25 - student - NYC That's all for now.

Thursday, December 15, 2005

Caveat Emptor

An alert reader brought this article about mortgage fraud to my attention. It's about time.

In 2004, I spent the majority of my summer doing my part to end the fraud of a particularly insidious little mortgage-lending/house-selling outfit operating out of Queens and Brooklyn. I spent a lot of time looking through the public records to see how much this real estate company had bought each house for and then how much they sold it for. They often were selling at a 100% to 150% profit after only holding the houses for less than a year. The repairs were extremely shoddy, most of these houses began falling apart less than six months after being sold.

The worst part of the whole scheme was that these houses were being sold overpriced and undersecured. The buyers were predominantly up-and-coming lower middle class minorities. They were the individuals who were the pride of their neighborhoods - the people who worked two or three jobs to support their family and buy themselves a home for that family. And they were taken in by these crooks who catered to and took advantage of the minority crowd. The company specifically employed minority salesman to appeal to their shared realities. It was sickening.

And the company colluded with a crooked mortgage lender who would lend the buyers the money for the overpriced house. And they would provide their own crooked lawyers for the buyers. Everything was internal. The buyers would end up paying way more than the house was worth and MOST IMPORTANTLY, way more than they could afford. No competent mortgage lender or real estate lawyer would sign off on this transaction. The buyers were always getting in over their heads. On the salaries they reported, they couldn't possibly afford the mortgages. But they didn't know that. They were first-time home buyers and their own lawyers were in bed with the crooks.

How could this scheme perpetuate itself though? If all of these buyers would eventually default, wouldn't that leave the mortgage bank with a bunch of expensive foreclosure actions and shitty houses that were falling apart? Well... not exactly. The problem is that the government stepped in many years ago in an effort to give everyone (meaning everyone well off) a chance at the "American dream." The government established the Fair Housing Act (FHA) which provides federal guarantees on mortgages in the event of a default. Because of this guarantee backed by the coffers of the federal treasury, the corrupt mortgage lender is able to package these mortgages and sell them to big commercial banks - essentially turning a nifty little profit on mortgages it holds for often less than two months. The banks then trade these mortgages back and forth as packaged securities. It's a beautiful way to make money off the hardships of the poor. As usual.

That's enough about that for now. Perhaps I'll go into more detail after I finish studying for my Bankruptcy exam.


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