‘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)

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New-Home Sales Gain Momentum

After three straight months of declines, sales of new homes got a boost last month, jumping 11 percent, according to the Commerce Department’s latest new-home sales report released Monday.

New-home sales rose in March to a seasonally adjusted rate of 300,000 homes, up from February’s 250,000. However, the number is still far from what economists view as a healthy 700,000-a-year pace for the sector.

The median price of a new home increased 3 percent from February to $213,800. New-home prices are about 34 percent higher than the median price of existing homes, according to economists.

Regionally, new-home sales saw the biggest boost in the Northeast, jumping nearly 67 percent in March. The West saw an increase in new-home sales last month by nearly 26 percent; the Midwest posted a 13 percent increase; and in the South, new-home sales dipped 0.6 percent.

The new-home market continues to be battered by a high number of foreclosures that continue to dampen home prices across the country. With 1.2 million foreclosures forecast this year, the new-home sales market may not see a major turnaround for years, according to RealtyTrac Inc.

However, while residential construction has decreased considerably in recent years, reports have recently shown building permits have increased 28 percent for apartment and condo buildings.

Source: “The number of people who bought new homes jumped 11 pct., but pace is far below healthy level,” Associated Press (April 25, 2011)

Analysts Say Housing Is on the Way Up

Analysts at both Standard & Poor’s and Barclays Capital agree that the uptick in home resales last month is a favorable sign of things to come. Because pending home sales — an indicator of future activity — were up in February, S&P believes transaction volume will rise for April.

Barclays, meanwhile, says March’s 3.7 percent gain in existing-home sales merely reinforces its position that the housing market actually hit bottom in late 2010.

Source: “Monday Morning Cup of Coffee,” Housing Wire, Jon Prior (04/25/11)

Property-tax deadline looms; need some help?

With the first installment of property taxes due May 2, Barbara Alsheikh has her work cut out for her.

“For many people, it is the first time they have really looked at the property-tax bill,” says Alsheikh, supervisor for the King County Tax Advisor Office.

“And before writing the check, they have questions about the value of their property, the levy rate and the amount due.”

The Tax Advisor Office is independent from the assessor and provides residents with advice and assistance, including appeals.

“We are, in effect, a one-stop shop for property questions,” she says.

The primary complaint this year, says Alsheikh, is that a drop in house values did not result in lower tax bills.

“It is a very tough year for many taxpayers,” she adds.

The property-tax bill is not based on real-estate markets at all. Like Ohio, Washington state operates under a “budget-based” property-tax system in which taxing districts, such as fire departments and library and school districts, submit their annual budgets to the assessor, who then determines the taxing rate necessary to meet the adopted budgets.

King County Assessor Lloyd Hara says several factors are at play.

“The most common is that voters approve a property-tax measure, typically a school levy, and that increases the overall property-tax levy that is reflected on the 2011 bill.”

Taxpayers in King County, on average, will pay about 3.33 percent more in property taxes this year, according to Treasury Operations Manager Scott Matheson.

Only 17 percent (or $624 million dollars) of property taxes support King County purposes, says Phillip Sit, Department of Assessments communication and outreach coordinator. The other 83 percent is divvied up among state and local government.

While taxpayers cannot appeal their property taxes, they have the right to appeal the valuation (assessment) of their property — the basis upon which their taxes are calculated — to the King County Board of Equalization, an independent board made up of citizens appointed by the King County executive. Generally, this must be done within 60 days from the time official property-value notices are received.

Alsheikh said her office typically handles about 800 calls in the first two weeks after billings are mailed in February.

Assessed value should not to be confused with market value, which is defined as the amount a buyer, willing but not obligated to buy, would pay to a seller, willing but not obligated to sell.

Assessed value is determined by actual sales and the real-estate market, rather than the current market, notes Alsheikh; assessed values use historical data, which lags behind real time by one or two years.

“Like any business, the budget for a public service tends to increase over time as employees’ wages and benefits, energy costs, transportation and facilities’ costs increase. In addition, voter-approved ballot issues tend to increase the taxes each year,” says Alsheikh.

Meanwhile, taxpayers who are unable to pay their property tax in full are encouraged to contact the Assessor’s Office. Additionally, seniors or disabled persons, may be able to qualify for a property-tax exemption or deferral program.

Alsheikh, for her part, won’t be slowing down anytime soon. She says her busiest season will begin in a month or two, when new official (property) value notices will be mailed out.

“We strive to put each taxpayer on “equal” footing with the assessor’s staff,” she says. “But we don’t take sides; we aren’t out to ‘beat’ the assessor. The goal for all three agencies [including the Office of the Assessor, the Treasury, and the Tax Advisor] is the same: fair and equitable distribution of property taxes.”

Of the 6,000 to 7,000 phone calls the office gets, Alsheikh said, perhaps 10 percent are asking for research and appeal advice.

At the end of last year, nearly 12,300 accounts, including households and undeveloped property for a business, hadn’t paid any taxes for 2010; and just below 12,750 accounts paid only the first half of their taxes owed for the same year according to Scott Matheson, Treasury Operations Manager for King County.

Together, those figures represent 3.7 percent of the 681,757 accounts that were billed last year. “Our historical collection rate,” notes Matheson, “has held steady at around 98 percent for the last several years, and we don’t expect to see a change this year.”

Source: By Elizabeth M. Economou, Seattle Times (4/22/2011)

Lawsuit reveals how a middleman is blocking mortgage modifications for homeowners

Pamela Jeter, of Atlanta, Ga., has been trying to get a mortgage modification for more than two years. She seems like an ideal candidate. She has shown she can stay current with a reduction in her monthly mortgage payments. Everybody would seem to win. Even the investors who ultimately own her loan think she should be able to get one. So, why is Jeter facing foreclosure?

A bank that she didn’t even know is involved with her loan has thrown up a roadblock to modifications. At least tens of thousands of other homeowners have shared a similar plight. Jeter’s case is a window into a broken system where even though the actual investors, when asked, say they want to allow modifications, the bank that acts as their representative has refused to allow them.

Two big banks act as middlemen between the homeowners like Jeter who make payments and the mortgage-backed securities investors who ultimately receive them. The banks’ jobs were supposed to be relatively hands-off, devoted more than anything to processing homeowner payments. When the housing bubble burst, they faced new demands.

One of those middleman roles is well-known to homeowners: the mortgage servicer, responsible for collecting homeowner payments and evaluating requests for a modification.

But it’s another middleman that’s proved the real barrier for Jeter: the trustee, who is supposed to be the investors’ representative, making sure the servicer is maximizing investors’ returns and distributing checks to them. HSBC is the trustee for the pool of loans of which Jeter’s is a part — and it’s refused to approve any modifications for loans like hers, saying the contracts around the mortgages simply don’t allow it.

The good news for Jeter is that, in what seems an unprecedented step, her servicer OneWest has taken HSBC to court to allow modifications. It filed suit in June of last year.

But in a sign of just how convoluted the mortgage world has become, OneWest is also pushing to foreclose on her. A recent sale date was avoided only after her lawyer threatened to sue. (One day after ProPublica published this story in March, OneWest postponed foreclosure, saying that it wouldn’t attempt to seize Jeter’s home again for at least two months.)

Bundled loan syndrome

Jeter’s loan was typical of the boom years. To help pay for improvements on her home in 2007, she’d refinanced into an interest-only adjustable-rate loan. That loan was bundled with thousands of others by a Wall Street bank and sold off to investors, such as pension funds, hedge funds and banks.

That’s where the trouble started. In Jeter’s loan pool and nine others, the contracts laying out the servicers’ responsibilities and powers contradict each other. OneWest’s lawsuit seeks to sort out that contradiction.

One document, a private contract between the servicer and the Wall Street bank that bundled the loans, explicitly forbids servicers from modifying loans in the pools in a way that would reduce homeowner payments. But other contracts — that investors could see — explicitly allow such modifications.

It’s become a familiar problem during the foreclosure crisis, dealing with the aftermath of the banks’ corner-cutting and sloppy paperwork of the housing boom.

No one appears to have tried to sort out this mess until 2009, when OneWest requested that HSBC, the trustee, allow modifications. The administration had just launched the Home Affordable Modification Program (HAMP), which pays servicers and investors subsidies to encourage affordable modifications. Under the program, modifications occur only when they will likely bring a better return to investors than foreclosure.

But HSBC refused to authorize any modifications, saying the contracts prohibit them. It’s obligated to act in investors’ interest, and it feared getting sued by those who didn’t want to cut homeowners’ payments. The dispute dragged on for months. Ultimately, HSBC offered to allow modifications only if OneWest accepted the risk of getting sued by investors, but OneWest wouldn’t.

OneWest was in an increasingly difficult situation, it says in its suit. It faced potential suits from investors if it modified loans, and if it didn’t, homeowners in the pool might sue.

In late June 2010, with HSBC still not budging, OneWest filed suit, asking a federal judge to decide whether modifications should or should not be allowed.

Eligible but not allowed

The case suggests that when investors themselves are asked, they will approve modifications. HSBC polled the investors in the 10 pools after the suit was filed. A large majority favored allowing modifications. Based on those results, HSBC said in a court filing in January that it did not oppose OneWest’s request for a judge to intervene and that if the judge declared modifications were allowed, that would be fine with them.

In the meantime, 3,000 homeowners like Jeter whose mortgages are caught up in the dispute have been unable to get any reduction in payments. When OneWest filed its suit, it said at least 800 of the loans seemed eligible for an affordable government-sponsored modification but couldn’t actually be modified because of HSBC’s stance. Those homeowners “are facing the possibility of losing their homes through potentially avoidable foreclosures every day,” it said.

It’s not clear how many of those homeowners have since been foreclosed on. OneWest said in a statement that it had no choice in pursuing foreclosure: It’s “contractually obligated to continue servicing loans in accordance with the terms of the underlying securitization documents.”

Foreclosure crisis

The suit is remarkable not only because it seems unique — close observers said they hadn’t seen another example of a servicer going to court against a trustee — but also because it lays bare a relationship that is usually a mystery to homeowners and investors in securitized mortgages.

It’s often hard for homeowners to tell if a servicer is correctly citing an investor restriction when denying a modification. Servicers have cited investor restrictions when denying modifications for at least 30,000 homeowners, about 2 percent of the 1.9 million total homeowners who’ve been denied, according to a ProPublica analysis of Treasury Department data. A Treasury spokeswoman said auditors examining such denials had found they were almost always legitimate. That’s not an experience shared by homeowner advocates.

In a number of cases, said Jeff Gentes, an attorney at the Connecticut Fair Housing Center, servicer employees have told his clients that there was an investor restriction, when a little bit of digging showed that’s not true. We reported on this problem last year.

Changes not pursued

In the cases when there actually is a restriction in the documents, the servicer is supposed to at least try to get permission. The HAMP rules require the servicer to send a letter to the trustee requesting that modifications be allowed.

In cases where there’s a clear contractual bar to modifications, the servicer and trustee could take the initiative to change the contracts by having the investors vote on it or, if voting isn’t required, amend the contract themselves.

But in general, said Gentes, the housing attorney, servicers are slow to investigate and eliminate bars to modification. Servicers are paid a low, flat rate per loan and are motivated to keep costs down. “The costs of removing an investor restriction are often borne by the servicers, and so extensive amendment rules often mean that servicers won’t pursue it.”

Trustees, who get paid even lower fees, are no different, said Bill Frey of Greenwich Financial Services, which specializes in mortgage-backed securities. “They’re very, very prone to inaction.”

Both, as middlemen, don’t bear the loss when a home is foreclosed on.

Source: By Paul Kiel, ProPublica.com (April 17, 2011)

House Flippers Return, Still Finding Profits

More investors are taking on the risk of flipping homes, despite falling home prices and sluggish real estate markets across the country. But investors say there are still profits to be made in the house flipping business.

Nearly 1 million homes were bought as investment properties in 2010, according to the National Association of REALTORS®, and a record number of buyers purchasing properties with cash currently are flooding the market.

Flipping homes for profit is easier in rising markets, but not many markets are reporting increases in home prices, analysts say. In Washington, D.C., Justin Konz of RestorationCapital says his clients are going through four of five properties a month and are making gross profit margins of 35 percent or higher.

Where to Find the Deals

Flippers mostly are finding their homes through foreclosures auctions, REOs, and short sales. They seek homes at rock-bottom prices that will have low fix-up costs, no more than about 5 percent or 10 percent of the purchase price.

In Florida, where investors are finding it more difficult to flip homes because of the drastic drop in prices and high inventories, flippers are targeting inner-city properties that are being sold at steep discounts. For example, some of houses are selling for $30,000 when they once sold for $200,000.

Perry Henderson, a real estate agent and investor in Austin, Texas, says the biggest opportunities in flipping are the “ugly” houses that have lingered on the market or “old houses that somebody’s grandma lived in for 40 years and didn’t do anything to. Now, she’s passed away and her family wants to sell quickly.”

Real estate investor Brian Fuller, who with partners buys and sells more than 200 properties a year in the San Diego area, says he’s drawn to the “biggest eyesore on the block.” He says they then “ turn it into the best looking house there. We’re helping pull up values in the neighborhood.”

Source: “Vulture Investors Flipping Their Ways to Big Profits,” CNNMoney.com (April 13, 2011)

Gov’t to Lenders: Pay Up for Foreclosure Errors

The nation’s largest banks reached a settlement with federal regulators, agreeing to compensate home owners who were wrongly foreclosed upon and to overhaul their operations.

The settlement also directed financial firms to hire auditors to determine if they improperly foreclosed on home owners in 2009 and 2010.

However, the settlement reached with federal regulators on Wednesday is hardly the end of punishment and investigation into banks’ shoddy lending practices and wrongful foreclosures, officials say. Officials warn fines will be determined later for the lenders and banking companies, which include Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup.

Wednesday’s settlement with banks was reached with three federal banking regulators: the Office of the Comptroller of the Currency, the Federal Reserve, and the Office of Thrift Supervision.

Banks still face settlement talks — which are believed to be even more stringent — with the 50 state attorneys general, the Treasury and Justice departments, the Federal Trade Commission, and the newly created Consumer Financial Protection Bureau. This group has called for tougher measures, including detailed document procedures and even guidelines for modifying loans that include reducing the mortgage principal of struggling borrowers.

Banks continue to face investigations and punishments from abusive lending practices that plagued the industry, including probes that have revealed banks approved foreclosure paperwork without proper reviews, court filings that weren’t properly notarized, mortgage documents that weren’t transferred properly, and having inadequate staff to handle the foreclosure process.

Source: “14 Lenders and 2 Servicers to Reimburse Home Owners who Were Incorrectly Foreclosed Upon,” Associated Press (April 13, 2011) and “Mortgage Lenders Settle but Still Face Probe,” MSNBC.com (April 13, 2011)