Real Estate & Property Law

Think the Mortgage Meltdown Has Made All Lenders Warier? Think Again

Despite the much-publicized mortgage meltdown of recent years, some lenders apparently still haven’t learned their lesson.

In a decimated neighborhood on the South Side of Chicago, homes have been selling lately for around $350,000. But simply driving by and looking at the boarded-up older homes that can be seen throughout the Back of the Yards area, which is sprinkled with spray-painted gang signs and lacks what many would consider basic commercial amenities, should cast doubt on the validity of that pricing, according to Reuters.

And statistics create further cause for concern. The area has a foreclosure rate of nearly 60 percent, the news agency reports in a lengthy article that explores policy and prosecution issues raised by mortgage fraud. Meanwhile, housing prices there supposedly went up 84 percent last year.

Nonetheless, some lenders are apparently granting mortgages on properties purchased for perhaps $25,000 that are sold for around $350,000 within the year, based on sales of “comparable” properties that recently sold for around $350,000.

At Flagstar Bancorp, a special rule applies to mortgage applications for properties in this part of Chicago and in portions of Atlanta that are also fraud hot spots: The applications must be approved both by Marni Scott, who serves as executive vice president for credit at the Michigan-based lender, and its chief appraiser.

“We see cases of mortgage fraud around the country. But there’s nothing out there that could match the mass-production, assembly-line fraud that’s going on here,” she tells Reuters. Virtually every sale, she says, is tainted: “There are no cases of Mr. and Mrs. Jones selling to Mr. and Mrs. Smith.”

Flagstar recently nixed an application for a loan in the Back of the Yards area on a property that had been bought for $33,000 in July of last year as a foreclosure and was to be sold for $355,000 in January. While an appraiser had pointed to four nearby “comps” selling for around $360,000, this is the same kind of number-crunching that left homeowners in far more upscale areas owing mortgage debt considerably in excess of the value of their properties, according to Scott.

Another nearby Back of the Yards area property sold for a little over $25,000 in January 2009, then resold for $355,000 in October. In June of this year, it was in foreclosure again, its $110,000 mortgage allegedly in arrears.

Taxpayers can be expected to foot much of the bill for such foreclosures throughout the country, Reuters says, since the government is largely backing the mortgage market right now. Abandoned buildings also encourage crime and blight, hurting the property values of legitimate owners, who may also be on the hook for higher taxes as a result.

Observers—including companies that stand to benefit from selling such products—say centralized, shared record-keeping could help red-flag potential fraud.

“In some neighborhoods in Atlanta there hasn’t been a clean transaction in 10 years,” says Ann Fulmer. She is a vice president at Interthinx, a fraud-prevention company.

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