It is really a shame to see what has happened to the FHA. Prior to the subprime bubble, the FHA has a good record with providing low down payment loans to borrowers. Before readers scoff, it had a simple secret: it screened borrowers. And the old-fashioned process was sufficiently time-consuming that the prospective homeowners also had to grapple with whether they could make the payments.
The FHA’s experience of yore is not unique. Not for profits that provide loans to low income borrowers also have shown default rates in line with prime borrowers. It is possible to make sound loans to homebuyers who look risky on paper…provided you do real due diligence.
But now the FHA has been assigned a role in the “save the housing market” game plan, which means notions of prudence get compromised. A story in Washington Monthly details some of the side effects. And the troubling bit is that while this activity isn’t wide scale, the Treasury proposals to streamline the short sale process will play right into this particular type of fraud.
From Washington Monthly:
Interthinx, which analyzes mortgage fraud nationally….found a continuing shift to schemes involving bank-owned foreclosed homes, and short sales…The firm also reported that real estate agents and other professionals increasingly are involved in the schemes, which are growing in popularity due to the abundant supply of foreclosures, and the fact that appraisals frequently aren’t required in order to sell distressed properties.
As fraud picks up, a typical scheme increasingly works like this: A homeowner underwater on a mortgage, owing more than the home is worth, arranges a short sale ….The home then gets deeded back or gifted to the troubled borrower shortly after the sale. Or, the bank unwittingly accepts a lowball short sale offer, allowing the new owner to quickly flip the property to a buyer already on standby, willing to pay a higher price. Such schemes amount to fraud because buyers and sellers lie to the bank about the true nature of the transactions…
Flipping foreclosures and short sales is taking off as the latest real estate craze, with numerous web sites popping up to market advice on turning quick profits on distressed properties. And short sales also are expected to only increase as loan modification efforts continue to falter, and borrowers facing foreclosure have few other options. Interthinx expects fraud involving a “straw” borrower – a deceptive stand-in used as cover for a questionable transaction – to also become more frequent as a result….
increasingly, people involved in fraud schemes are finding ways to finance them through taxpayer-backed Federal Housing Administration loans, an agency already dealing with delinquency problems and and mortgage fraud, said Robert Simpson, president of Investors Mortgage Asset Recovery Co. in Irvine, Calf., a firm that analyzes mortgage fraud. The FHA’s loan volume has quadrupled since 2006, and FHA-backed loans have been beset by rising defaults…
“Anytime there’s money out there, someone will begin trying to figure out a way to get to it,” Simpson said. “Right now, the fraud gets shipped over to the FHA. We’ve got to hope they are being very diligent, because if they are not, the damage will be irreversible.”…
Short sales at first seem an unlikely target for fraud, because they can be a lengthy and difficult process, with banks often taking months to approve sales, if they do at all. For that reason, Cecala said, he believes short sales – at least for now – comprise only a small piece of the mortgage fraud picture. But the Treasury Department is expected to issue guidelines soon on streamlining short sales and offering financial incentives to borrowers and lenders. The push for more short sales, combined with a backlog of foreclosed homes, distressed homeowners, and banks anxious to get foreclosures off their books, will likely make short sale and REO flipping fraud more prevalent.