Banking and Finance

The market is ripe for real estate fraud

By Kevin Rademacher / Staff Writer

As interest rates begin to creep higher and the once-frantic real estate market begins to slow to a more measured growth rate, mortgage regulators and law enforcement officials are growing nervous.

The fear, they reason, is that those willing to skirt the boundaries of legality will begin to press their luck in search of a quick buck.

"Real estate fraud is the monster around the corner right now," said Capt. Randy Montandon, head of Metro Police's Financial Crimes Bureau.

Scott Bice, Nevada's mortgage lending commissioner, is even more concerned.

"It's not even around the corner, though," Bice said, pointing to a growing series of scams being perpetrated on local homeowners and prospective homeowners.

One of the most common scams, Bice described, is "equity skimming." Unscrupulous companies offer second trust deeds and credit repair services that tap equity for huge fees and also make some of the initial payments on the second note. Once the high payments become the responsibility of the homeowner, and are inevitably late or missed all together, a quick foreclosure process ensues.

Companies also are preying on homeowners already facing foreclosure, Bice said, offering to buy the home and sell it back quickly. Once the sale is complete, however, the initial homeowner is charged hundreds of thousands of dollars for "repairs."

"Before they actually sell the property, back they have skimmed off all of the equity," Bice said. "People always seem to have to prey on somebody."

He said such scams are easier to pull off in Southern Nevada than places such as California because homeowners here are not accustomed to handling home equity, much of which was created over the past 18 months.

"People in California have seen their homes appreciate over time," Bice said. "They are used to using their equity. Here, it all happened at once."

Another problem looming is the backlash of aggressive mortgage loan products. These products allow homeowners and investors to buy property for small initial payments on an option adjustable-rate mortgage or an interest-only mortgage that requires little or no principle. Those loans, however, reset themselves based on new interest rates and a collection of unpaid principle. That means payments, in some cases, can more than double. In the next couple of years, those reset payments will begin showing up on local bills.

With a much slower appreciation rate, homeowners holding those loans might not have enough equity built up to refinance, particularly as interest rates have crept up.

"In an upwardly appreciating market, it really disguises a lot of those problems," Bice said. "When those loans stop performing, it becomes more visible."

The mortgage regulator pointed to a recent case in which a flight attendant was making about $30,000 a year holding three mortgages totaling nearly a million in debt. The loans had been bought through a "stated-income" loan claiming a much higher income.

With a low appreciation rate, the loans are poised to default since a quick profit is no longer likely. The result is likely to be foreclosures for the lender and wrecked credit for the borrower.

"Owning a home is great," Bice said. "But there's nothing worse than putting a person in a situation where it reasonably looks like they are going to fail right from the get-go."

Another scam has investors looking for straw buyers with good credit willing to part with their financial information for as little as $5,000. The unscrupulous investors then buy properties using stated-income loans. If the market slows, the investors default, but the straw buyer takes the credit hit.

"Also, if the people they have given their information to don't protect and safeguard that personal information, it can get even worse," Bice said.

The slowing real estate market, Bice said, does thin out the number of players in the lending arena as some move on in search of quicker profits. There still remains, however, much to clean up.

There are currently 1,350 mortgage companies doing business in Nevada and about 11,000 mortgage agents. Bice said he is preparing to ask the Legislature for funding to increase the Mortgage Lending Division's roster of nine examiners.

Kevin Rademacher covers utilities and finance for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at (702) 259-4069 or by e-mail at kevinr@lasvegassun.com.

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