Fraudulent Home Flipping

As day follows night, financial fraud follows economic distress. God forbid people try to make an honest living as opposed to seizing opportunities to make a dishonest buck. This financial artifice is on display in the short sales of homes throughout our country.

Bloomberg highlights this fraudulent activity in reporting, Banks Face Short-Sale Fraud as Home ‘Flopping’ Schemes Spread,

Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.

Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed — known as a short sale — without disclosing that there were better offers. They then flipped the houses for a profit.

The Federal Bureau of Investigation, the California Department of Real Estate and mortgage finance company Freddie Mac have warned that such schemes may be spreading after a plunge in values left homeowners owing more than their properties are worth. The scams threaten to deepen losses for lenders that are increasingly agreeing to short sales as an alternative to more costly foreclosures.

How and why might a lender agree to a sale at an exceptionally depressed price? Kickbacks and payoffs. To whom and from whom? From brokers or agents that have a buyer willing to pay more for the home. To whom? Let’s navigate.

First off, mortgage servicers are already being paid by Uncle Sam to facilitate the short sale. Bloomberg highlights how Uncle Sam has overlooked the potential for this fraudulent ‘flopping,’

An Obama administration effort to boost short sales may increase incentives for fraud, Neil Barofsky, special inspector general for the Troubled Asset Relief Program, wrote in an April 20 report to Congress. The government, through its Home Affordable Foreclosure Alternatives Program, that month began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who close short sales.

“It appears that the program may lack necessary antifraud protections,” Barofsky wrote.

While the Bloomberg article focuses on payoffs to appraisers, it would seem the fraud embedded in payoffs and kickbacks likely runs far wider than that. Whom else are likely recipients for these payoffs and kickbacks?

1. The mortgage servicers are already being paid by Uncle Sam to expedite short sales. Might a little extra cha-ching provide even greater incentive for these servicers to neglect their obligations and expedite a short-sale? You think?

2. Could a mortgage officer at a bank which originated the mortgage be corrupted by a payoff or kickback to sell the home at a distressed level? Why not? These individuals pull the trigger on the sale so they would seem to be the critical piece in the puzzle.

3. Could individuals at Freddie Mac (FRE) and Fannie Mae (FNM), the largest holders of mortgages in our nation, be corrupted by these payoffs or kickbacks as well? Say what you want but Freddie and Fannie long since stopped being for profit enterprises.

Who ultimately pays for the fraud involved in ‘flopping’ homes? American taxpayers on the hook for losses at banks and Freddie and Fannie are bearing the bulk of the costs of this ‘flopping.’  Additionally, residents of neighborhoods in which the ‘flopping’ occurs also bear the cost of seeing homes appraised and sell at overly depressed levels. Lastly, the taxpayers within those communities also pay because tax receipts from property valuations are lowered.

Although short sales of homes are far more beneficial than ongoing foreclosures, Uncle Sam and his regulatory partners need to be more aware and increasingly aggressive in rooting out the fraud that grows in the process. Will that happen? Do Uncle Sam and the regulators have the requisite ’sense on cents?’

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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