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Lending Meltdown

Topic: Loans and Credits

There were found throughout hundreds of fraudulent in southern California transactions on the theme of real estate. These transactions are all easy to spot because they're a matter of public record.

The most common type of fraudulent transaction recently is the ISAC scheme (Inflated Sale and Crash). This type of scheme involves cash back at the time of closing to a third party. To accomplish this, the purchase price has been inflated 10 to 30% above market value. When this type of transaction has been perpetrated it is readily apparent, for example you'll see a property listed at $500,000 for several months then sold with a final purchase price of $600,000, with no down payment. The seller is paying the difference, in this case $100,000, to the buyer at closing.

Now you may ask, "How can this be possible?" During the last year, with the number of transactions occurring declining many lenders relaxed their standards for borrowers (no secondary review of appraisal). This created an ideal environment in which these fraudulent transactions could thrive, since the key to these schemes is the appraisal. Every one of these sales required a fraudulently inflated appraisal.

Federal and state investigators have been overwhelmed during the last 15 months due to the sheer number of these types of transactions. The primary parties involved in these fraudulent sales are the selling agent, the appraiser, the buyer, and a third-party through whom the money is funneled. All of which will be subject to prosecution. In this type of investigation the listing agent and seller are also typically considered co-conspirators.

When a transaction of this type closes, the buyer has achieved their objective (cash back at closing). The end result of this is that once the transaction closes the buyer has no motivation to make any payments on the property because they have no money invested. The loan quickly goes into default and the lender ends up foreclosing on a home worth 10 to 30% less than the fraudulently appraised value.

In conclusion, there are new schemes consistently popping up to take advantage of changes in the real estate market. There are many victims, not only the lender but people unknowingly involved, as well as the stability of the real estate market and the communities in which these fraudulent schemes have taken place. To make the right decisions you must have professionals on you trust.

07/30/2007
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