How Real Estate fraud / Mortgage fraud works.
Here is a real example of 330 Alesio Avenue - an upscale and otherwise stable Coral Gables neighborhood in Miami, FL.
In November 2003 Marta Perez bought the home for $415,000. She resold it in December 2004 to Rafael Piedra for $550,000 — a 33 percent return, public records show.
Four months later, Piedra defaulted on his loan, but in December 2005, before an auction was set, he sold the property to Samuel Morejon for $850,000 — a 55 percent return. Eight months after that, Morejon defaulted. He also sold before the lender could take the home. In December 2006, Jose D. Martinez paid $1.2 million, a 41 percent return for Morejon. Before 2007 ended, Martinez also defaulted, public records show.
I have no idea if the above example is fraud or not. This particular example may very well be just a serious of honest buyers/sellers. But almost all of the similar examples are 100% fraud. A lot of this stuff was going on in FL, CA, AZ, NV, CO, and through the rest of the US.
Here is how this type of Real Estate fraud works:
In some cases mortgage brokers and appraisers do not even get a kickback. Mortgage brokers approve larger and larger loans because they make commission on each loan, and the loan is sold right away to "investors". So mortgage brokers do not care if the loans default in the future. And appraisers often understand that if they do not appraise the house at say $700K, then they will not get any more business from that mortgage broker. So appraisers basically rubber-stamp whatever the "appraisal" mortgage broker wants them to write down.
- Say a person A buys a house for $300K.
- A few months later he sells the same house to the person B for $500K. The person B takes 100% financing on the house. Person A and person B split the $200K profit. Mortgage broker and appraiser are sometimes paid a kickback to help get the inflated appraisal and approve the inflated loan.
- A few months later the person B sells the same house to the person C for $700K. The person C takes 100% financing on the house. Person B and person C split the $200K profit.
- The above just keeps repeating every few months, each time inflating the price by a few hundred thousand.
There are some variations of the above scam.
Sometimes the buyer is a random person off the street, homeless person, illegal immigrant, older senile person, or someone whose identity was stolen, etc... The "buyer" is told to just sign all the papers (often blank papers), and in return the buyer will get $5K cash. So the "buyer" gets a way inflated mortgage based on 100% fake data, and the seller gets to keep all the profit. In this scenario there is no need for a real buyer to damage his/her credit, because for $5K you basically get a fake buyer whose credit will be damaged.
All this fraud was possible because someone was buying all these fraudulent inflated loans on the other end. These fraudulent loans were packaged into various investment pools, sliced and diced, repackaged, sold, re-sold, and borrowed against. In the example of this $400K house in Coral Gables that sold for $1.2 million, this $1.2 M loan probably has many additional $ millions borrowed against it as leverage (and the $1.2 million loan is a collateral of sorts for this additional leverage). As this house will probably only sell for $400K again in the future, this $1.2 million loan will default, and all these extra millions borrowed against it will have to unwind, and someone will have to take all these losses.
Housing appreciation based on mortgage fraud - pyramid scheme.A much more common form of mortgage fraud is simply lying about your income on mortgage/refinancing application. Millions of people lied about their income in the last few year, and many still continue to do so. Mortgage brokers do not care that people lie (and often encourage them to lie) because mortgage brokers are paid commissions per transaction and take no risk if/when inflated mortgages default. So lying about income leads to bigger mortgages and the balloon expands exactly like a pyramid scheme. In order to sell a house at ever-inflating price, one needs a "greater fool" who will also lie about his/her income to get an even larger mortgage based on fraud.
Housing pyramid scheme collapses when the mortgage fraud stops, and the "real buyers" (who buy based on actual income) can only afford to pay a small fraction of the selling price. We are now going back to verifying annual income and multiplying it by 3 to get the mortgage, and that means that people making $35K/year can only get $100K mortgage, and in order to sell a house for $600K you now need a buyer who makes $200K per year.