Arts & Crafts, Part 2: The Masters

The people of the United States are a crafty bunch. We’re persistent. We’re ambitious. We don’t use the words I Can’t. We found ourselves religiously oppressed, so we sailed across a seemingly endless ocean for freedom. We were taxed to death, so we fought to send the taxman back to Europe. We were undermanned in an agrarian economy, so we withstood the shame of slavery (sixty years after our former English oppressors had the courage to end it). And then, after we tired of stabbing one another with bayonets for four years, we were distracted by the next great cause: applied technology. Between the years of 1860 and 1890, the enduring entrepreneurial spirit drove Americans to apply for more than half a million patents. This was more than ten times the previous 70 years combined. Fast forward a century and change, and we’ve got the new economy, which is kind of like the old economy with one awesome exception: the things worth the most are things we never see, can’t touch, and don’t understand.

In 2008, the FBI investigated 1,644 cases of mortgage fraud. That was more than one hundred times the number of cases from only two years earlier. A crafty bunch indeed. The pilgrims would have been proud had pride not been an unforgivable sin akin to women learning to swim.

So, who were all these sinners driving the Love Boat through the sink drain of America’s real estate market? The Masters of Fraud. Here is an example of the sort of tricks they held up their sleeves:

The Check Is In The Mail

It’s pretty smart at first, but it requires a fairly high level of depravity. Let’s say there is a guy named David. He has spotless credit and he smells terrific. Any bank would love to lend him money. In fact, they’ve lent him money in the past. And when they did, Joe the broker got him the loan. So when Joe got the idea to make some big bucks, he readied an application for a new loan for David. It had David’s name, his social security number, his employer’s name—everything. All the documents he needed were already on file. He didn’t even have to call and bother David. He cut and pasted David’s signature from the last loan and sent the new documents out to the lender. The problem was that the loan was for the purchase of a home which David had neither seen nor heard of and had no intention of every buying.

Joe then goes out and finds himself a mark, who we’ll call…Mark. Mark has crappy credit and he smells like Subway no matter how much he washes. Much like his high school classmates, the banks don’t like him at all. But he still needs a place to live. Luckily for him, Joe makes him an amazing offer: come move into this great $300,000 home, pay an oddly low monthly payment of $1,500 directly to Joe who will make the mortgage payments himself until the time when Mark can get back on track and purchase the place himself at a discounted rate. After all, he’ll have been making the payments in the meantime and earning some equity along the way.

With the help of shady real estate and title company agents, the no-money-down loan gets approved in David’s name. Joe signs the closing documents himself (using David’s name), the previous mortgage belonging to the seller gets paid off, and the proceeds go to the seller. Here’s where it gets fun.

The seller is Joe. He bought the place for $200,000 a few months earlier. He got an appraiser to value it at a 50% increase. After paying off the mortgage Joe had on the property (which was also a no-money-down loan), Joe splits the $100,000 profit with his cohorts. Not bad—and also, not done. So what happens to Mark? He’s living in what is actually a $200,000 home—still not bad for what he’s used to and the price is right at $1,500. But when Joe collects those payments, instead of paying the mortgage, he pockets the cash. When the lender comes knocking on Mark’s door a few months later, Joe is nowhere to be found. Mark gets evicted, and the lender has to sell the place. In a decent market, lenders typically take a 10% hit when they sell a foreclosure. In a bad market, it’s much worse. They’re $300,000 into it, and it’s only worth $200,000 to begin with. Sucks for them. Oh yeah, and let’s not forget about David. He’s the one the lender comes after to foreclose upon. Remember, it’s his mortgage. His credit is going to suck for the next ten years. And if you’re into trends and statistics, the likelihood is that there are five other Marks out there living in five other homes that are secured by five other mortgages—all under David’s name…because Joe is persistent. He is ambitious. And he doesn’t use the words I Can’t.