Sick and tired of foreclosure headaches, a bank jumps at a short sale offer, even though the deal means a modest loss on paper.
But the lender -- and the entire community -- would suffer less if the agent had been honest. The agent hid much better offers, or refused to take them, because he wanted the bank to see only one.
Of course, he didn't reveal his involvement in the purchase, perhaps enlisting a straw buyer or forming a limited liability corporation. He might even have help from a conspiring title agent, broker, appraiser, attorney or all of the above.
And soon after the lowball short sale, he lists the home again, snags a much higher offer -- maybe even from someone who bid the first time -- and pockets a tidy profit.
Whether called "flopping" or "double escrow" or simply short sale fraud, it's the scourge of the real estate industry, it's sweeping the nation and it's illegal.
And Stanislaus County is a prime target.
A study by analytic firm CoreLogic recently estimated that lenders are dealing with $14 billion in fraudulent loans. Another recent analysis by Interthinx says Stanislaus County remains -- for a third consecutive quarter -- more at risk for rip-off schemes than anywhere else in the nation.
Lenders and legitimate buyers forced out of the market are most commonly perceived as victims, although authorities say they're becoming frustrated at banks' lack of cooperation with investigations.
But officials and industry experts increasingly acknowledge that the ultimate victims are us -- regular people hurt by artificially devalued neighborhoods, fewer government services and a poor economy tied to the American dream of property.
"Fraud affects everyone at every level," said Glenn Gulley, investigator with the Stanislaus County district attorney's real estate fraud unit.
His workload multiplied after The Bee first reported Stanislaus County's dubious distinction as the mortgage fraud capital of the country earlier this year. About the same time, leaders of counties and cities anguished over laying off hundreds of workers and slashing services that people come to expect from government.
Now they're seeing a link.
"When values of properties go down artificially, taxes also are artificially low and services provided by cities goes down also," said Scott Abell of Century 21 M&M and Associates in Oakdale. "Fraud hurts all of us."
Fraudsters are adaptive
Real estate fraud knows many faces and constantly evolves to stay a step ahead of investigators, said Ann Fulmer, vice president of industry relations for Interthinx, which analyzes mortgage application data across the United States.
Short sale fraud -- essentially, tricking lenders into selling homes for substantially less than they're worth -- is the most prevalent, locally and throughout the nation, several experts said.
"(Banks') motivation has nothing to do with getting the best value for the property," Abell said. "They're trying to rid themselves of bad mortgages, converting rotten assets into cash. And the collateral damage is impacting us all."
In June, RealtyTrac reported that two of every three Stanislaus County homes purchased this year went through short sales.
CoreLogic reported recently that one in 200 short sales throughout the United States are deemed "very suspicious," defined as resale less than 60 days after a short sale, with the new price more than 20 percent higher.
Other schemes might involve lying about income to qualify for loans, obtaining lower down payments or interest rates by falsely claiming intent to occupy, and falsified lien releases. Some crooks change locks on abandoned homes neglected by banks, lease homes to unsuspecting renters and collect small fortunes before anyone catches on.
The prosecutors' fraud unit now has mounds of potential cases, Gulley said. But he gets little traction, he says, when he approaches lenders for help closing the loop on suspicious short sales.
"In four and a half years, I've never had a bank call me to say, 'We've been defrauded.' Never. I've never had a bank ask me to investigate a fraudulent transaction with a house. They just don't care," he said.
"Taxpayers have bailed them out and they're going to keep bailing them out," Gulley said. "As long as (lenders) can keep passing the loss along, they don't want to talk to me about their practices. They don't want the public and their investors to know."
Tom Pool, spokesman for the California Department of Real Estate, said: "I would want to go after the people who duped me. But a lot of times, they just don't have the resources."
Fulmer, of Interthinx, said it's good for banks to be "concerned about privacy and not just hand over records" to investigators. She also agreed that "most losses are going to be borne by us taxpayers."
Taxpayers shoulder the risk
During the real estate boom, federal agencies held a relative handful of residential mortgages. Since the collapse, Fannie Mae, Freddie Mac and the Federal Housing Administration now control more than 90 percent of mortgages, studies show. "So all that risk is going to us taxpayers," Fulmer said.
"The banks don't seem to care because they're being made whole by the federal government, and you know what that is -- you and me and everyone paying taxes," said Stanislaus County Supervisor Bill O'Brien. "It's wrong on so many levels."
The price to pay for fraud may be more pronounced at a neighborhood level.
A bogus sale arranged by an unscrupulous agent can hurt neighbors, whose property values are affected by comparable nearby transactions, making it difficult to obtain full price when a homeowner tries to arrange a loan or goes to sell a house.
"You have a few people making money at the expense of everyone else," said Stanislaus County District Attorney Birgit Fladager.
Or, neighbors can point to a lowball sale and demand that government assessors lower their taxes. A small number of bogus transactions could lower combined revenue in an exclusive neighborhood by $1 million, Gulley said.
Fladager said untold numbers of first-time home buyers were excited to strike deals, but failed after submitting offers on multiple homes. Some agents said they later discovered that prices accepted by banks were substantially lower than what their clients had offered.
"It's an unlawful sale if you already know who's going to buy it," and conceal better offers, Gulley said.
But local prosecutors haven't brought charges despite dozens of referrals. Fladager said white-collar cases take enormous amounts of time with ever-
decreasing resources, sifting through documents and contacting bankers who may not want to get involved.
Some cheating hides behind limited liability corporations, experts say. LLCs often are used legitimately to hold properties, especially rentals, said Jenny Brawley, associate director of mortgage fraud investigations with Freddie Mac. But red flags go up if an LLC is created not long before it's used to buy what might be a devalued property, she said.
"LLCs are a favored vehicle for illicit activity," Fulmer agreed, "because you don't have to register principals (only agents for service are listed). It's another way to make things anonymous."
A review of home short sales in 2010 throughout Stanislaus County turned up 64 acquired by LLCs. Of those, the corporations involved in 21 transactions were set up only months, and in some cases, mere weeks before the sale.
Shady deals eliminate jobs
Fladager and Gulley recently met with state and county leaders and local real estate professionals to discuss havoc wreaked by fraud on the local economy.
"I don't like being number one for real estate fraud," said O'Brien, wondering how many sheriff's deputies might have been retained in an honest market.
Agencies in the Northern San Joaquin Valley have shed more than 2,300 employees since the recession began and have tapped $132 million in reserves to balance budgets over the past two years, according to a recent Bee review. Stanislaus County alone has laid off more than 500 workers, including 52 this year in the Sheriff's Department.
"I think it's time we start doing something about it," O'Brien said. "It's naive to think we can stop 100 percent of it, but let's get out of first place."
Some banks are experimenting with commissions based on performance over time, instead of paying a cut all at once, Fulmer said.
Experience suggests a long, hard climb out of the hole. It took eight years for Fulmer's Atlanta neighborhood to heal after 20 homes were exploited by crooks, she said.
"It seems that once fraud takes root in an area, it's incredibly difficult to eradicate it," Fulmer said.
Bee staff writer Garth Stapley can be reached at email@example.com or 578-2390.