‘Flopping’ scam enables fraudulent flipping in housing market

Although reports of mortgage fraud nationally fell 41 percent in 2010 from 2009, the continuing downturn in the housing market has fostered new ways of perpetrating it, experts say.

Consider “flopping” — the intentional misrepresentation of housing value for purposes of illegal flipping.

Here’s how it works: A real-estate agent or broker identifies properties with severely depressed values. These could be properties with mortgages that exceed the present values or they could be short sales or foreclosures.

A property is valued using a “broker price opinion.” The broker’s “opinion” is a lowball price, because his intention is to profit from a quick resale for a higher price.

A lender, believing the broker’s assessment is legitimate and unaware of any scheming, agrees to the lower sales price.

The broker buys it at the greatly reduced price, arranges for a “straw buyer” to purchase it, then flips it for a higher price than negotiated with the lender. The broker pockets the profits.

The broker pays off any of the participants that enabled the scheme, and then moves to the next target property.

Misrepresentation

“This is a misrepresentation of value,” said Denise James, co-author of an annual report on the topic by the LexisNexis Mortgage Asset Research Institute, during a recent teleconference.

She said such schemes could add to problems faced by regions with an abundance of distressed housing, since “lenders will grow concerned with false depreciation of values,” thus making the buying and selling of homes even more difficult in depressed housing markets.

“Flopping increases as desperation to get rid of rising inventory grows,” she said.

While reports of fraud by 600 lenders and other real-estate businesses to the LexisNexis mortgage institute declined year over year, “the decrease does not necessarily correlate to actual occurrences of (fraud), which are rising according to several industry sources,” James said.

Rising numbers

Suspected mortgage fraud submitted to the Federal Financial Crime Reporting Network rose 5 percent from 2009 to 2010, for example.

The list of crimes included short sales, bankruptcy abuse, debt-elimination scams, income and employment misrepresentation, Social Security number theft and loan-modification fraud.

Mortgage fraud has become more complex and is more difficult to verify, James said, because many lenders are trying to implement new procedures at the same time they are trying to recover huge financial losses.

Florida leads the list of states with high levels of fraud, with the institute’s index showing more than three times as many reports of fraud than legitimate mortgage originations.

One of the fastest-growing ways homeowners are being bilked is by people posing as the new servicers of their mortgages, she said.

“They (the homeowners) get letters saying, ‘I’m your new servicer. Send your payments to me,’ ” James said. “Homeowners who are not aware that there is a formal procedure involved in changing servicers” fall victim to this scam.

Source: By Alan Heavens, The Philadelphia Inquirer (6/10/2011)

Foreclosures for sale: Big supply, low prices

NEW YORK (CNNMoney) — There’s a three-year inventory of homes in foreclosure for sale, and that’s devastating home prices.

Las Vegas has so many foreclosures that 53% of all the homes sold in Nevada are in some stage of foreclosure, according to a report from RealtyTrac, the online marketer of foreclosed properties.

Foreclosures represent 45% of sales in California and Arizona, and 28% of all existing home sales during the first three months of 2011.

“This is very bad for the economy,” said Rick Sharga, a spokesman for RealtyTrac.

What’s more, the homes are selling at steep discounts, especially so-called REOs, bank-owned homes that have been taken in foreclosure procedures.

The average REO cost on average about 35% less than comparable properties, according to RealtyTrac.

But in some areas, the discounts were ever greater: In New York State, the discount for REOs was 53% during the first quarter. And it was nearly 50% in Illinois, Ohio, and Wisconsin.

10 dirt cheap housingmarkets

Also weighing on market prices are “short sales,” homes where the selling price is less than what is owed by the borrowers. These sales sold at an average 9% discount.

Including both REOs and short sales, Ohio had the biggest discount of any state, at 41%.

There were 158,000 deals involving distressed properties nationwide during the first quarter, less than half the nearly 350,000 during the same period two years earlier.

With the slowed sales pace, it will take three years to burn through the inventory of 1.9 million distressed properties, according to Sharga.

“Even if you look at REOs alone, it will take 24 months to clear them and that’s without any new foreclosures at all coming into the system,” said Sharga.

Banks to Pay $22 Mil for Military Foreclosure Errors

Bank of America and Morgan Stanley have agreed to pay more than $22 million combined to settle federal civil charges on improperly foreclosing on military personnel, The Associated Press reports.

Between 2006 and 2009, the mortgage lenders foreclosed on 178 military members in 22 states without getting court approval. The military members affected will each receive $125,562, on average. The banks will also continue to investigate whether improper foreclosures occurred in 2009 through 2010.

The settlement is “easily the largest amount recovered” in a case of improper military foreclosures, Thomas E. Perez, an assistant attorney general, told The Associated Press.

The Servicemembers’ Civil Relief Act offers protections to military personnel to prevent foreclosures. It bans evictions or creditors trying to repossess their property while on active duty.

JPMorgan Chase earlier this year admitted to overcharging about 4,000 military personnel on mortgages and wrongly foreclosing on 14. It paid $2 million in settlement charges originally and last month paid more than $60 million to settle a class-action lawsuit regarding the overcharges.

Source: “2 Firms to Pay for Improper Military Foreclosures,” Associated Press (May 26, 2011)

Mortgages, foreclosures top agenda at BofA meeting

Foreclosures and home-mortgage modifications took center stage at Bank of America annual meeting last week.

Outside the headquarters of the nation’s largest bank, protesters held signs and gave testimonials about their own foreclosure experiences.

At the meeting, which was held inside the bank’s new 32-story building adjacent to its headquarters, shareholders confronted CEO Brian Moynihan about mortgage woes in their communities.

The Rev. Clyde Ellis, a pastor from Virginia, said Bank of America should take responsibility for its role in the foreclosure crisis.

“Come to Prince William County and I will show you disaster,” Ellis said.

Losses and litigation related to foreclosures and poorly written mortgages have haunted Bank of America for several quarters. In its latest quarter, the bank’s income dropped 39 percent on higher costs related to mortgages and legal expenses.

At the end of the first quarter, the bank had $2 billion of foreclosed properties on its book, and its customers were late by 90 days or more on $24 billion of its total loans, which included commercial and residential properties.

Moynihan tried to separate the rest of the bank’s business from its mortgage woes. He described the company as being made up of two stories, with the mortgage business on one side and all its other business units on the other.

“The power of the franchise is held back by the mortgage challenges we face,” he said.

The bank’s stock is one of the worst performers of the S&P 500 index this year. Recently, the stock slid after the Federal Reserve rejected the bank’s capital plan and its request for a dividend increase.

BofA was the only bank among the country’s four largest that didn’t pass a stress test from the Fed. The central bank examined the 19 largest banks in the country to see if they were strong enough to withstand another economic downturn. BofA will submit a revised plan later this year.

Moynihan said the bank will pay dividends once it resolves more of its mortgage issues and submits a plan that is acceptable to regulators.

Some shareholders want the bank to scrutinize itself more closely. Michael Garland, who was representing several large public pension funds at the meeting, said he had written to BofA’s audit committee asking that it conduct an independent review of mortgages and foreclosures to show they conform with the laws.

Garland said that audit committees of other banks responded soon after he sent them a similar letter in January.

He said was disappointed that there had been no response from BofA’s audit committee until just five days before the annual meeting.

The plan didn’t get enough votes to pass on Wednesday.

“If this is your response to shareholders with a $1.3 billion stake in the company, I can only imagine how you treat your residential-mortgage customers,” said Garland, who was also representing the New York City Comptroller’s Office, which oversees the public pension funds of New York.

Source: By Pallavi Gogoi, Associated Press

Banks Rush to Revamp Foreclosure Rules

The rush is on for banks to meet a mid-June deadline in offering up plans on how they plan to meet a set of guidelines by U.S. regulators to clean up their foreclosure procedures. The banks will have another 60 days after that deadline to implement the changes.

As part of the rules set by U.S. regulators, 14 financial institutions will be required to provide a single point of contact to borrowers trying to modify a loan or in the foreclosure process as well as set “appropriate deadlines” for deciding whether borrowers can get a loan workout. Regulators are also requiring banks to ensure their staffing levels are on par to handle the flood of foreclosures and loan modifications.

Several banks have already taken steps to implement the changes.

For example, J.P. Morgan says it’s developing a software program to make it easier for employees and borrowers to track loan modification requests. It also has started providing borrowers with a “relationship manager” to help navigate the loan modification or foreclosure process.

Citigroup, which already provides a single point of contact, says in the next few months it’ll debut a “concierge” system that will provide a small team of employees to guide delinquent borrowers and home owners at risk of default.

Banks are also making efforts to speed up their loan modifications, after customers have complained of long delays from banks in responding to requests. For example, Los Angeles Neighborhood Housing Services says it takes an average of 141 days for its borrowers to get an answer on an initial loan modification request. Wells Fargo was found to have the fastest turnaround: Initial reviews averaged 79 days. But the bank says now 60 percent of its borrowers receive a decision five days after the company receives the request.

Banks are also increasing their staffing. J.P. Morgan has announced it’ll add up to 3,000 new home-lending jobs, and Bank of America plans to hire about 3,000 employees to focus on its troubled mortgages.

New Incentives From Fannie, Freddie

Banks and mortgage servicers also must meet new guidelines from Fannie Mae and Freddie Mac, announced this week, that aim for more loan modifications and prevent foreclosures from taking too long.

Mortgage servicers will be required to approach borrowers earlier, making contact frequently after just one missed payment.

The GSEs are also offering incentives: They’ll pay $1,600 in incentives depending on how quickly servicers complete a loan workout. They also will impose a $500 compensatory fee on servicers who do not complete loan modification applications within six months after the loan goes delinquent. The changes will go into effect in the second quarter.

Source: “Banks Rush to Improve Foreclosure Practices,” The Wall Street Journal (April 29, 2011)

BofA opens office for foreclosure alternatives

Bank of America announced Wednesday it had opened an office in Seattle to allow distressed homeowners whose mortgages it services to meet face to face with specialists and consider alternatives to foreclosure.

Meetings are by appointment only, available from 9 a.m. to 6 p.m. weekdays and 9 a.m. to 1 p.m. on Saturdays. Bank of America customers can call the office at (206) 358-4338 to make an appointment.

The bank is also holding outreach events from 9 a.m. to 6:30 p.m. May 19-21 at the Meydenbauer Convention Center in Bellevue and the Spokane Convention Center. To register, go to www.bankofamerica.com/outreachevent or call toll-free (855) 201-7426.

More Borrowers Have ‘Strategy’ to Defaulting

More borrowers who can afford their mortgage payments are opting to stop making payments and walk away from their homes. But new research sets out to help lenders pinpoint the behavior that makes up these strategic defaulters.

According to research by FICO, these strategic defaulters pay their bills on time, rarely exceed their credit card limits, hardly use retail credit cards, have a reputable credit score, and tend to have a short occupancy in their current home.

“These are savvy people who organize themselves,” says Andrew Jennings, FICO’s chief analytics officer. “This is a planned activity, not an impulse activity.

Since they know their credit scores will be badly hit after they default, they even tend to open up new credit cards in advance to prepare, according to the FICO study.

“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” Jennings says. Most borrowers who strategically default owe much more on their home than it is currently worth.

But “before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them,” Jennings says.

That’s why FICO is releasing a new technology tool that will help lenders predict the probability of strategic default based on a borrower’s credit score.

“Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future,” Jennings says.

How Many Are Out There?

Just how many home owners are “strategically” defaulting on their mortgage is difficult to estimate since “strategic defaulters have all the incentive to disguise themselves as people who cannot afford to pay,” according to researchers from the European University Institute, Northwestern University, and the University of Chicago. Yet, researchers have estimated about 35 percent of the defaults in September may have been strategic, up from 26 percent in March 2009.

As defaulters continue to weigh on the industry, housing experts say the real estate market will take even longer to recover since foreclosures drag home prices down.

Source: “‘Strategic Defaulters’ Pay Bills on Time and Plan Ahead, Study Finds,” The Washington Post (April 22, 2011) and “New FICO Technology Predicts Strategic Default,” HousingWire (April 20, 2011)