Wednesday, July 30, 2008

Still Stinko after all these years

From Calculated Risk:

If you haven't yet had a chance to read this article by John Gittelsohn in the Orange County Register about a real estate sale that was financed by Wells Fargo in January of this year, please do so now. And if you were, like most people, working on the assumption that lenders and other industry participants had at least cleaned up their acts in time for the 2008 mortgage vintage to be worth something, think again.

There isn't any significant fact about this transaction I can identify that isn't a red flag. A home in a foreclosure-wracked neighborhood was purchased at foreclosure auction in October of 2007 for $304,500, just over half what the defaulted buyer had paid in 2006. In January of 2008, the house was flipped to a non-English-speaking couple for an apparent sales price of $625,000 after some "sprucing up" by the property seller.

Ridiculous? Sure. It turns out that the seller provided the $125,000 down payment, and also executed an "addendum" to the sales contract agreeing to pay the buyers $30,000 in cash, cover the borrowers' first three mortgage payments, and toss in a 52-inch TV. Subtract out all that, and the true sales price of the property was $460,000. But apparently nobody did subtract out any of that, because Wells Fargo made a $500,000 loan to these buyers to purchase this property.

That's January of this year!

Gimme an "F," "R," "A," "U," "T." What does that spell, boys and girls?

Fraut, Spotty.

Oh, sorry. Spot meant "FRAUD," of course. But for potential investors who thought that mortgage-backed securities based on new pools of loans were going to be better, this is a cautionary tale, to put it mildly.

We can hope this is an isolated incident, but Spot wouldn't bet on it. The seminar business on how to get rich in real estate by flipping foreclosed properties is better than ever. Rows and rows of people furiously taking notes about buying low and selling high. This is not a source of optimism to Spot.

Interesting to Spot were the comments of some of the bright lights involved in this transaction:

From the mortgage broker who put the deal together: "Whatever agreement the buyer and seller made, it was between them."

From the appraiser who dutifully came up with a value of $625,000: "Like Sanchez, she had no knowledge of the terms of the sale."

From the escrow agent who closed this loan: "It sounds to me like the seller helped out," she said. "If someone gave them $125,000, what's the problem? That's a beautiful thing, if you ask me."

From Wells Fargo: "In many instances, borrowers are able to use gifts from family members or friends for a portion of their down payment, provided the amount and source of the gifts are documented."

Except, Wells Fargo, this wasn't a gift from family members or friends. It was a gift by the purchaser of a security based on this mortgage to the flipper.

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