I have absolutely no cognitive aptitude for criminal schemes, so I've been baffled trying to understand the apparently increasingly popular "straw buyer cash-back" mortgage fraud scam. But, while looking, I did stumble upon an equally stumped person who left this plaintive (and sadly unanswered) comment on the Mortgage Fraud website:
"Can someone please help me understand the straw purchaser situation? I have recently discovered that my b/f has changed his surname to his mother’s maiden name then either sold his house to himself in the new name OR he may have just put the house into that name without any type of financial transaction. Since I’m not familiar with how this works, I don’t want to confront him until I have all the facts. Am I on the right track with this or is this something harmless that he’s doing ‘just on paper?’ I’m extremely concerned that something fraudulent may be occurring."
My published articles are archived at iSteve.com -- Steve Sailer
Some people are good credit risks and, as a result, can get mortgage (loans). Some ain't and can't. So you get your uncle or someone to sign off as the buyer, under a gentleman's agreement that you'll pay. The thinking is: as long as the bank gets it's monthly payments, why would they make a stink?
ReplyDeleteEven with good intentions, things can go wrong. http://www.nycourts.gov/reporter/pdfs/2008/2008_31054.pdf "Though none of the matters contained in the moving papers are a sufficient defense to the foreclosure this Court does not pass on any financial breach of contract claims [non-legal buyer and resident -c] may wish to assert against Defendant [alleged straw buyer -c] upon proper substantiation of the same in a separate proceeding. Parties should be aware of the risks they take when they try to circumvent existing procedures and statutes enacted for their protection."
Cash-back refers to immediately taking out a home equity loan so there is cash-back at the closing. Of course, as long as you're pretending stuff anyway, you might add some other permutations (impersonation, fake ID's etc.).
take out a mortgage under a fake name, buy a house from yourself at the price you want, walk away with cash and leave the bank holding the bag.
ReplyDeletejust a guess.
http://www.dfwrealtors.com/fraud/Straw%20Buyers.htm
ReplyDeleteSomeone with bad credit or who wants a loan at an inflated value on a piece of property gets a "straw" (fake) buyer who takes title in name only. The straw buyer either offers (1) a good credit rating which the real owner doesn't have or (2) claims an inflated value (say $150k) for the property so that he can get a bigger loan than the property is really worth (say $100k). In situation (1) the the real buyer executes an after mortgage swap with the straw buyer so that he's got the property with financing he couldn't have obtained on his own. If he can make the payments no one maybe notices. If he can't...
In situation (2) they've got the house plus and extra amount of loan money. Maybe they extra $50k goes into some risky stock market scheme , or a new boat they couldn't obtain financing for, or whatever.
Here's a better explanation:
ReplyDeletehttp://www.searchlightcrusade.net/2006/10/straw-buyer-fraud.html
You know how debit cards give the option of "cash back" when you make a purchase. Imagine the same thing with credit cards...without the issuing bank knowing. That is, the grocery store tells the bank, "So and so bought 1000 dollars worth of groceries", when it was actually 980 dollars worth of cash (on good terms.)
ReplyDeleteSame thing, on a large scale.
Well, I'm no expert on fraud, but isn't this just an obvious scheme for pretending the market value of a house has gone up, refinancing at the higher value, then cashing out the difference? Here's an example:
ReplyDeleteYou buy a house at $100K with a bank loan. Then you sell it to yourself (under a false name) at $500K, financing the $500K from StupidBank. Finally, you take the $400K cash you've netted, and run off, leaving StupidBank with a $500K loan to someone who doesn't even exist and a house worth $100K.
(Though since StupidBank has securitized the loan and sold it to investors, they don't really care either!)
Steve,
ReplyDeleteStraw buying is when someone with good credit signs for the mortgage for someone with bad credit. When the housing market was booming banks would often give you cash back at closing. The good credit person would often get some or all of this money. The hope was the bad credit person would keep making the payments, or would be able to sell if they couldn't.
There were a bunch of variations of straw buying. Some were relatively benign, like flippers with bad credit needing good credit to get a run down property to fix up. Others were bad, like stealing someone's identity and using it for a straw purchase.
As to the lady commenting about her boyfriend, he may be legit or may not be. If he did change his name for whatever reason he can have the mortgage paperwork updated. This is called an assumption and is fairly common when people get divorced or married.
ReplyDeleteIf he actually sold the house to his new self it's fraud, and there are certainly mortgage business people involved with it.
Checking the county records should show if an actual sale occurred.
A owns a house and knows the market value is 500K. B comes to A and offers 700K, but A has to give B 150K in cash in order to get that price.
ReplyDeleteB then finds a corrupt appraiser who says the house is worth 600K, gets a 0-down mortgage, and then never makes a payment on it. The bank is now out 700K on a 500K house.
Possibly during the few months before the bank discovers this a marijuana crop is grown or maybe the house is used as a meth lab.
The bank doesn't much care because it has sold the mortgage to an investment bank, who then in turn has pooled the mortgage into mortgage backed securities.
I don't quite understand the ins and outs of this either. Over the last couple of years in Delaware Co., Ohio, there were a number of these transactions where the seller would ask, say, $300K, the buyer would offer $350K and the terms of the sale would be $50K back to the buyer. Then of course the buyer defaults.
ReplyDeleteAlthough several people were charged it appears to me the guilty party would be the bank officer who approved what was clearly a fraudulent loan.
Also interesting, if only coincidental, is the buyers and sellers in these transactions were all Mohammeds and Husseins, etc.
What in the devil is a "b/f"?
ReplyDeleteIn theory, lying on a mortgage application is a serious federal felony. But since each deal is a small transaction and there are so many going on, the odds that the Feds will pop any particular wrongdoer are pretty low.
ReplyDeleteThe big problem is that everyone in the transaction-- realtors, appraisers, mortgage brokers, lawyers-- makes money with YES and doesn't make money with NO. Hell, even the bank officer lending the money doesn't really care if you're a deadbeat, they intend to sell the mortgage immediately.
If someone in the process had a chance to collect a bounty for uncovering fraud, a lot of fishy deals would be stopped in their tracks.
This article in the Palm Beach Post explains it pretty well, if this is the same scam you're referring to. Two things jump out from reading up about it on the web: 1. FL seems to be a hotbed for this particular scam (maybe no state tax makes it easier somehow?) and 2. it's often extended families involved. All relative, indeed. Frankly, it also seems like a pretty dumb scam, too easy to get caught. If anything it will force the bank to approve appraisers.
ReplyDeletehttp://www.palmbeachpost.com/business/content/business/epaper/2007/10/28/m1a_MORTGAGE_FRAUD_MAIN_1028.html
b/f - boyfriend.
ReplyDelete"Anonymous said...
ReplyDeleteb/f - boyfriend."
Thanks.
It all seems to come down to banks lending more money money than the property is worth, knowingly or unknowingly.
ReplyDeleteWhen I bought a house here in UK, I had to pay for a surveyor, working for the bank, who gave a conservative estimate of its value - £15k less than I was paying for it, but £10k more than the mortgage I was taking out. The bank was happy - the survey showed that if I defaulted they could foreclose and get their money back.
Apparently this elementary safety check ceased working in the US property boom? The banks assumed a house was worth whatever somebody appeared willing to pay for it?
Beowulf makes a very good point that there are a lot of people involved in these deals who make money and have an incentive to look the other way. One group he left out though were the people who get your property taxes. When home prices rise, so do their taxable values. It's not just a particular homes taxable value that rises in these schemes but the taxable value of other homes in the neighborhood and other similar homes and neighborhoods in that area. There's an enormous incentive for almost everyone involved to game the system.
ReplyDeleteTo Simon Newman:
ReplyDeleteWhat you call surveyors are called appraisers in the US. There job is supposed to be the same: appraise the actual value of the home so the lender can make a prudent loan. Unfortunately, this system has in fact broken down because the initial lender no longer keeps the loan, it will be packaged and sold to investors almost immediately and certainly as soon as the lender is able. Since the initial lender has no long-term stake in the loan they are usually more than happy to loan as much as they can whether it make financial sense or not.