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Sunday, January 11, 2009

Some Perspective on the Great Loan Modification Scam

During the real estate boom, there was a great deal of real estate scams. One of the most common was a scam in which the value of a property was beefed up at the same time the seller and buyer to exchange money under the table so to speak. The scam worked something like this. Let's say that a seller and a buyer agreed to sell a property at $250,000. They would agree to make the purchase price $300,000 with the understanding that the seller would then give the buyer $50,000 back after the closing. Because real estate prices were soaring, this sort of a scam wasn't terribly difficult to do because often appraisals warranted whatever price was necessary to pull it off.

The scam was often used to allow buyers to get cash in order to make payments that they frankly couldn't afford to make. I was recently made aware of one such obscene scam. In this scam, a buyer bought million dollar plus home. They bought this home even though they didn't have income nearly enough to cover it. They used the proliferation of so called stated loans to pull of the mortgage. In this particular scam, the buyer received roughly $150,000 under the table from the seller. Then, the buyer proceeded to make several subsequent cash out refinances when the money ran out in order to continue to be able to make the payment.

All of this was fine when the real estate market was moving. Once the market topped out though, this sort of a scheme was no longer workable. As soon as the value no longer supported the subsequent cash out refinances, the borrower began to fall behind.

Most of the time, this sort of scam goes unnoticed. In this case though, the amount of the mortgage was too large to ignore. The bank involved did in fact initially investigate. It looked for a while as though it was possible that all involved, borrower, broker, and maybe even appraiser, might all face criminal charges. Then, a couple of months back, the bank reversed course. Instead of pursuing legal action, the bank decided to pursue a loan modification. Rather than prosecuting the borrower for fraud, the bank was now willing to look at redoing the mortgage into something more affordable.

This was of course no easy task. After all, affordability was never in the equation. Of course, several subsequent cash out refinances made that even less likely. Of course, the borrower has since moved out and even found a tenant. With that in place, the bank was able to work something out. What did this borrower get for the obscene fraud? They were rewarded with a brand new loan and this loan is at 1%. No joke. Get ready for the next great mortgage fraud, loan modifications.


Gail said...

That bubble too will burst. And I will still be safe and sound in the modest little house that I could afford.

If Obama and the Democrat majority congress do half of the socialist things they are promising, we are in for a long, cold depression.

Best regards,
Gail S

Anonymous said...

What you described is just a small part of the overall problem. Social Engineering came into play back in the early 90's (thank you Barney Frank/Chris Dodd) with their "affordable housing" legislation which drove buyers (who could not afford the housing) into the market with in turn drove up the price to the 2006 peak. To return to normalcy property values will have to drop 50% from that high.

The very people who caused this "poor public policy" are no in charge of making matters worse under the guise of fixing the problem. Have you noticed who is not taking the economic hit and who is paying for this mess? Can you say depression?

Where are the responsible leaders in congress? A blind man with a cane can see the systematic bankruptcy of America by the greed being played out on Wall Street (for the money) and Congress (for the power to govern). Has it struck you, as it did me,as strange that the intent of the Democrats is to control every aspect of our lives?

Have a great day,
Deed In Lieu

loan modification said...

Depression has played a huge impact on our economy. A lot of people lost their jobs and it aint a pretty picture among a lot of people. Hope everything goes well.

Anonymous said...

Many homeowners are losing their own homes because of the current economic crisis. Good thing there's a loan modification process that they could obtain to save their home from foreclosures. Loan modification can help them lessen up the burden of paying monthly debts.