From Flips to Flops
During the boom years, fraudulent property-flipping schemes bedeviled the mortgage industry. As the housing market recovers, the scourge du jour is called flopping.
In his quarterly report to Congress Tuesday, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, urged that the Treasury Department stiffen appraisal requirements for the administration's Home Affordable Foreclosure Alternatives program.
Recent revisions to the program, which encourages short sales (liquidation of the home for less than is owed on the mortgage, with the lender's consent), could give rise to flopping schemes, he warned. In flopping, home values are fraudulently deflated for the purpose of decreasing the cost of a short sale to a straw purchaser.
The property is then quickly resold for its true market value, "leaving the difference in the crook's pocket," the inspector general said in the report. (Conversely, when a property is flipped, a house is sold at an inflated price, sometimes to an unwitting buyer but more often to an insider.)
The inspector general came down on the side of the Appraisal Institute, a trade group for appraisers, which sent a letter to Treasury Secretary Tim Geithner in March urging "independence in the valuation process" and the use of full appraisals.
Barofsky recommended that Treasury adopt a uniform appraisal process similar to that of the Federal Housing Administration for all the department's loan modification and foreclosure alternative programs.
As it stands now, servicers are allowed to use broker price opinions rather than a full property appraisal, making the program vulnerable to such schemes, the inspector general said.
BPOs are cheaper at about $40 per property, compared with the $350 to $500 for the cost a full appraisal.
The Appraisal Institute said in its letter that real estate agents and brokers are not trained in property valuation and have "an inherent bias towards quick results and actions which produces a fee for themselves irrespective of whether the lender, servicer, investor, property owner or borrower gets a fair return on the short sale."
The inspector general warned that the recent doubling of the incentive fee to $3,000 for borrowers who complete a short sale (meant to cover moving costs) without adding antifraud protections "increases the incentives for those participating in criminal short sale scams."
The Department of Housing and Urban Development has elevated Barton Shapiro to acting director of its Office of Real Estate Settlement Procedures Act and Land Sales.
Shapiro had been a deputy director at the office. He took over the directorship from Ivy Jackson, who helped shape the final Respa rule that HUD published in 2008. The rule's overhaul of mortgage disclosures took effect this year.
Jackson, who had been the office's director since 2000, has been reassigned to the Office of Insured Health Care Facilities, which administers mortgage insurance for hospitals and long-term-care facilities.
The moves were announced in an undated memo from HUD Assistant Secretary David Stevens this month.
When Rejection Is Praise
Halfway into its complaint against Goldman Sachs Group Inc., the Securities and Exchange Commission pays a compliment, of sorts, to Wells Fargo & Co.
During the process of selecting a portfolio of mortgage-backed securities that were to be the subjects of a bet arranged by Goldman, the complaint says, the hedge fund Paulson & Co. rejected several bonds that Wells had issued.
As most readers probably know by now, one of the SEC's main allegations is that Goldman put together the portfolio for Paulson to bet against, without disclosing the hedge fund's true role to the investors on the other side of the trade.
"Wells Fargo was generally perceived as one of the higher-quality subprime loan originators," the SEC says. (No oxymoron jokes, please.) That is why Paulson would have wanted to exclude Wells' mortgage-backed securities from the deal.
(For the record: Paulson, which the SEC did not accuse of wrongdoing, has said that ACA Management LLC, one of the long investors in the deal, "had sole authority over the selection of all collateral." Goldman Sachs is fighting the securities fraud case, saying that it provided extensive disclosures, that it did not misrepresent Paulson's role and that Goldman itself lost money on the deal.)
According to the complaint, "Paulson's selection criteria favored [mortgage-backed securities] that included a high percentage of adjustable rate mortgages, relatively low borrower FICO scores, and a high concentration of mortgages in states like Arizona, California, Florida and Nevada that had recently experienced high rates of home price appreciation." In other words, those most likely to sour.
The investors that effectively sold Paulson insurance against defaults on the portfolio ended up losing $1 billion, the SEC says.
In this case, Wells Fargo probably would concur with Groucho Marx's saying, "I don't care to belong to a club that accepts people like me as members."
"The SEC's allegations read like a 'Sopranos' episode. … It would be like Goldman selling consumers houses deliberately designed to collapse just so Paulson could collect the insurance."
— Connecticut Attorney General Richard Blumenthal, quoted in the Hartford Courant on Saturday.
"What's the problem? There's nothing illegal about selling customers a product designed to fail. The Chicago Cubs do it every year."
— Stephen Colbert, joking about the Goldman case on television's "The Colbert Report." The Cubs have not won the World Series since 1908.