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Are You Missing the Real Estate Boom? (part 1 of 2)

Whiskey & Gunpowder
August 23, 2005
by Mike "Mish" Shedlock
Illinois, U.S.A.

"Realtors Say Home Prices Are "Close to a Peak,' With Condos to Fall":

"'The housing market is probably close to a peak right now in terms of sales activity, but there is tremendous momentum,' said David Lereah, chief economist for the [National Association of REALTORS], in a statement. 'Sales are expected to coast at historically high levels into next year, but they will trend slightly downward.'

"Lereah's statement on Tuesday comes six months after the release of his book, Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade -- and How to Profit From Them."

Can't afford to buy? No problem. The Orange County Register reports, "Buyers Doubling Down":

"More buyers are piggybacking, using tow loans to buy an O.C. home."

Buyers are commonly using yet another new loan trick. They take out two mortgages at the time of purchase in so-called "piggyback" transactions, according to DataQuick.

"Piggybacks are frequently used by cash-strapped buyers who can't meet a key financial hurdle.

"Lenders prefer a down payment so large that a key mortgage ratio -- the loan's size versus the value of the home -- is 80% or less. That's an industry quality standard to get the best mortgage deals.

"But as purchase prices soar, lenders now allow buyers to essentially borrow the down payment shortfall: a first mortgage at the desired 80% loan-to-value ratio plus a second mortgage to make up the difference.

"Such double-dippers averaged 38% of all local buyers in the 12 months ending in June -- basically double the rate in 2002, DataQuick says. A decade ago, just 2% of O.C. home purchases went piggyback.

"With every boom comes two things:

1) Panic fear of "missing out"
2) Rampant fraud"

Let's take a look at No. 2 since No. 1 should be blatantly obvious by now.

The Detroit News reports, "Refinancers Must Beware Foreclosure "Rescuers: Fast-talking predators can quickly get your home for a fraction of what it is really worth":

"You may think kindly toward companies that would offer a hand to debt-ridden homeowners on the brink of foreclosure. Don't. The majority of these so-called foreclosure 'rescuers' are actually predators who offer sinking homeowners what Harvard Law School professor and bankruptcy expert Elizabeth Warren calls 'the cement life jacket.'

"Before you're even aware of it, these scam artists will have acquired your home for a fraction of what it would have brought at sale. Or in an even worse scenario, they will have transferred your title into a trust that then enables them to rent or 'resell' your property to equally hoodwinked buyers while, to your surprise, you remain legally obligated to make the mortgage payments...

"Foreclosure 'rescue' scams fall into three main categories:

** Phantom help: The "rescuer" charges outrageous fees for light-duty phone calls or paperwork that the homeowner could easily do, none of which results in saving the home. This predatory scam gives homeowners a false sense of hope and prevents them from seeking qualified help.

** The bailout: In this scam, the homeowner is deceived into signing over title with the belief that they will be able to remain in the house as a renter and eventually buy it back over time. The terms of these scams are so onerous that the buyback becomes impossible, the homeowner loses possession, and the 'rescuer' walks off with most or all of the equity.

** The bait-and-switch: In this scam, the homeowners think they are signing documents to bring the mortgage current, but instead actually surrender their ownership. They usually don't even know they've been scammed until they're evicted."

** Following is an e-mail about fraud from a broker friend of mine. In this case, it is about appraisal fraud. Dave Donhoff of No Bull Mortgage writes:

"A friend of mine is a retired mortgage banker with over 40 years in the industry... one of the pioneers of the original equity stand-alone second, and over 25 years in management at Beneficial Finance. He not only KNOWS all the myriad regulatory issues (Reg Z [TILA], Reg X [RESPA], FACTA, Sarbanes-Oxley, and many others), he's been involved in crafting them at various stages in his career.

"He and I watch and chat about the 'fraud blogs' (by industry attorneys) daily, and marvel at the blatant, unrepentant fraud that goes unconstrained on several of the mortgage industry professionals' discussion boards.

"So... my pal calls up the FBI (and goes through a massive runaround of handoffs and brushoffs to get to someone who theoretically is in the authorized position), explains who he is and what his background is (to establish he's not just another crackpot old fogy complaining about noisy-neighbor communist insurgents), and seeks to find who he can channel airtight fraud leads to for prosecution. FINALLY, he's handed off to someone who appears to understand the issues and has an interest in proceeding. This agent sets an appointment to personally visit my pal onsite at my buddy's home.

"The day comes (last week), and the agent doesn't show. Instead, two junior agents come out in his place, have absolutely no clue about anything about the finance business, let alone the pertinent laws and regulations, and merely do a 'fill in the forms' data collection interview with my pal, as though it were a police report for a stolen car. The attitude was very clearly, 'Let's get this over with... don't call us, we'll call you.'

"Mind you... we see brazen and pure banking fraud being committed, out in the open, by not only loan originators, but by wholesale lenders' agents and underwriters (not to mention 'make it work whatever it takes' real estate agents) CONSTANTLY! It's being done, unencrypted, on industry message boards nationally... it's BEGGING to be 'trimmed' (if not whacked at the knees unmercifully!).

"The FBI delivered a very clear and obvious message: 'This isn't news, this isn't terrorism... this is only going to be little fish commercial issues, so we frankly don't give a damn... but thank you, and have a nice day ;~).'

"So... I have no idea what the solution is, short of the disease going full course. Our regulatory enforcement is less than sufficient; it's leaving the warehouse back door open, going to the roughneck bar, and bragging about it."

Check out this snip of a horror story posted by MEW on The Motley Fool:

"A few years ago, I refinanced my house and got a lower mortgage, took a little money out for some landscaping and bills. Loan was $187K, house was appraised at $225K.

"This spring, I went to refinance again. Unfortunately, because times have been hard, employment has been on and off, and we were hoping to sell the house in a few years, so I refinanced to an interest-only loan, took some money to pay more bills, and kept a pretty low rate, 5.25% fixed, I think. At this time, just a few short months ago, the appraisal of my house was $260K, my new loan amount $204K.

"I was only willing to refinance and take out money because my home was now valued at $260K. $260K seemed high to me, I've also seen nonremodeled homes on my street selling for under $200K, but I thought I could probably sell for $240K.

"I live in an area that realtors say is 'hot.' It's a neighborhood that used to be undesirable because it was near the airport, but now the airport has moved far away and the old airport is a very hip and trendy new home community. New shopping areas are springing up around this area; recently they built a brand-new arts magnet school one block away....

"So we decided we would try to sell the house this month. I called a realtor.... They did a very thorough comp evaluation and came back to me saying I would be lucky to get $200K for the house.

"In my mind, I thought I would like to list it for $250K and accept $240K. I was floored. I explained the $260K appraisal and the response, 'Oh yeah. Appraisers do that for mortgage brokers to get the loans/refinances.' IS THIS LEGAL? ETHICAL?"

Let's address Mew's question: Is this legal? Is this ethical?:

** No, it is not legal, but proving appraisal fraud is going to be very tough to do

** Is it unethical? Of course, but no one cares

** Credit card companies like it because they get paid and consumers just go right out and run up their credit card debts again

** Originators like it because they get paid to originate the loan no matter how bad it is

** Originators in turn take all of the poor loans and sell them to Fannie Mae or to other "investors" stupidly striving for yields just slightly better than Treasuries, with nearly infinite more risk on a percentage-wise basis.

As long as originators can count on selling mortgages to Fannie Mae (no matter how bad they are) or securitize them in a package of loans sold to "investors," blatant fraud is likely to continue. Such practices will continue until credit lending eventually blows up. At that time, there will be 24 congressional hearings trying to figure out "how it happened." Mish is quite confident that in the upcoming "biggest hand-washing affair in history," the loudest proclamation will be, "No one could possibly have seen this coming."


Aug 18, 2005
Mike Shedlock "Mish"

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