Thursday, April 1, 2010

Low-Ball Property Appraisals, "Double Escrow" Flipping/Flopping Arrangements Lead To Massive Ripoffs Of Underwater Lenders In Short Sale, REO Deals

In Stanislaus County, California, The Modesto Bee reports:

  • The hottest form of mortgage fraud in the Northern San Joaquin Valley involves bogus property valuations. [Interthinx vice president of industry relations Anne] Fulmer said a lot of the fraud involves the resale of foreclosed bank-owned homes and "short sales," in which homes facing foreclosure are sold for less than their outstanding mortgage. [...] Fulmer said there are "flopping" schemes going on involving short sales and bank-owned homes. These essentially trick banks and lenders into agreeing to sell homes for substantially less than what they're worth.

Here's one way that scheme works, according to Fulmer:

  1. A bank repossesses a home, then hires a real estate agent to resell the property.
  2. That agent secretly creates a limited liability corporation that offers to buy the property for a very low price.
  3. Meanwhile, other interested buyers also submit bids for the home, offering considerably more than the LLC's bid.
  4. But the dishonest agent tells the seller (which in this case is the bank) only about the low bid from the LLC. It illegally keeps the other bids secret.
  5. Figuring that the LLC's bid is the best deal available, the bank agrees to sell for the low price just to get the foreclosed home off its books.
  6. Then the agent immediately resells the house on behalf of the LLC to one of the other bidders for the house.
  7. Say the home's fair market value is $150,000. The agent and LLC persuade the bank to sell it for $100,000. Then the legitimate home buyer pays the agent and LLC $150,000, netting the agent and LLC a quick $50,000 at the bank's expense.

  • "We call that double escrow," said Craig Lewis, president of Prudential California Realty in Modesto. "It is happening. ... These listing agents are not disclosing all the offers to the seller." Or at least that's the widespread suspicion.(1)

For more, see Stanislaus County tops for cheaters targeting lenders.

(1) According to the story, real estate agents who suspect their clients' home purchase offers never were presented to sellers rarely investigate or report their suspicions to the state Department of Real Estate or their board of Realtors. They can't call the seller because it's a violation of the Realtor's Code of Ethics to call the seller directly, the story states.

Agents can file complaints about suspected fraudulent activity by their colleagues, the story states, but they almost never do, according to Chuck Bukhari, president of the Central Valley Association of Realtors. "All the agents are complaining verbally (about other agents involved in short sales and bank-owned properties). Unfortunately, nobody is willing to report it in writing," Bukhari said. "I'm shocked as much as you are. Nobody is coming forward. As president, it bothers the heck out of me." Bukhari said "there are a few names everybody's mentioning" when real estate agents discuss fraud among themselves. But rather than filing formal complaints, he said, honest agents simply "avoid these people."

No comments: