Just when you think it’s safe to assume the worst is over in the struggling mortgage sector, another kind of fraud makes its way into the spotlight. This time, it’s mortgage flopping and here’s why it’s called an actual fraud.
Sellers are letting go of theirs houses at significant losses – some because they are underwater. The buyers are the accomplices with the sellers and once the trade off has happened, they then move in and make repairs and improvements and re-sell the houses. Flopping is the latest craze in mortgage fraud, in which sellers actually don’t mind taking a loss or losing it in a short sell. An accomplice can flip the home for a big gain. Sometimes, it’s those underwater mortgages that are targeted by these scammers. Consumers need to get out from under their overwhelming financial burden and they will often get their lenders to agree to a short sale. When this happens, the lenders then write off the differences between what the house sells for and what the current owner still owes.
It’s the low blows and disturbing things they’re doing that’s only making matters worse. In some instances, those who come in to get the house ready to sell will use possum urine emptied in and around the property to keep buyers away (Have you ever smelled possum urine? It’s quite pungent.) Now that the odds are stacked against the bank and more in favor with what the fraudsters are attempting to do, those buyers (accomplices) can swoop in and buy the house for a steal. From there, they make the renovations and then flip the house at incredibly high prices. In fact, house flipping can be completed in a single day in some instances. And the rates are climbing in terms of the flopping process. Floppers are averaging 34% gains for their efforts; most, however, are scoring around 18% to 20% in profits. Wondering what the average profit is in dollars? Hang on to your truth in lending forms – the average is $55,000.
Not only that, but the number of short sales that were flipped in one day made up 2% of all mortgage transactions in 2011. That number could be growing, too, especially in the suburbs.
So if this is illegal, how is it happening and why is it a growing practice? These fraudsters are getting away with these scams for one simple reason: they know banks and mortgage companies are snowed under with all of the other short sales, foreclosures and other crises in these tough economic times. In the past three years alone, these types of flopping scams have tripled. The methods are becoming more unethical and dishonest, too.
In some cases, the houses are shown only after appliances are removed from the premises, cabinet doors are loosened so that they don’t open and close properly, foul laundry being inserted and even putting so called “water marks” on ceilings so that potential buyers believe there is water damage. Some have even gone so far as to invent plumbing or electrical problems and giving appraisers fake repair estimates created by cooperating contractors. This keeps legitimate buyers at bay long enough for the fraudsters to do their work and then re-sell it to other buyers at substantially higher prices.
It should be noted that more and more lenders are now putting restrictions in place that will prevent floppers from selling the house in a day. This is partly because of the continued tough economic times and past mortgage fraud successes that are driving these lenders’ to take these drastic measures. Mortgage fraud is also becoming much more difficult to identify.
Massive Jail Sentences
There are now instances, too, that some floppers are finding themselves facing jail time for their efforts. In some states, mortgage fraud, when proven in court, can result in 35 year prison sentences and fines in the millions of dollars.
Once the sellers have successfully run off serious buyers, they then approach the bank with the argument that the house simply isn’t up to par and that the price needs to be lowered. Once the bank is convinced the damages are hurting the property’s value, the tag teams move in for the proverbial kill. Even though banks are not necessarily able to prove the scam, many are now conducting full investigations. The problem is growing especially faster in areas like Utah and other mid western states. One group in the Ogden area kept claiming houses had been contaminated with residue from crystal meth labs, which are properties banks are not fond of anyway since the cooking fumes and the damages of those fumes can last for decades.
For now, Freddie Mac is investigating complaints and asks consumers to call them when they feel as though their communities have floppers. The number is 1-800-4fraud8.
Have you suspected mortgage flopping in your community? Would you become a whistle blower if you did suspect it? Tell us your thoughts on this crime and whether the punishments are too harsh or just right.