken over the past three years. - Thoughts on Avoiding the Landlord Trap
I've heard several people say they would never invest in a multifamily rental property because they - An Idea to Increase the Bottom Line of Your Investment Property
Are you pretty sure that you've already maximized the income coming from your property? If you've cl - Finding the Value of a Piece of Investment Real Estate
There is a lot of confusion about how much investment property is really worth. We'll look at three - Arkansas Land For Sale - Search Engine Optimization and Your Website
If you have Arkansas land for sale and are interested in advertising it on your website I have a few
Most viewed articles in this category:
- How High Did Home Prices Really Go
The U.S. Census Bureau released data on Tuesday that revealed where the nation's hottest markets wer - New Homeowners Tips for Household Safety
With so many items on their ¡°buying a home¡± checklist, few homeowners take into considerati - Truth About VA Foreclosures
Many people now days are finding themselves out of work and not being able to make the mortgage paym - Avoid Rookie Real Estate Investing Mistakes
When Robert Kiyosaki, author of the Rich Dad book series, bought his first property he was, of cours - Finding The Perfect Roommate On Craigslist
Craigslist, Roommates, and The Concerns Craigslist is "great" when it comes to looking for housing - The Forgotten Secret To Selling Property - Simple, Quick And Cheap
Why spend big dollars trying to get people to drive a long way to see your house, when your best pro - Get Amazing Results Selling Real Estate Online
This is the age of the internet. Why not take advantage of the widespread use of the internet to ad - Dallas Real Estate Information
In the United States, Dallas is considered as the second leading state according to the area. If any - The Largest Private Equity Indian Real Estate Deal
In the largest private equity deal won by the real estate sector, Morgan Stanley Real Estate has inv - Fractional Real Estate Ownership
Fractional ownership of vacation ski condos is growing in popularity. Park City Utah a popular ski t
