Biggest Source of Housing Fraud?

Extending Buyers a Helping Hand (& Leg & Arm)

(One more) pop quiz: what's the biggest source of fraud in today's housing market?

A. Inflated appraisals
B. Seller downpayment "gifts" to their Buyers
C. Borrowers falsifying data -- including income --on their mortgage applications
D. Shaky mortgages bundled into securitized debt and re-sold to investors

Answer: B.

Think of it as "seller-paid points on steroids."

Paying points -- the Seller contributing up to 3% towards the Buyer's closing costs -- is a common feature of today's buyer's market; as long as the lender knows about it, it's perfectly legitimate.

Unfortunately, it appears that many home Buyers need more help than that -- and at least some Sellers, eager to consummate a transaction, are obliging.

The catch is that lenders forbade such "gifts," for a couple reasons: notwithstanding appearances, such Buyers have little or no "skin" in the game; Seller gifts can mask Buyer credit risks; and such gifts effectively inflate the value of the home being sold, which serves as the bank's collateral if the Buyer defaults.

To crack down on the practice, lenders are stepping up their documentation requirements, big-time.

Thanks to Steve Mohabir, City Lakes' resident mortgage expert, for providing background on this post.