Wondering about the fraud next door

Yesterday's post about the possible loss of $6 trillion in housing wealth brought me a small flood of e-mail. One of the most provocative notes came from an old friend in suburban Phoenix who poses the question: How much of that $6-trillion bubble was created by outright fraud?

He writes, "I haven't seen articles surrounding the common fraudulent scheme where mortgage brokers worked with a home appraiser to overvalue homes, then direct owner to sell home to a pre-identified buyer at hundreds of thousands over market value with large kick-back from seller to buyer at closing.

"This happened with great frequency in my former neighborhood just north of Phoenix. In fact, three homes out of six homes on my former street are in foreclosure due to this scheme. An example: I sold my house in Dec. of 06 for $815K (legitimate sale and value at the time at height of price boom). Five months later the same house sold for $1.2 million. The people who bought it from me sold it to an "investor" at the $1.2MM price.

"We bought from builder in '03 for $493K then sold in Dec. '06 for $815K. My buyers never moved in but did remove expensive window coverings, outside landscaping fountain and custom-made iron entrance gate then did the kick-back sale scheme for $1.2MM. Their buyer never moved in either.

"The house is now in foreclosure but was recently listed (while in foreclosure) for $534K. It is now set to go to auction. What I wonder is, do the banks who hold the mortgages know the last buyer received the kick-back? Are they going after the money and prosecuting? This happened all over our community. The buyers would never even move in to the properties. They've been sitting empty for a year and a half with no landscaping and other maintenance being done on these upscale, gated golf community homes.  Much of the sky-high valuations in the Phoenix and Scottsdale areas were an illusion as this scheme was rampant."

"What angers me most is that innocent buyers in the neighborhood would have been shown these phony sales as 'comparables' by their Realtor and may have overpaid for a home in a legitimate sale but have now lost a great deal of value as these 'comps' weren't real. I would imagine it took place in California and Nevada as well."

Fascinating note -- and frustrating, too. I've seen no evidence that prosecutors are going after this kind of fraud in any meaningful, systematic way.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Burbank Airport Sunset, submitted to Your Scene at latimes.com by dragonfly68.

Comments

[m]

This story sounds similar to a story I heard up in Fresno. There a college student making 12K a year, made a deal with his mortgage broker and real estate agent to say he made 12K a month and bought a 750K house. The kid refinanced soon after closing for another 150K or so. Then a "family friend" moved in and split the refi money with the student. The family friend lived in the house for close to a year before foreclosure, never once paying a mortgage payment, the college student got forclosed on because he was the "owner" and the family friend walked away with 75K and a free year of rent.

However, I have it on good authority that this case is being prosecuted by the local authorities.

[peter m]

IMHO the entire LA Re market is based on criminally overappraised valuations on properties, both for high and low end areas. Now that the worm has turned folks suddenly find thenselves upsidown by as much as half a milion on westside properties. They may be unwitting victims but it does not alter the fact that westside propertys were overpparaised by as much as a million or more .

I just saw someone on another blog post up a property in Upscale Rancho Park which dropped in value by $750,000 dollars from 2.3 to 1.6 million, the current list price. large 5/4.5 4000 sq ft mansion but in a shoddy location off busy Olympic. IMHO still 1 million $ overpriced

This is an example of what criminal overappraisals will do to westside properties.

[Brad Neal]

these fools need to do some time in the pen

[firesale]

The U.S. Attorney General, together with the
state attorney generals, need to set-up a
special powers branch to investigate and
seize RE fraud assets with RICO-style
enforcement.

Grab or freeze everything in sight then set
court dates in the distant future. This would
be a great way to get back the money the
government (through honest taxpayers) is
shelling out in this crisis.

In the story above, there should be at least
three people (or their corporate covers) on
one street alone, who should have all assets
frozen, or repossessed, immediately.

Let's populate skid-row with instant paupers
who committed fraud during this Ponzi boom.
Just let them keep enough for a down on a new shopping cart.

[Sunking]

As a realtor in the Palm Springs/Palm Desert/ La Quinta area, Ive seen many cases of widespread fraud. Same scenario....I will see a home sell for what seems an insane astronomical price...and sure enough it will sit empty and end up in foreclosure and finally get listed as an REO at a huge loss to the bank. When I dig a little into the property histories of these foreclosures I usually find a realtor or lender involved....this problem is widespread.....the banks need to take some action....it's easy to spot.

[tew]

This post gets to how upside down the media/politicians are about housing. Renters should get the most sympathy. And though most posters to this blog would seem to be of the "let them burn" variety, I think many would agree that next in line for any sympathy or assistance would be those who put real money down.

Somebody that put 20% down two years ago, didn't refi or do other tricks, and still lives in the home got screwed. They may be called "victims" in some real sense of the word. Ignorant, yes. But greedy or criminal? Very unlikely.

[Joseph...The Real Estate Guy]

The percentage of people committing fraud is minuscule.
But the few who do, do lots of it.

When caught, most of these guys get incarcerated for 25-30 years.

I think that should be changed. Catch more and give them less prison.

For example:

1 guy gets 25 years

Now you prosecute 25 guys and give them a year each and you will see a whole lot less fraud going on.

Who would want to go to prison?

The government only catches a few. For the most part, only those who commit a lot of fraud.

[IToldu2CashOut]

Just because you're a criminal or an idiot doesn't mean you shouldn't get a bailout.

We need to bring the bearstearns golden parachut to the masses.

Hillary and Frank get it, why don't I? Something must be wrong with me, the media says I should feel bad, but I don't.

[Laker]

The whole SFV is based on fraud of every kind. I listed couple of weeks ago (april 12) a similar case of fraud, check my blog, it has full details.
I'm also seeing many cases of "straw" buyers that unload a property from a flipper and then disappear. One such case happened to my best friend renting a house in van nuys. His landlord was actually a nice guy, and told him that he could live the last two months without paying him....Then we both checked propertyshark, and found that the house was sold to someone about 4 months before that. Needless to say, my friend never seen this new buyer...Last month, we found that the house received a NOD, and it is safe to say that the new buyers never paid a single mortgage payment and this house is going to foreclose pretty fast...The fraudster here is the SELLER that managed to unload the house, without a ding or foreclosure, and also got some money from the bank's new mortgage. There is only one loser - bank. the buyer....probably does not exist, or lives somewhere in his native country in Europe/asia.
And as it was said in the article; "innocent buyers in the neighborhood would have been shown these phony sales as 'comparables' by their Realtors" Since many could actually buy this inflated houses, they did and now find themselves upside down just because they trusted the market and their Realtor...All this 300% appreciation is such a huge fraud, it is hard to believe...
Ok, so in LA income/price ration will not be 3, but certainly not 10. Now, more than ever, I'm convinced that housing in LA is coming back to normal levels of about 4-4.5 income tops!

[Liv Gonzales]

During the boom, there are signs by the freeway - Wanted , real estate partner. It was so obvious , they were looking for first time home buyers so they can split the money after. I personally know someone from work, He is from Michigan, came to the US, bought a house. His Chinese wife never joined him in that California home. He bought, then sold after five months.
A real estate agent friend of mine, likes it a lot when a republican is on board. She said, the republicans makes it easier for everyone. Easier for anyone who knows the trick of the trades, I guess. There's no control, that's what you mean by smaller government.

[happy jack]

I overheard this at a party, the guy who was doing the talking is well he was a very rich playboy.

I call it the sell it to yourself program

2001

You put a S-corporation together, (I think he said S-corporation with hundreds of shell companies underneath it's umbrella) anyway you find investors, use their money to buy properties, but you run the show.

Cost is around 500k to start up the company with century city offices and a full time staff for the first year.

2002

You start buying the estates at 5-10MM a pop spend 10% of the selling price on remodeling and you relist them at a 30% increase and sell them to one of your companies within weeks, creating a false sense of a demand.

2002-2007

after 6 months to a year, you again put the estates on the market for a 50% markup and a sucker comes along, you take 3% off so that he thinks he got a great deal.

You keep on repeating the cycle every year.

All was well until 3 months ago, the buyers vanished, he was complaining that they are to internet savy now, they wanted 50% off of his listing prices, so the cat was out of the bag.

2008

His company currently owns 40 highend estates, no buyers in site for his prices, if he sells them for 50% off, he will lose everything, his investors will sue and he will end up in prison, or worse, investors sure get testy when they are losing tens of millions of dollars.

So he set it up so that the corporation pays out 10MM a year in taxes, maintence for the next 5 years for the properties, some will be leased out, some will stay on the market, others will be taken off and he is now gone on a very very long vacation overseas, he has a special passport where he can stay anywhere in the world as long as he wants oh and the main offices are now closed, he has a very small staff managing things while he is away.

Now although he was dishonest at least he is trying to save the company from going under, he figures that by spending 50MM over the next 5 years he will come out ahead 500MM when the estates sell for or close to the prices he wants.

He knew the market would drop, just not this fast.

He thinks it will be down for a 4 years and then it will skyrocket back up to where it is now in the 5th year.

I think it would be more like 10 years before a ponzi scheme could ever happen like this again.

I am sure there are many more like him out there.

So my conclusion is that his business model has been copied and redone over and over again for the last 5 years in LA.

[peter m]

These are a few selected areas, maybe 20-30% of the total inner ghetto zips and the ones i have some familarity with. My inclusion of these particular ones is because these are where mortgage fraud was running most rampant, and these contain some of the nastiest gutted hoods in america. Bell and Maywood are for all intents and purposes controlled by the 18th st gang lock stock and barrel.
Where mort Fraud activity was the highest u will see the steepest drops in YOY drops.
La inner city runups were based entirely upon fraudulent appraisal and subsequent 300-400% markups. have been so since about 2005. They should revert back to under $200,000 when the smoke clears.
]
These are from LA ZIP chart Feb 2008 dataquick:

Bell 90201 5 $420 -11.6%
Huntington Park 90255 5 $385 -16.3%
Inglewood 90301 2 $400 -22.3%
Inglewood 90302 4 $450 -25.6%
Inglewood 90303 5 $295 -49.1%
Inglewood 90304 1 $417 -16.2%
Inglewood 90305 3 $469 -20.6%
LA 90011 5 $360 -18.2%
LA 90018 4 $343 -43.6%
LA 90047 17 $350 -26.7%
LA/View Park/Windsor Hills 90043 8 $363 -30.3%
LA 90062 9 $380 -23.4%
Long Beach 90805 17 $378 -16.3%
Maywood 90270 2 $325 -29.3%
Norwalk 90650 30 $352 -27.8%
Pacoima 91331 17 $320 -37.9%
Paramount 90723 9 $260 -46.8%
San Fernando 91340 2 n/a n/a n/a n/a n/a n/a
Wilmington 90744 5 $355 -20.7%
Winnetka 91306 11 $360 -35.7%

Just a few examples: For pacoima 91331 during peak of bubble back in early 07 i saw SFH's going for $700,000- $900,000 Do U know Pacoima? Anyone here! It is one of nastiest polluted rundown ghetto stews in LA. These prices were pure fraudulanet transactions, 100%.

Saw same S*t in 90011 just south of dwtn. It is the nasty polluted 4th world tenement zip just south of LA dwtn. Tons of Criminal overappraisals & RE transactions for garbage homes selling for over $500,000 in this EPA superfund zip, basically looting the naive lenders and securitation market.

[Darren]

Its no secret that their was fraud, you only had to go to one of these Robert Allen seminars to see that, i attended one in Anaheim that was supposed to teach you the so called secrets and they actively encouraged getting friendly with all the poeple in the chain of selling a home with particular reference to the appraiser !! needless to say you learnt no secrets as it was really just a way to sell you a high end Vegas property - im amazed that the authorities havent gone after this sham artist and his cronies - remeber he was the one touting no money down

[lefty]

guys you gotta wonder what bank would do that lol ! but you know the math: bank loss = your gain in amazing metro L.A.!! make some offers today and then have some pinot noir; enjoy your shopping!

[peter m]

This is a reprint from a post i did back on march 08 on another blog:

The City, state, Fed mort fraud investigators simply lack the manpower and resources to investigate more than a miniscule fraction of all the mortgage fraud out there. There was a tremendous amt of teardowns , quick refurbishmnets, buyin up and doing quick cheap fixs of old SFH s, or cramming cheap twnhome/condo units on former wasted weedy plots which was a prominent feature of the inner city crapburgs last several tears. There will naturally be accompanying fraud in the transactions.
The massive fraud rings prosecuted in Temelula- riverside, and recently in Beverly hills, were in middle class/upper class areas, and investigators are more likely to go after mort fraud rings in these largely safe areas because the investigators are usually pasty-faced cubilcle workers who don't want to dirty their fingernails or shiny Gov't- provided vehicles going into nasty grimy graffitited trashed-out impoverished ghetto pockets to investigate RE fraud.

This is why $500-700,000 RE loans were given out like candy in extreme ghetto parts of LA, then sold and packaged to wall st . The lenders never bothered to see exactly i n what neighborhoods and what types of homes were given the 100% toxic loan using faked/lier/ stated income . Later on the buyer(s) simply walked out or resold to family members/ relatives or straw buyers and ran up another $100,000-200,000 on the sale price. Plenty of fraudulent equity extracted from the ignorant pasty- faced lenders/bankers in their isolated cubicles in South OC or some glass tower in NY.

[RUKidding]

"This post gets to how upside down the media/politicians are about housing. Renters should get the most sympathy. And though most posters to this blog would seem to be of the "let them burn" variety, I think many would agree that next in line for any sympathy or assistance would be those who put real money down."

Why should renters get the most sympathy?

Most don't want to own a house, and the few who do want to own a house only had a to wait a few years for the prices to fall. And during those years they were able to accumulate more money for a down payment.

Saying that renters should get the most sympathy is like saying the people driving past an eight-car pile up on the freeway twenty minutes after the crash should get the most sympathy because traffic is slow.

[orcadrvr]

A common thread in this real estate bubble, as well as the S&L crisis in the 80's, was reliance on bogus appraisals by lenders. It seems as though many appraisers were susceptible to pressure by loan brokers to "hit the numbers", resulting in exaggerated or even fraudulent appraisals.
Couldn't this be avoided in large part by requiring loan brokers to go through a government agency (or even a lender's industry group) who would choose appraisers at random, without regard to "hitting a number"? There should be absolutely no contact between appraiser and loan broker until after the appraisal is completed.
This might eliminate the urge by appraisers to placate loan brokers to ensure future business referrals, and it might make it impossible for the brokers to pressure the appraisers.
It would seem to be in the interest of the banks who are lending all this money to ensure that appraisals are conducted by people who don't have a direct financial outcome in the results of the appraisal.

[Mike S]

Talk to OCRenter at BMIT.

He apparently tried to get the FBI interested in investigating this exact scheme, and several others, in San Diego (North County). The FBI's reply was between investigators and prosecutors there weren't enough resources to make it worthwhile investigating. (or words to that effect)

Mike S.

[John]

I think the solution is that people who sold their houses during the boom should have to give back some of the money they walked away with!!

Peter, you made 400K! Give back 200 and we will be happy..

Yah, I am a commie...

[RZ]

These are specific cases of fraud, but I'd argue that over-inflated prices in general are a case of fraud. Hosues for sale are often appraised at the highest value of a similar home in the area - regardless of whether the other home has more square footage, better electric wiring, better landscaping, etc. This practice constitutes a sort of fraud by overvaluing a retail product.

[left of lefty]

anyone from zillow reading this blog? here's a business opportunity for you: use your pricing model to detect this type of fraud and market your serivce to lenders.

while everyone accuses your zestimates as being inaccurate, at least they're *consistently* inaccurate. :) so you should still be able to detect sales price anomalies using statistical techniques.

just remember to send me my 'finders fee'. :)

[anon]

The actual direct fraud may have been "minuscule", but its effect was much larger.

How many honest but misguided buyers paid prices based on fraudulently inflated comps?

Deregulation (as we Californians well know) has a downside.

[Steve]

Here is a possible solution, bank morons use the web and new web based appraiser services for an objective appraisal. The banks should have their own direct employee appraisers, not fee based. The current sturcture of the appriasal process will continue to be corrupt until they make these changes. The appraiser is a whore like the lender broker and realtor, bottomline no one gets paid until the deal closes. The appraiser knows they must qualify the house or they do not get called back by the other whores.

[$200k+ ab$olute ba$tard]

I'm fed up.

I just sent out $30k in tax payments. Then got slapped in the face with no rebate check. Living in a too-small condo purchased before the bubble. Unwilling to venture into the ponzi scheme that has dominated LA real estate since 2003. Pissed off about the taxpayer financed bailout (yes, bailout) of Connecticut investment bankers via Fed assumption of risk in the Bear Stearns debacle. So tired of financing other people's lives.

So, sorry for you, every new job I create will be in the cheapest location I can find. Not California, not the US. China, India, Vietnam. You'll have to depend on the Hugo Chavez contingent in Sacramento to find jobs for you from now on. Trust me it is not worth the extreme headaches to start a jobs-creating business in the state of California...But first, I'm headed to Europe for a nice long vacation.

You can clean up your own damn mess.

[RadioManTodd]

A friend of mine just bought a house (3 bed, 1 bath, single family home, 1038 sq feet near the airport in Burbank) that this had happened in. The house was purchased 5/12/06 for $536K. Some minor renovations (most without permits) were done probably totalling $10K - $15K in cost, and then sold 10/16/06 for $680K.

How does a property appreciate $144,000 or 27% in just 4 months? It doesn't. Not unless some fraud has happened.

Everyone is in on the deal. The agent, the mortgage broker, everyone. Its happening less and less now, but the after effects are still rippling..... to the benefit of my friend who was able to purchase the house Jan 31 out of foreclosure for the bargain basement price of $485K