Thursday, July 23, 2009

Flipper (and friends)

Greetings good citizen,

It all had to start somewhere and that somewhere is now nearly 40 years in the past, when the Masters of the Universe suddenly realized their markets were saturated. But that’s a different (albeit related) story.

When viewed as individual pieces the main segments of this long downward spiral appear to be unrelated and so it is with our friend ‘flipper’.

Tonight’s offering , taken at face value, looks like a simple conspiracy to commit fraud. What was done here isn’t ‘new’; it is merely a ‘repeat’ of what happened during the ‘condo craze’ back in the mid-eighties, which ended with millions ‘trapped’ in condos they had foolishly paid far too much for.

It seemed like such a good idea at the time and hell, ‘everybody’ was doing it, only not so much. Condos are a ‘landlord’s dream’ (and still are, as long as there isn’t a shortage of ‘stupid people’.) You retain ownership of the land and still collect a monthly ‘rent’ called the condo fee. Once the building aged to the point where it needed major repairs, it was time to bail. You’d sell off the rental units that made you the defacto head of the condo association and left the suckers to fend for themselves…but I digress, there is a different part of the condo story that has parallels to the current crisis.

When condos first ‘caught on’ they were relatively cheap. You could pick up the average ‘conversion unit’ for twenty to thirty thousand at a time when your average house was priced in the eighty to hundred thousand dollar price range.

The average shmoe has a hard time scraping up the 20% down payment needed for the average house but almost anyone could scrape up the down payment for a condo.

This is where our pal ‘flipper’ comes in. He already has two or three condos and he’s willing to make you a ‘sweet deal’ that requires no down payment. He sells you one of his units and folds the down payment (and a little more, for his ‘trouble’) into the sale price.

Understand, Reagan was president, the country was in a deep recession and unemployment is as bad as it is today while interest rates were sky high! Well, the next thing you know, the twenty thousand-dollar condo unit is a thing of the past. But you can still get the same ‘sweet deal’ if you go to a ‘condo party’, where some units change hands a dozen times in the course of a single evening, each one getting the same ‘sweet deal’ from the ‘previous owner’.

Sadly, if you turned out to be the ‘greater fool’ you were stuck with a property you owed far more on than you could sell it for.

By the time all was said and done there were thousands of vacant condos and pages of foreclosure notices. Hundreds of banks went out of business and our pal ‘flipper’…he took the money he made flipping condos and bought a nice million-dollar house.

Herald Tribune: Flipping Fraud Ignored
by CalculatedRisk on 7/22/2009 10:24:00 AM

From the Herald Tribune series on mortgage fraud in Florida: Flipping fraud ignored by police and prosecutors

In November 2005, when the real estate market in Florida had just begun to slow, the state’s top law enforcement agency issued a warning that mortgage fraud was about to wreak financial havoc.

In sober language, a 36-page Florida Department of Law Enforcement report explained that banks would collapse and losses would be counted in “hundreds of billions of dollars.”
The report, which was not released to the public but was sent to prosecutors and law enforcement officials across the state, laid out a series of responses to help prevent or lessen the disaster.

But instead of heeding the warning, most law enforcement officials ... did nothing.

Even the most basic recommendation in the FDLE assessment — posting a notice at the county courthouse warning that mortgage fraud is a criminal offense — was ignored in Sarasota County.

Today ... the scope of fraud has overwhelmed state and federal law enforcement agencies to the point that only the most egregious cases are likely to be prosecuted.

In addition to the FBI’s 2,500 cases, state agencies, including the Attorney General and FDLE, have pursued a few hundred more dating back to 2000.

But the amount of fraud dwarfs the number of cases being pursued, the Herald-Tribune found. The Herald-Tribune analyzed nearly 19 million property transactions looking for one type of housing fraud — illegal property flipping. The newspaper found more than 50,000 transactions in which prices increased so much, so quickly, that fraud experts interviewed by the newspaper deemed them highly suspicious.

If you follow the link there are three stories there that outline specific cases where ‘flipper’ (and his confederates) er, ‘defrauded’ banks out of millions of dollars.

But there’s a missing piece to this puzzle, just as there was a missing piece to the condo explosion…why did the banks fail to question these obviously outrageous sale prices?

If we look at the condo craze, prices went from twenty thousand to one hundred and fifty thousand in a matter of months…and nobody thought something was ‘fishy’? Heck, towards the end, ‘new’ condos were selling for more than new single family homes!

It might be nice not to have to do yard work but the downside to this is you have to get ‘permission’ to use the common areas if you’re having guests over. If you have a large clan, you stand a very good chance of being told no!

Sadly, many ‘unsophisticated’ buyers found this out the hard way AFTER they had committed to purchase. These days, condo associations are very up front about what is and is not permitted.

I slid off track there (as there are many ‘horror stories’ related to the early days of the now fabled ‘condo’.) let’s return to the issue of why banks didn’t see what are, in hindsight, some pretty glaring ‘red flags’.

The first issue to hit us in the eye is that banks exist to lend money…albeit, ‘responsibly’. A good credit score and the ability to pay are only two of the three legs of the lending stool.

Banks ‘know’ what properties in pretty much every location ‘should be’ selling for. So when a deal comes in for significantly more than what it should be, whose responsibility is it to verify the ‘legitimacy’ of the deal?

The bank is obliged to protect their depositor’s funds…but apparently mortgage companies are a different animal. The condo craze pretty much burned down the S&L industry but ‘mortgage companies’ didn’t exist until after Glass-Steagal was repealed.

Is it just coincidence that the housing bubble took off pretty much within weeks of the repeal of legislation that prohibited ‘dark pools’ (a.k.a. mortgage companies?)

The banks are being blamed for the housing disaster but the evidence points to the mortgage companies, that dried up and blew away virtually hours after the bottom fell out from under the housing market.

Leaving the Investment banks holding an empty bag…which was promptly dumped onto the taxpayer.

One last piece of the puzzle, the ‘mortgage companies’ were funded by ‘investors’, the primary customers of the Investment banks…

If you recall, the bust was pretty much a situation of too much money chasing too little ‘return’…
When the Internets ‘failed to launch’, there was still too much money seeking high returns.

I probably should have mentioned up front that tonight’s offering is ‘food for thought’ but if you follow the money it begins to look quite sinister, no?

Thanks for letting me inside your head,


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