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Under a flopping scam, the owner seeks permission from the lender for a short sale at a price that is below what he owes on the property. The lender hires a real- estate agent to provide what’s known in the trade as a “broker price opinion,” which is the agent’s informed estimate of the property’s worth. But instead of providing honest evaluations, some agents are low-balling the number. And then, if the lender accepts the figure, they or an accomplice buy the house in question at that price and flip it, or resell it quickly at the true market value and pocket the difference.
Crime and punishment
Some readers asked what’s the big deal? After all, no crime is committed. “I don’t really get the objection to this,” wrote Bill, a Colorado attorney. “If I buy a short-sale property from a bank and sell it a year later for a profit, there’s no issue. If I do it a month later, no problem. Why is it fraud if I resell it a day later? Lenders are not losing money on the marked-up price because they cannot sell the property; they are not the owners yet.”
Yes, it’s true. No crime. Yet. The original reader, J. McK., only had an inkling of what was planned from, I suspect, his neighbor, who was about to pull the wool over his lender’s eyes. But if the sale and repurchase does go down as J. McK. described, the whole thing is a form of mortgage fraud that alert reader Joseph Branton, a loan officer at TN Mortgage Connections in Knoxville, Tenn., points out carries a 35-year prison sentence.
Here’s the thing: If a lender pays an agent to provide an “expert” opinion (we’ll get into that in a moment) the bank has a right to a fair and honest evaluation. If the agent purposefully serves up a phony price opinion, it is fraud. And the fraud is compounded if the agent expects to profit from the phony valuation by participating in a scheme in which the lender agrees — based on the agent’s price opinion — to the sale of a house at a price that is less than what the current borrower/owner owes the bank.
The agent is paid a commission to sell the house. Then, when the house is resold a few days or weeks later at the real market value, he gets another commission. That, and plus the agent usually at least splits the gain with the second seller, who is usually in on the scheme. And the lender gets short-changed, because if the house had sold for its real value, it wouldn’t have lost as much on the short sale.
According to a study by CoreLogic, a mortgage and real-estate data research company, short-sale fraud, or flopping, is an emerging financial crime. Lenders will lose more than $375 million this year alone when they sell undervalued houses to unscrupulous realty agents and their cohorts, the company says. In its study of the issue, CoreLogic labeled as suspicious two-thirds of short-sales that are resold within six months at a profit of 40% or more.
Loan officer Branton also asks: “Why isn’t someone arresting these people?”
They are. For example, two real-estate agents in Connecticut will soon be sentenced in connection with a short-sale mortgage fraud scheme involving four properties. The pair face a maximum term of imprisonment of 30 years and a fine of up to $1 million on each count.
The indictment against the two agents charged that they created straw-buyer transactions in order to negotiate with mortgage holders to allow sales of the properties to occur without paying the mortgages in full. During the negotiations with the mortgage holders, the agents knew that legitimate purchasers already had executed purchase and sale agreements with the property owners to purchase the property at higher prices.
On each of the transactions, the agents arranged for two closings to take place, the first from the property owner to the straw buyer at the short-sale price, and the second from the straw buyer to the legitimate purchaser at a higher price. The lenders in each case did not know about the second closing and received no proceeds from the second closing. The two agents pleaded guilty to all the charges.
Real-estate agents don’t do that, do they?
Next, we have the many, many readers who suggest that real-estate agents would never, ever participate in such shenanigans, to which I say, balderdash. Some, but not all — in fact, just a fraction — will do anything to make a buck, as the Connecticut case cited above shows.
And that is far from an aberration, according to Michael Richardson of BrokerPriceOpinion.com, a Colorado company that has streamlined the BPO process with proprietary web-based software tools.
Richardson’s company maintains a network of some 65,000 real-estate professionals and appraisers whose work is reviewed and rated daily to ensure its quality. On top of that, though, he has had to cut loose 20,000 or so for inferior work — incomplete orders, poor quality and bad information — over the last five years or so. As Richardson said in my original story, realty agents are “clever, even more so than criminals.”
But Alan Joyner of Richmond, Va., writes that the problem “is broker price opinions, period. Brokers (and especially agents) are not trained as appraisers and quite often don’t know their own bottom from a hole in the ground about valuing property.”
I suspect that lenders use BPOs because they are cheaper and faster than full-blown appraisals. But many readers believe that lenders get what they pay for and deserve to be hoodwinked, if only because they are seen as the original crooks who fleeced borrowers in the first place. That, of course, is absurd. Lenders don’t deserve to be screwed anymore than consumers.
And what about consumers, especially those poor schnooks who sell their houses in a short-sale at the low-ball price? There are two thoughts on this.
Joyner, a former appraiser, pointed out that anyone who lists or sells the property is an interested party and should not be doing any kind of valuation work. He says sellers should always hire a competent appraiser to perform a market-value appraisal rather than rely on a real-estate agent’s opinion.
At the same time, other readers suggest that the problem is a misrepresentation of agency on the part of shady real-estate agents. If sellers hired agents who work exclusively with sellers and no one else, they maintain, any conflict of interest world be avoided.
Maybe so. But — and this isn’t meant to disparage buyers’ brokers, whom I have long favored over traditional agents — I suspect there are just as many rotten apples, percentage-wise, in that barrel as there are in the entire real-estate community.
http://www.marketwatch.com/story/thi...ce=patrick.net
Crime and punishment
Some readers asked what’s the big deal? After all, no crime is committed. “I don’t really get the objection to this,” wrote Bill, a Colorado attorney. “If I buy a short-sale property from a bank and sell it a year later for a profit, there’s no issue. If I do it a month later, no problem. Why is it fraud if I resell it a day later? Lenders are not losing money on the marked-up price because they cannot sell the property; they are not the owners yet.”
Yes, it’s true. No crime. Yet. The original reader, J. McK., only had an inkling of what was planned from, I suspect, his neighbor, who was about to pull the wool over his lender’s eyes. But if the sale and repurchase does go down as J. McK. described, the whole thing is a form of mortgage fraud that alert reader Joseph Branton, a loan officer at TN Mortgage Connections in Knoxville, Tenn., points out carries a 35-year prison sentence.
Here’s the thing: If a lender pays an agent to provide an “expert” opinion (we’ll get into that in a moment) the bank has a right to a fair and honest evaluation. If the agent purposefully serves up a phony price opinion, it is fraud. And the fraud is compounded if the agent expects to profit from the phony valuation by participating in a scheme in which the lender agrees — based on the agent’s price opinion — to the sale of a house at a price that is less than what the current borrower/owner owes the bank.
The agent is paid a commission to sell the house. Then, when the house is resold a few days or weeks later at the real market value, he gets another commission. That, and plus the agent usually at least splits the gain with the second seller, who is usually in on the scheme. And the lender gets short-changed, because if the house had sold for its real value, it wouldn’t have lost as much on the short sale.
According to a study by CoreLogic, a mortgage and real-estate data research company, short-sale fraud, or flopping, is an emerging financial crime. Lenders will lose more than $375 million this year alone when they sell undervalued houses to unscrupulous realty agents and their cohorts, the company says. In its study of the issue, CoreLogic labeled as suspicious two-thirds of short-sales that are resold within six months at a profit of 40% or more.
Loan officer Branton also asks: “Why isn’t someone arresting these people?”
They are. For example, two real-estate agents in Connecticut will soon be sentenced in connection with a short-sale mortgage fraud scheme involving four properties. The pair face a maximum term of imprisonment of 30 years and a fine of up to $1 million on each count.
The indictment against the two agents charged that they created straw-buyer transactions in order to negotiate with mortgage holders to allow sales of the properties to occur without paying the mortgages in full. During the negotiations with the mortgage holders, the agents knew that legitimate purchasers already had executed purchase and sale agreements with the property owners to purchase the property at higher prices.
On each of the transactions, the agents arranged for two closings to take place, the first from the property owner to the straw buyer at the short-sale price, and the second from the straw buyer to the legitimate purchaser at a higher price. The lenders in each case did not know about the second closing and received no proceeds from the second closing. The two agents pleaded guilty to all the charges.
Real-estate agents don’t do that, do they?
Next, we have the many, many readers who suggest that real-estate agents would never, ever participate in such shenanigans, to which I say, balderdash. Some, but not all — in fact, just a fraction — will do anything to make a buck, as the Connecticut case cited above shows.
And that is far from an aberration, according to Michael Richardson of BrokerPriceOpinion.com, a Colorado company that has streamlined the BPO process with proprietary web-based software tools.
Richardson’s company maintains a network of some 65,000 real-estate professionals and appraisers whose work is reviewed and rated daily to ensure its quality. On top of that, though, he has had to cut loose 20,000 or so for inferior work — incomplete orders, poor quality and bad information — over the last five years or so. As Richardson said in my original story, realty agents are “clever, even more so than criminals.”
But Alan Joyner of Richmond, Va., writes that the problem “is broker price opinions, period. Brokers (and especially agents) are not trained as appraisers and quite often don’t know their own bottom from a hole in the ground about valuing property.”
I suspect that lenders use BPOs because they are cheaper and faster than full-blown appraisals. But many readers believe that lenders get what they pay for and deserve to be hoodwinked, if only because they are seen as the original crooks who fleeced borrowers in the first place. That, of course, is absurd. Lenders don’t deserve to be screwed anymore than consumers.
And what about consumers, especially those poor schnooks who sell their houses in a short-sale at the low-ball price? There are two thoughts on this.
Joyner, a former appraiser, pointed out that anyone who lists or sells the property is an interested party and should not be doing any kind of valuation work. He says sellers should always hire a competent appraiser to perform a market-value appraisal rather than rely on a real-estate agent’s opinion.
At the same time, other readers suggest that the problem is a misrepresentation of agency on the part of shady real-estate agents. If sellers hired agents who work exclusively with sellers and no one else, they maintain, any conflict of interest world be avoided.
Maybe so. But — and this isn’t meant to disparage buyers’ brokers, whom I have long favored over traditional agents — I suspect there are just as many rotten apples, percentage-wise, in that barrel as there are in the entire real-estate community.
http://www.marketwatch.com/story/thi...ce=patrick.net
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