5 metropolitan areas in California ranked among the nation’s top 10 most at risk for mortgage fraud in the third quarter of 2011, according to the Mortgage Fraud Risk Indices by Interthinx.

  1. Stockton, CA
  2. Modesto, CA
  3. Bakersfield, CA
  4. Las Vegas-Paradise, NV
  5. Phoenix-Mesa-Scottsdale, AZ
  6. Riverside-San Bernardino-Ontario, CA
  7. Vallego-Fairfield, CA
  8. Miami-Fort Lauderdale-Pompano Beach, FL
  9. Cape Coral-Fort Myers, FL
  10. Reno-Sparks, NV

Nationally, the Mortgage Fraud Risk Index remains elevated at 143 (where n=100 is the nominal index value). Statewide, the California index value is 197 – third highest just behind fellow sand states Nevada and Arizona. The Golden State scores once more with the number of zip codes at most risk for mortgage fraud – seven out of the nation’s top ten. The Interthinx report forecasts the higher the index value, the higher the future foreclosure activity. [For more information on mortgage fraud analyses for the nation and for California see the Interthinx Q3 2011 Mortgage Fraud Risk Report.]

Credit fraud analysts attribute the high levels of risk for mortgage fraud to the present conditions in real estate. Bottomed-out pricing, historically low interest rates and empty foreclosures yet-to-be resold are causing dodgy real estate investors to set up house, again, with the risky practices which played a role in kindling the recent housing boom and following bust.

Reported real estate schemes of late include:

  • speculators back on the grid sweeping up condominiums which crashed in value;
  • agents generating misleading evaluations in an effort to get banks to approve below-market pricing for shortsale purchases by investors to flip the properties at the higher fair market value (FMV) to user homebuyers;
  • “credit enhancement” providers arranging the  “renting” of bank savings accounts to an investor seeking a mortgage – the accounts are real, but the investor only pays to have his name attached to the account, never having access to the money; and
  • investors lying in their loan applications about their intentions to occupy property as their principal residence in order to qualify for a low down payment and interest rate.

first tuesday take: Someone has a painfully short-term memory. Here we are only fresh out of the Millennium Boom and wandering around in the moratorium of the Lesser Depression, and speculators and flippers (and ashamedly, agents) are reverting back to their old ways. The high of making a quick and cheap profit is just too irresistibly seductive. [For more information on how risky investment practices led to the housing crisis, see the December 2011 first tuesday article, Blame speculators for the intensity of the boom and bust.]

That’s all for our sarcastic condemnation, again. Now onto what’s to be done.

Back in 2010, first tuesday advised California agents to guard against a future resurgence in speculator activity. There’s nothing inherently wrong with speculation. It’s often needed to loosen a financially paralyzed market (such as the illiquidity of recent) and coax the activity of users – the sellers and buyer-occupants of real estate.

However, speculation becomes a problem when it turns into a frenzied performance of momentum flipping and the associated temptations of fraudulent real estate schemes – profitable for the speculator but to the disadvantage of real buyers and sellers who have to deal by definition with speculator-inflated prices. [For more information on the need for speculator regulation, see the August 2010 first tuesday article, Speculations on speculator suppression.]

California brokers and agents, take a hint from the report – you’re in tenuous territory and as the gatekeepers of real estate, you share society’s reformative task in regulating the transactions you arrange and the mortgages involved with them. [For more information about how to police real estate fraud in California, see the DRE brochure Preventing Real Estate Fraud.]

After the debacle of the Great Recession and financial crisis, public trust in real estate professionals has hit a low. Brokers and agents must lead the long-term effort in rebuilding real estate conceptually in the interest of homebuyers and sellers. [For more information about repairing the public perception of real estate, see the November 2011 first tuesday article, Damage control: restoring public trust in real estate professionals.]

RE: “Conditions are ripe for reprise of real estate scheme and fraud” from the LA Times