There Goes the Neighborhood: Loan Fraud Affects Everyone

I was startled in early 2006 when I interviewed to list a small house near the train tracks in Mag Center in Riverside, and the sellers told me that other agents had told them the tiny 2/1 bungalow was worth over 400k. I told them this was impossible. If their house had been one of the cute historic Tudor-style cottages from the 1920's, it may have been possible, provided that it was in excellent condition. But their house was from 1959 and, though nicely updated inside, the exterior was chocolate chip mint green. I gradually talked them down, and for the next 6 months, I struggled to get their price down to reality.

There was, however, a house across the street that was from the same year and had similar square footage though with a 3rd bedroom and another bathroom. This house had sold late in 2005 for 480k, which seemed bizarre. It couldn't have been worth more than 380k during the slow fall period, and even that would have been pushing it. This house would come back to haunt everyone.

A neighbor called me off my sign for a CMA. When I met with her and told her what her house could go for at that time, she informed me that they owed more than that. They had just refi'ed a few months before, and an appraiser had said their house was worth much more. That's when I realized that the mystery house was getting people into trouble.

I poked around some more and discovered that the house had been sold in 0 days on market, with the agent representing both sides. According to public title records, the buyer had gotten 100% financing. Yet the house had been listing just a year before and had failed to sell at 359k, even though it was described at that time as a 4-bedroom.

Well, this past spring, that house went on the market as a pre-foreclosure house. They were asking 305, dropping to 299k without any bites. Now it's bank-owned with a dead lawn and a couple of broken windows. They're currently asking 295k.

Just where did that extra $100,000+ go? Apparently, according to mortgage fraud investigations into companies such as Stonewood Consulting in Murrieta, the money would appear to go to the buyer at close of escrow. The buyer would then give the money to his mortgage broker who would then promise to help pay the mortgage while investing the money in other properties for the buyer. The realtor got an extra 3k in commission (it was 3% to the buyer's side, but there was apparently a dual rate commission, so we don't know how much total he got.) He didn't do the loan, as far as I can tell, but he's likely related in some way to the lender. In the end, the buyer was stuck with an unpayable mortgage and couldn't possibly sell the house for close to what he owed. The bank is stuck with a house that wasn't worth nearly as much as had been invested. And who knows how many home owners in the neighborhood have been affected by that scam.

Here are some links to articles on Stonewood and a similar situation in Atlanta:

Press Enterprise article on Stonewood

NC Times article on Stonewood

article on sham mortgages in Atlanta