The Orange County resale home sales market enjoyed its seventh consecutive month of increasing affordability. The lack of a move-up market has depressed sales more than 25% below the long-term average.

Irvine Home Address … 11 VERNAL Spg Irvine, CA 92603

Resale Home Price …… $4,895,000

Are you ready to crawl out?

Are you ready to take my hand and see?

Are you ready to crawl out?

From within the slow bleed?

Thousand Foot Krutch — Slow Bleed

The story of the housing market over the next few years will be a slow bleed. Prices won't likely crash hard as lenders have learned to control the price descent by slowly releasing product. They know if they release too fast, prices will crash, so they slowly bleed the market drop by drop. This slow bleed will go on until the inventory of distressed properties is cleared from the system. At current rates, that will take a very long time.

O.C. home prices at 7-month low

September 25th, 2011, 12:01 am — posted by Jon Lansner

DataQuick’s first glance at September and Orange County homebuying trends shows pricing at a 7-month low — suggesting that a summertime price bump may have lost steam.

For the 22 business days ending Sept. 8 – the latest numbers — Orange County’s real estate market saw …

• Median selling price for all residences of $417,500 – that is off 6.2% vs. a year ago. Last full month that was lower was February 2011 at $410,000.
• Total Orange County sales of 2,683 residences closed in the latest period — that is up 6.8% vs. a year ago.
• Note: 16 of 83 Orange County ZIPs had both rising sales and prices in the period. Is your ZIP one of those neighborhoods? To see, CLICK HERE!

Here’s the breakdown of recent activity by key category; included is how the latest results compare to the average monthly sales pace from 1988 through 2010:

Slice	Price	Price vs. year ago	Sales	Sales vs. year ago	Sales vs. ’88-’10 avg.
Houses	$470,000	-11.3%	1,784	+8.6%	-21.0%
Condos	$269,500	-10.2%	749	+4.5%	-13.0%
New	$583,000	+12.2%	150	-2.0%	-71.5%
All O.C.	$417,500	-6.2%	2,683	+6.8%	-26.4%

Take a careful look at the chart above. Note the price change on resale houses and condos are both down over 10%. Only new home sales — numbers which can be easily gamed by incentive programs — shows any strength at all in the market. And since the actual sales volumes of new homes is declining, the price gains are largely an illusion.

Also note the rate of sales versus the long-term average (1988-2010). Sales of all housing types is down well below their historic norms. It is particularly bad in sales of both new and resale detached houses. This is explained by the lack of a move up market due to the utter collapse of low end pricing. Nobody at the bottom of the housing ladder has any money to purchase a move-up home.

And more analysis ….

• $417,500 median selling price is 35% below June 2007′s peak of $645,000.
• Current price is 7.2% below 2010′s peak (May and July) of $450,000; 2% above end of 2010′s median ($410,000.)
• The most recent median is 13% above the cyclical low hit in January 2009 at $370,000 — so the median has recouped 17% of the $275,000 price drop from the peak.

While it's true that the median does not show the double dip that both the hedonic and the $/SF measures show, the median is more susceptible to changes in the mix than either of those measures.

Basically, when the bottom dropped out of the market, the only thing that was selling was low-priced homes. With the complete seizure of the high end of the market, a radical change in mix caused the median to decline more rapidly than actual home values. Therefore, the increase in the median since then is more reflective of a change in sales mix than an actual increase in sales prices of individual homes.

• Compared to cyclical low, single-family house median is 12% higher ($418,250 in January 2009); condo median is 7% higher ($252,000 in March 2009.) Builder prices for new homes are 38% above June 2009′s $424,000 bottom.

Does anyone believe builders are selling the same houses for 38% more than they were in 2009? Do you see how the change in mix effects the numbers?

• The median selling price of a single-family home is 36% less than their peak pricing (June ’07). Condos sell 43% below their peak in March 2006. Builder prices for new homes are 33% below their February ’05 top.

Those are some sobering numbers. Most of that drop is due to a return to sane lending standards and the commensurate decline in loan balances.

• Single-family homes were 74% more expensive than condos in this period vs. 77% a year ago. From 1988-2010, the average house/condo gap was 57%.

This disparity portends a continuing decline in high-end pricing. Prices at the high end are generally pushed up from below as move-up buyers take their accumulated equity and increase buying power to bid up prices in the next rung of the housing ladder. With the collapse of low end pricing, what is ordinarily a price push is turning into a price pull — to the downside. Without a move up market, high end prices are floating in air with little real demand to support them.

The chart from Global Decision displays how during the price rally, condos rose more rapidly than SFRs, so prices were pushed up from below. Now with the decline at the low end, the price push has reversed and a price pull has taken its place.

As the lack of a move up market squelches demand, the substitution effect will also pull demand away from higher priced properties as each successive rung on the property ladder falls to more affordable levels.

• Builder’s new homes sales were 6% of all residences sold in the period vs. 6% a year ago. From 1988-2010, builders did 14% of the Orange County homeselling.

Despite the fanfare regarding the Irvine Company's new home products, sales continue to be very weak. Given the price points they are wishing for, sales should continue to be very weak indefinitely.

Delusions at the high end

Wealthy home owners seem to live in their own world. For them, the price crash never happened, and no matter how much they paid, they believe a great fool is waiting in the wings to pay them substantially more when they want to sell. For some, this has proven to be true.

The owners of today's featured property paid $3,350,000 on what was a distressed sale back in April. Did they really buy this for 40% under its “real” value back in April? If they pull off a $1,251,300 profit on a Shady Canyon flip in less than six months, I will be very impressed.

Personally, I don't give them much chance. Where was their take-out buyer willing to pay so much more back in April? If so, was this a flop?

What do you think? Will they sell this for a profit in this market environment?

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 11 VERNAL Spg Irvine, CA 92603

Resale House Price …… $4,895,000

Beds: 5

Baths: 7

Sq. Ft.: 7577

$646/SF

Property Type: Residential, Single Family

Style: Two Level, Spanish

View: Mountain

Year Built: 2004

Community: Turtle Rock

County: Orange

MLS#: U11003897

Source: SoCalMLS

On Redfin: 14 days

——————————————————————————

With a private and expansive corner lot, this beautifully customized estate reflects Hacienda-style Spanish Revival architecture and is located within the exclusive residential golf preserve of Shady Canyon. The home was recently expanded and completely remodeled, opening up the living space and providing a soft contemporary flair to the custom home sized estate with 7,577 square feet. The well-designed additions created a full theater room, family room, and two additional bedrooms. The one of a kind home now features an incredible outdoor kitchen, dining area, and covered logia adjacent to a spectacular new yard complete with a pool, fire pit, custom lighting and water features, and pool bathroom.

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $4,895,000

House Purchase Price … $3,350,000

House Purchase Date …. 4/21/2011

Net Gain (Loss) ………. $1,251,300

Percent Change ………. 37.4%

Annual Appreciation … 78.3%

Cost of Home Ownership

————————————————-

$4,895,000 ………. Asking Price

$979,000 ………. 20% Down Conventional

4.10% …………… Mortgage Interest Rate

$3,916,000 ………. 30-Year Mortgage

$982,420 ………. Income Requirement

$18,922 ………. Monthly Mortgage Payment

$4242 ………. Property Tax (@1.04%)

$585 ………. Special Taxes and Levies (Mello Roos)

$1020 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$610 ………. Homeowners Association Fees

============================================

$25,379 ………. Monthly Cash Outlays

-$2145 ………. Tax Savings (% of Interest and Property Tax)

-$5542 ………. Equity Hidden in Payment (Amortization)

$1414 ………. Lost Income to Down Payment (net of taxes)

$632 ………. Maintenance and Replacement Reserves

============================================

$19,738 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$48,950 ………. Furnishing and Move In @1%

$48,950 ………. Closing Costs @1%

$39,160 ………… Interest Points @1% of Loan

$979,000 ………. Down Payment

============================================

$1,116,060 ………. Total Cash Costs

$302,500 ………… Emergency Cash Reserves

============================================

$1,418,560 ………. Total Savings Needed

——————————————————————————————————————————————————-

Mortgage interest rates continue to drop to record lows with recent rates dipping below 4%.

Irvine Home Address … 92 RINALDI Irvine, CA 92620

Resale Home Price …… $659,900

You think you'll never get it right

But you're wrong. You might.

The sky could fall, could fall on me

Coldplay — Low

The current low interest rates are truly remarkable. We are approaching the all-time recorded low from the early 1950s. The reason for the latest drop in interest rates is more market manipulation by the federal reserve. However, in a broader context, the continually dropping interest rates are a sign of monetary deflation caused by the ongoing write-offs of bank debt.

It can be argued that today's low interest rates are high in real terms. If you accept Mish's definition of inflation as the expansion of money supply and credit, we are currently experiencing deflation caused by all the write downs. When you have deflation, even low interest rates are high relative to inflation.

Another way to look at the situation is from supply and demand. During the housing bubble, lenders created enormous amounts of debt as credit expansion was off the charts. Now we have a huge overhang of debt borrowers cannot support. As we all know, lenders are loathe to write this debt off, so we are left with a large supply of debt. With the return of prudent lending standards based on real incomes, demand for debt is very low. Large supply and low demand makes for lower prices. The price of debt is the interest rate, so lower prices on money mean lower interest rates.

However, you want to conceptualize or explain the low interest rates, it looks as if they will be with us for a while. As long as the economy remains weak, the federal reserve will want to keep interest rates low. Bernanke has publicly committed to keep rates at zero for two years, for whatever his word is worth.

Mortgage rates drop to once unthinkable lows at less than 4%

The Federal Reserve's latest step to prop up the economy means that 30-year fixed-rate loans are available for less than 4%. But many people are in no position to buy or refinance a home.

By E. Scott Reckard, Los Angeles Times — September 23, 2011, 7:40 p.m.

The Federal Reserve's latest effort to prop up the economy has dropped mortgages into once unthinkable territory, with 30-year fixed-rate loans available for less than 4% — a record low.

For people lucky enough to still have their credit ratings, bank accounts and home equity in good shape, the change means the opportunity to refinance at rates that once seemed unimaginable.

Note those exclusions carefully. It isn't lucky people who have good credit and home equity. Mostly, it is savers and buyers from prior to 2002 who didn't HELOC themselves into an underwater condition. The two groups benefiting most from the housing crash are prudent long-term homeowners (other than the loss of illusory equity) who can now refinance, and renters who have waited until prices and interest rates have fallen so low as to make properties affordable.

“I can remember when I thought 7% was a great loan,” said Roger Hornbaum, a retired city of Orange employee who has already refinanced his home on California's Central Coast twice since purchasing it last year. “After the news this morning, maybe I'll be getting another call from [my mortgage broker] and be trying it again sometime soon.”

Hornbaum's broker, Jeff Lazerson of Laguna Niguel, said clients who pay closing costs and a 1% fee to him are refinancing into 30-year fixed-rate loans at 3.75%.

If Mr. Hornbaum has refinanced twice in the last year, it's his mortgage broker who is really happy.

Of course, these days many people are in no position to buy or refinance a home. Many can't meet the stringent lending standards that have prevailed since the housing bust and bank bailout, or they owe so much more than their house is worth that they can't get a new loan at a better rate.

“The phone is ringing off the hook with people who want to refinance,” said loan officer Darin Hardin at Premier Mortgage Group in Ladera Ranch. “But the property values just aren't there.”

The GSEs and FHA will allow underwater refinancing, but the terms aren't very good. Again, the only real beneficiaries are long-term homeowners who didn't HELOC themselves into an underwater position.

The record low rates are driven by the Fed's announcement Wednesday that it would load up on purchases of long-term government bonds and mortgage securities. The extra demand was intended to drive down long-term interest rates, including those for home loans — and it worked.

The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgages, had closed at 1.94% on Tuesday. By the end of the day Wednesday it had dropped to 1.86%, and it plummeted Thursday to 1.72%, setting a record low before rising again Friday to 1.83%.

For a 30-year fixed-rate mortgage, the typical rate for solid borrowers had been 4.09% last week and early this week, according to mortgage finance giant Freddie Mac. That's within a whisker of the record low of 4.08% set in 1950 and 1951. The Fed's action dropped it well into record territory.

Mortgage professionals said many companies were making loans slightly more expensive Friday because their loan pipelines were full of more refinance requests than they could easily handle.

Provident Funding, a lender that concentrates on borrowers with solid credit, said on its website Thursday that it could refinance a $300,000 loan on a $450,000 home in Los Angeles County at 3.875% and hand back $3,000 to the homeowner to help with closing costs. On Friday, the rebate on the same loan had dropped to $1,875.

But should the 10-year Treasury yield stay low, there appears to be room for mortgage rates to fall further, industry experts said.

Bernanke is buying 10-year Treasuries to have this effect. He wants to drive down mortgage interest rates to make houses more affordable and spark economic growth by reducing the mortgage burdens on those who qualify for refinancing.

Of course, the flipside to his policy is to reduce the profits accruing the member banks of the federal reserve he is trying to support. Banks were borrowing from him at zero percent, buying treasuries and earning a 3% riskless trade. As long rates go down, the profits from this trade are diminished, and banks will take longer to earn their way out of insolvency.

Refinancing mortgages at lower rates should help stimulate the economy by putting more spending money in borrowers' pockets. Lowering the rate on a 30-year $350,000 mortgage to 4% from 5.5% would cut payments by about $3,800 a year.

Despite this fact, most borrowers are better off walking away from their massive debt loads they can never hope to repay.

Mindful of that fact, the Obama administration is trying to encourage greater use of a program that allows borrowers with loans backed by Freddie Mac and Fannie Mae to refinance up to 125% of their home's value. The borrowers must have kept payments current on the underwater loans to qualify.

According to the Mortgage Bankers Assn., more than three-quarters of all home loan applications are now for refinances, although the volume is more of a boomlet than a boom. As rates sank toward 4% recently, borrowers were refinancing their loans at about half the pace seen in early 2009, when rates cracked the 5% barrier for the first time since 1956.

Each drop in rates prompts some refinancing, but the effect diminishes over time. When rates start going back up, all refinance activity will cease. Mortgage brokers and loan officers are hoping purchase activity picks up dramatically for them to make a living.

Jay Brinkmann, chief economist for the mortgage trade group, said the torpid housing market had produced few new purchase loans in recent years that would be good candidates for refinancing. What's more, many people already have refinanced at rates less than 4.5% or simply never intend to replace an old loan.

“We'll have to see what happens this week with the [latest big] rate drop,” Brinkmann said. “Until a few weeks ago, rates were just back to where they were this time last year.”

Meantime, mortgage borrowing to finance home purchases continues to lag despite the record low rates and home prices that in many areas are down more than 30% from their 2006 peaks. Plenty of families are too stressed out financially to buy. Others are leery that housing prices, which rose a bit in the second quarter, could crater again in a double-dip recession.

It's difficult for most industry veterans to understand how low prices and low interest rates aren't creating demand, but the reality is (1) prudent lending standards, (2) the plethora of foreclosures and short sales, and (3) high unemployment due to the weak economy has greatly diminished the buyer pool. Couple this diminished buyer pool with abundant supplies of distressed properties, and you have a recipe for lower prices and anemic sales volumes.

With a 1-year-old daughter, Joseph and Allison Dillard would normally be prime candidates to stop renting and buy a house.

He is a software engineer and she has a master's degree in mathematics that should allow her to find work when their daughter is older. They have saved enough money for a 20% down payment on a single-family home in Mission Viejo or Laguna Hills, or perhaps a town home in Irvine, she said. And they have been pre-approved for a loan through Hardin, the Ladera Ranch mortgage banker.

Having looked at homes off and on since early this year, the Dillards stepped up the search this month after Joseph settled into a better new job at Google Inc.'s offices in Irvine. But they haven't taken the plunge into ownership.

I know several of the software engineers at Google. I have been to their offices many times. The IHB has spread like a virus there. I wonder if his trepidation about buying is related to the IHB?

“The mortgage rates are so low but we're worried, because we don't know much further housing prices will fall,” said Allison, 30. “We're trying to gauge the potential risks and benefits.”

In any case, the Dillards figure, the economy's precarious state means they'll have at least another year before interest rates rise significantly.

“It doesn't seem like they'll be jumping up any time soon,” she said. “So that's not motivating us to do anything right away.”

scott.reckard@latimes.com

He is right. There is no urgency to jump into home ownership. Prices will be flat or down, interest rates will likely remain low, and supply will remain abundant. There are fewer reasons not to buy, but there are few compelling reasons to buy now — not that realtors will admit that.

Buying in a low interest rate environment

realtors generally tell people to buy when interest rates are low. As with most things realtors say, this isn't usually a good idea. The reason is simple, when interest rates rise, money gets more expensive, and future buyers cannot borrow as much to bid up properties. Unless incomes are rising dramatically (or DTIs get out of control), rising interest rates make for tepid appreciation at best.

Ideally, buyers should wait for interest rates to rise so they can refinance into a lower rate and smaller payment in the future. I have endorsed this strategy on several occasions. However, in today's market environment, this advice just doesn't work. It may be seven to ten years before we see the peak of the next interest rate cycle. How long do you want to wait?

The days of making huge gains from appreciation are over. Real estate is going to struggle for years as the supply is absorbed and interest rates slowly rise of the bottom. Both of those factors are going to put pressure on prices for the foreseeable future.

In a low interest rate environment, the primary reason to buy is to save money over renting. This should be the focus of buying decisions for the next several years.

There are many reasons to buy real estate, and it won't be a loser for those buying over the next several years, but buyers need to have realistic expectations. Buy because you want to provide a stable home for the family, but forget the nonsense about appreciation. It isn't going to happen.

Sale-leaseback foreclosure

When a builder puts in a model center, they don't want to leave their capital tied up in the houses they built, so they usually sell these to investors and lease it back until they wind down their sales operation. Today's featured property was purchased by one of these investors who walked away and let the bank take the property back in foreclosure.

Note on interest rates for posts

When I prepare posts for the IHB, I get the current mortgage interest rate from Bankrate.com. They reported mortgage interest rates average 4.1% rather than the 4.0% mentioned in today's post. The rate I show represents the average in the marketplace not the lowest interest rate attainable. I believe this is more accurate to what the eventual buyer of the featured property will actually pay.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 92 RINALDI Irvine, CA 92620

Resale House Price …… $659,900

Beds: 3

Baths: 3

Sq. Ft.: 1964

$336/SF

Property Type: Residential, Condominium

Style: Two Level, Mediterranean

Year Built: 2006

Community: Woodbury

County: Orange

MLS#: S673564

Source: SoCalMLS

Status: Active

On Redfin: 9 days

——————————————————————————

REO BANK OWNED PROPERTY!! Stunning 2 story condo with excellent curb appeal. Inside this gorgeous home there are tiled floors throughout the living room and kitchen. The living room has a cozy fireplace and recessed lighting. The kitchen would be perfect for any cook, with the built in refrigerator and the KitchenAide stainless steel appliances. There is a bedroom and a full bathroom located down stairs. There is a laundry room upstairs. This condo is a former model home and the 2 car garage was remodeled into 2 sales offices. Therefore there is no actual garage. The buyer may convert it back at the buyer's expense. This home is turn key ready and is a must see!

——————————————————————————————————————————————-

Proprietary IHB commentary and analysis

Resale Home Price …… $659,900

House Purchase Price … $956,000

House Purchase Date …. 8/24/2006

Net Gain (Loss) ………. ($335,694)

Percent Change ………. -35.1%

Annual Appreciation … -7.0%

Cost of Home Ownership

————————————————-

$659,900 ………. Asking Price

$131,980 ………. 20% Down Conventional

4.10% …………… Mortgage Interest Rate

$527,920 ………. 30-Year Mortgage

$150,708 ………. Income Requirement

$2,551 ………. Monthly Mortgage Payment

$572 ………. Property Tax (@1.04%)

$400 ………. Special Taxes and Levies (Mello Roos)

$137 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$233 ………. Homeowners Association Fees

============================================

$3,893 ………. Monthly Cash Outlays

-$594 ………. Tax Savings (% of Interest and Property Tax)

-$747 ………. Equity Hidden in Payment (Amortization)

$191 ………. Lost Income to Down Payment (net of taxes)

$102 ………. Maintenance and Replacement Reserves

============================================

$2,845 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,599 ………. Furnishing and Move In @1%

$6,599 ………. Closing Costs @1%

$5,279 ………… Interest Points @1% of Loan

$131,980 ………. Down Payment

============================================

$150,457 ………. Total Cash Costs

$43,600 ………… Emergency Cash Reserves

============================================

$194,057 ………. Total Savings Needed

——————————————————————————————————————————————————-

realtors scamming their lender clients is becoming epidemic in America. Banks are overwhelmed by the volume of distressed sales, and realtors are taking advantage of them.

Irvine Home Address … 1967 PORT RAMSGATE Pl Newport Beach, CA 92660

Resale Home Price …… $2,885,000

It's just a fake make no mistake

A rip off for you but a rolls for them

Sham 69 — Rip Off

I first covered the flopping phenomenon a few months ago in Flopping: unscrupulous realtors deceive lender clients and profit from fraud. Apparently, the occurrence is common enough the story is gaining traction in the mainstream media. The main reason I am covering it again is because a reader posted a property that looks like a particularly egregious case of flopping. I'll let you decide.

Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.

Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright's brokerage office who wanted to buy it for their own use. She didn't think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.

When she asked the listing agent why, she was told to “leave it alone.”

I wonder if she had to resist the temptation to punch them in the face.

Wright says she is still not sure if the servicer or owner of the property ever saw her clients' much higher offer.

Undoubtedly, the lender did not see the better offer. Why wouldn't they act on it if they did?

All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.

The realtors must consider that a win-win-win. They got a bargain, the listing commission, and the buyer's commission. They win three ways, and their client — the one they are supposed to have a duty to serve — is the loser.

“It's just robbery,” she says.

Yes, it is. It is brazen theft by a fiduciary.

“And I don't know how to stop the robbery.”

Apparently the nation's mortgage servicers don't, either. Suspicious real-estate transactions have surged in the past two years, analysts say, along with the number of short sales, in which a house is sold for less than the amount of its remaining mortgage.

Short sales are supposed to be “arms length” transactions without any relationship or collusion among the parties, all of whom must sign affidavits to that effect. But the parties often are connected.

The paper trail should make these crimes easy to prosecute if a district attorney wanted to. A few high profile cases should be prosecuted to set an example for others. Today's $900,000 flop would be a good candidate. If anyone knows the DA in Newport Beach or Orange County, please forward them a link to this post.

Many times, this fraud is committed through limited-liability companies to make it hard for servicers to see who is buying the property, says Robert Hagberg, associate director of mortgage-fraud investigations for Freddie Mac.

In some cases, this type of mortgage fraud involves buyers scooping up distressed properties for a portion of their value, either for themselves or to give back to a friend or relative.

The rest involve “flopping,” where an investor – with the help of an agent or middleman – persuades the bank to agree to a much steeper discount than it should, and immediately resells the property to another buyer for a significant profit without having made any improvements. The FBI says it has found numerous instances in which organized-crime groups were involved in short-sale fraud.

Isn't there something in the realtor code of ethics against this behavior?

According to a recent study by CoreLogic, short sales that were resold the same day averaged a 34% gain (or $54,947) between sale prices.

The gain from today's featured flop was over 50% after commissions.

One in every 52 short-sale transactions in the first half of last year appeared to be one of these “suspicious” resales, CoreLogic said. This year, it expects lenders, servicers and investors to incur more than $375 million in unnecessary losses from these shady deals, as the number of short sales surges an additional 25%.

“Short-sale fraud and other servicing-related fraud is definitely the fraud du jour and our greatest area of focus at the moment,” Hagberg says. In 2011, more than 50% of Freddie Mac's investigations were related to short sales.

Investigations are fine, but there should be prosecutions at the end of the investigations for any deterrent effect.

Who are the perpetrators?

For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called “facilitators,” or middlemen negotiating with the banks and buyers trying to flip the properties.

There is no way this can go on without collusion among insiders. In an arms-length transaction, the listing agent would have to be a complete idiot to miss the comps by over 30%… well, maybe some of these sales are flopping….

Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.

Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.

When lenders are overwhelmed, there is nobody carefully watching over their agents to double-check valuation. With no cross-verification in the system, fraud is bound to result.

Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.

In Wright's case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.

Everyone was in on the fraud. For them, it was just another day at the office.

“The thing that really bothered me was the lack of ethics,” Wright says. “Sure I can find my clients another house; what I couldn't explain to them very well was how (something like this) can happen.”

Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.

“It set an all-time low for that neighborhood,” he says.

How much more compelling does the evidence need to be before prosecutors will act?

Price manipulation

To realize a big profit from this type of fraud, an investor, agent or middleman must first push down a home's price. That means driving down the broker price opinion (BPO), the estimate of value that servicers get agents to provide for short sales.

While the vast majority of these estimates are probably free of influence, many aren't. Short-sale facilitators or other middlemen often contact these agents with lowball comparable sales that they would like to see used in the valuation, such as mobile homes or major fixer-uppers. In one case, Hagberg says, he was told of a negotiator leaving two envelopes for the agent coming up with the BPO: One contained the comparables to be used in the valuation; a second contained two $100 bills.

Direct cash payoffs. That is flagrant.

Another way to drive down the price of a short sale and pack more profit into the flip is by making the house look as though it is in worse shape than it is. Borrowers or negotiators brought in by the borrower will submit false repair bills for shoddy pipes, wiring or lead paint.

“A lot of times these repairs are for things Realtors are not qualified to assess,” Hagberg says.

What are most realtors qualified to assess?

Hagberg has even seen cases of “anti-staging” or “reverse staging” in which a house is sabotaged to look weather-beaten, vandalized or smelly.

How can someone gain access to do this? Many times, an underwater borrower will give his negotiating rights – and access to his home – to a short-sale negotiator who will conduct all communications with the lender and allow other investors to manipulate the sale for a kickback.

Everyone involved is usually getting some kind of cash payoff.

“Many times, borrowers don't know about the flip” that's coming, Hagberg says. “And frankly I don't know if there's a whole lot of concern on their part. They are seeing the same loss anyway.”

Particularly now that borrowers are not on the hook for losses from the short sale, they don't care at all. Some of them were probably in on the deal as well trying to get a cash payoff after the short sale.

There haven't been very many indictments for this type of short-sale fraud. But such fraud can be punishable by up to 30 years in prison.

Sentencing a few to prison would certainly help.

To catch a thief

Servicers are slowly trying to improve their systems and give paperwork more scrutiny to prevent short-sale fraud, Fulmer says. Prevention is more practical than prosecution, given the limited resources of law enforcement.

And, in the past, it has been hard for investigators to get servicers to cooperate in efforts to crack down on this fraud.

Glenn Gulley, a real-estate fraud investigator with the district attorney's office in California's Stanislaus County – one of the nation's hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.

“In 4½ years, I've never had a bank call me and say we've been defrauded,” he says, though he adds that they're slowly starting to respond as they put more staff in charge of mitigating these losses.

Wow! Law enforcement was being proactive by investigating these cases, and the lender's couldn't be bothered to call back. I wonder how many asset managers at the banks are in on the scam.

Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.

“I'm getting people calling and saying, 'I offered $300,000 for a house that sold for $200,000.'”

And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as “sale pending” at 9:01.

“Then you know the same agent double-ended it” and is bringing in his own buyer, Gulley says.

So much for getting the best price for their client. Most lenders discourage listing agents from double ending deals, but it doesn't stop them from referring to friendly agents for a significant kickback.

Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.

Now we see how buyers are brought into the scam. If a broke buyer is facing a $30,000 bill for a spent HELOC, getting a $30,000 cash payment to pay off the debt is very enticing.

Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.

The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren't sure that BPOs should take the place of full-fledged appraisals.

“There are no real standards for how to pick the comps to establish the value that you receive,” Fulmer says. “You can pick the lowest of the low balls and skew the results.”

Any transaction is supposed to have an independent third-party appraisal. Since appraisers cannot have cozy relationships with realtors anymore, this is less of a problem.

Whom does it hurt?

After the recent mortgage meltdown, few are shedding tears for lenders over these short-sale losses. Fulmer says that when she talks about this type of fraud, a common reaction is, “So what?”

But people should care, she says, because we're all ultimately paying the tab for it.

“A lot of these loans are insured by the Federal Housing Administration or bought by Fannie (Mae) and Freddie,” Fulmer says. “These excess losses are translating into losses that taxpayers are going to have to make up for.”

Yes, we are going to pay for much of this fraud through bailouts.

Moreover, this type of fraud pushes down neighborhood values, potentially putting more people underwater on their loans. In other cases, the fraud is part of a larger network of schemes that leaves the house sitting empty and open to theft and vandalism.

“Once a neighborhood gets caught up in fraud, it can get recycled in fraud indefinitely,” Fulmer says. “I saw one house that was flipped and foreclosed, flipped and foreclosed for 10 years.”

Flopping is an amazing opportunity for unscrupulous realtors. They have opportunity to make thousands of extra dollars by double-ending commissions and getting kick-backs from the buyers getting a great deal. In fact, many of these agents probably list the flip and make a second commission on the deal for good measure. With the lack of oversight by overwhelmed banks, this scam will be rampant over the next several years.

Is this flopping?

Today's featured property looks suspicious. The property sells on July 8, 2010 for $1,800,000 — supposedly the highest price the market would bear — and then it goes pending less than a month later for $2,885,000. How does the first listing agent miss the market price by over a million dollars? Somebody please give me a plausible explanation other than fraud.

Date	Event		Price	Appreciation
Sep 22, 2010	Sold (Public Records)		$2,885,000	893.9%/yr
Sep 22, 2010	Sold (MLS) (Closed)		$2,885,000	—
Sep 10, 2010	Pending		—	—
Aug 06, 2010	Pending (Backup Offers Accepted)		—	—
Jul 15, 2010	Listed (Active)		$3,199,000	—
Jul 08, 2010	Sold (Public Records)		$1,800,000	10.4%/yr
Jul 01, 2010	– Delisted (Withdrawn)		—	—
Feb 16, 2010	– Pending		—	—
Feb 05, 2010	– Delisted (Hold)		—	—
Feb 05, 2010	– Price Changed		*	—
Feb 05, 2010	– Pending		—	—
Feb 04, 2010	– Listed (Active)		*	—
Dec 27, 2000	Sold (Public Records)		$700,000	—

In my opinion, this property should be investigated further by the authorities. Prosecution of a $1,000,000 flopping case would be high profile and serve to deter others.

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This property is not available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 1967 PORT RAMSGATE Pl Newport Beach, CA 92660

Resale House Price …… $2,885,000

Beds: 5

Baths: 6

Sq. Ft.: 5450

$529/SF

Property Type: Residential, Single Family

Style: 3+ Levels, French Country

Year Built: 2007

Community: East Bluff/Harbor View

County: Orange

MLS#: U10003139

Source: SoCalMLS

Status: Closed

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Completed in 2007, this impeccably maintained home was designed and finished with the finest materials and forethought for a Port Street family. The custom built home with 5,450 Sq. Ft. of living space includes 5 bedrooms, 5 1/2 baths, dedicated office with built-ins, and a full height subterranean basement. It is ideally located inside the Harbor View community just a few houses from the central greenbelt and a block away from the community pool and highly acclaimed Andersen Elementary School. The home features an exquisite kitchen any chef would admire with Wolf range, Sub-Zero refridgerator, freezer, crisper drawers, and center island adjacent to family room that opens up to a covered patio and fireplace in the back yard. Other features of the home include large laundry room with 2nd refriderator, oversized garage w/ storage loft, reclaimed beams, custom millwork throughout, a downstairs bedroom, and much much more. This home is truly unique and must be seen to be appreciated.

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Proprietary IHB commentary and analysis

refridgerator? refriderator?

Resale Home Price …… $2,885,000

House Purchase Price … $1,800,000

House Purchase Date …. 6/8/2010

Net Gain (Loss) ………. $911,900

Percent Change ………. 50.7%

Annual Appreciation … 35.9%

Cost of Home Ownership

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$2,885,000 ………. Asking Price

$577,000 ………. 20% Down Conventional

4.10% …………… Mortgage Interest Rate

$2,308,000 ………. 30-Year Mortgage

$574,978 ………. Income Requirement

$11,152 ………. Monthly Mortgage Payment

$2500 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$601 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$600 ………. Homeowners Association Fees

============================================

$14,854 ………. Monthly Cash Outlays

-$1657 ………. Tax Savings (% of Interest and Property Tax)

-$3267 ………. Equity Hidden in Payment (Amortization)

$833 ………. Lost Income to Down Payment (net of taxes)

$381 ………. Maintenance and Replacement Reserves

============================================

$11,144 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$28,850 ………. Furnishing and Move In @1%

$28,850 ………. Closing Costs @1%

$23,080 ………… Interest Points @1% of Loan

$577,000 ………. Down Payment

============================================

$657,780 ………. Total Cash Costs

$170,800 ………… Emergency Cash Reserves

============================================

$828,580 ………. Total Savings Needed

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