Fraud- How does it happen, why does it happen?

Fraud- How does it happen, why does it happen?

I have submitted another posting on the Real Estate Finance market, with basic news on what is happening every day. I think the next logical step is to talk about WHY this is happening. The main motivation and reason that a market collapses or gets saturated is greed. There is soooo much money to be made on every side of every transaction. Realtors, mortgage brokers or lenders, title and escrow, appraisers, everyone involved, gets paid, and gets paid well for their time. With the increase in demand over the last 4 years, the attractiveness of joining the real estate workforce has gotten even more attractive, and relatively easy to get started. Why wouldn't people want to be involved? (I am one of them!!)
What this did was open the doors to the negative part of the business. Everyone wants to "eat" while there is food on the table, and eat well. This desire to "eat", fueled the market, and created the inevitable demise of the mortgage market that we are starting, and I stress, starting...to see. It is only the beginning.
On the mortgage side, there are many types of fraud that exist, and ultimately kill the market. Some of the most common forms of fraud are:
Pushing appraisal values
Faking or altering income or asset documentation
Giving cash-back on purchase transactions
Flipping Properties- (not like you see on TV)
Pushing Appraisal Values
This is a basic form of fraud. Lenders are relying on an appraiser to come to a decision on the value of the property without "heat" or "pressure" from a seller, buyer, mortgage broker, or real estate agent. That "pressure" can cause them to inflate the value, for fear of losing future business from the parties involved. Now, in the case of the 3 years ago when the market was appreciating every day and you didn't have to really worry about the value, it didn't really matter as much, but when now, we are faced with the thought that home prices possibly coming down, this "pressure" can hurt the people that are financially banking on the appraiser, the lender.
Faking or Altering Income of Asset Documentation
This is a technology age. Creating fake forms of income or asset proof is out there, and I am fighting against it daily. If I have a borrower that has a credit score, makes a certain amount of income, and according to the market, deserves a certain rate, and I am getting shopped and beat by someone that is quoting a rate 1 or 2 percent lower than my quote, with the same cost, something is going on. There are two possibilities, they are faking documentation to get into a better program, or they are pulling a "bait and switch" type scheme getting the borrower to go with them, and then switching the terms upon the loan signing. Both cases are forms of fraud and are not just unethical, but are illegal.
Giving cash-back on purchase transactions
One of the more common types nowadays is when a buyer will get cash back after buying a home. This is a form of fraud, in that again, the appraisal is ceritifying a value of the property, and that extra out of escrow cash-back is distorting that value, and the lenders investment.
Flipping properties
I am not talking about when a person buys a home and improves it and sells it the next month for a profit, that is just good business. I am talking about when someone buys a property, sells it to a friend for a profit, who sells it to another friend for a profit, and sells it again to another friend for a profit. This is an evil type of fraud, because each person along the way makes a killing, and the final lender is the one left with the bill.
Fraud is happening every day, that is nothing new. When people can make 3-5 points on a transaction (in California that is up to $25,000 on a normal transaction!) and all you need is a decent credit score, mortgage brokers can make a killing, and in the long run, the person that is left holding the knife is the bank. In this case, New Century(update at http://money.cnn.com/2007/ 03/13/markets/subprime.reut/index.htm?po stversion=2007031314), the second largest sub-prime lender, is on trial, and going to be dealing with it for years, if they are even going to be around. I think over the next few years we will see a decrease in fraud, because lenders won't ignore potential red flags, and a balancing of the market, so that we will get back to a more honest business.

Tags: purchase, Mortgage, Refinance, Fraud, New Century, Appraiser, Sub-prime, flipping, w2's, assets, cash-back