Peter Hong of LA Land recently posted on an FBI report that Los Angeles leads the nation in mortgage fraud – and not by a small margin either:
Other schemes the report identifies are scams in which a group uses a straw buyer to intentionally default on a mortgage, then buys the property at a discount from the lender through a short sale; and foreclosure rescue schemes in which perpetrators offer to help a borrower in foreclosure and surreptitiously take over the deed to the property.
The interesting part of this report for us is the finding of yet another short sale scam to add to the list. It seems pretty clear that many of the former Circle K shift leaders that started selling wild option ARM loans to granny back in ’05 & ’06 have now fully settled into the short sale business.
With banks holding back huge numbers of REOs from the market and 1 in 5 mortgages underwater (1 in 4 depending on which data source you use), rising unemployment, and rising interest rates, it will be many years before short sales and REOs fade away. Standardized practices, certifications for short sale listing and selling agents, and more regulations need to be put in place to clean up the short sale process so that real price levels can be discovered.
These steps will help to clear the market of excess supply more efficiently and enable the housing market to recover sooner than it would by imposing moritoriums on foreclosures or doing loan modifications to 125% LTV. Moritoriums and crazy loan mods that distort real market prices will only extend the pain. We need to let the free market clean up the mess that it made over the past few years. But this time the free market needs to do it with sufficient regulatory oversight over lenders, loan officers, and real estate agents.