Mortgage fraud and appraisal fraud were, I’ve always suspected, rampant in Chicago’s South Side and West Side neighborhoods during the past decade. A recent study cited at Science Blog, took a closer look at the incidence of deals involving “cash back at closing:”
How would these transactions work? In one case Ben-David found, the seller wrote “$8,000 cash back to buyer at closing with full price offer.” Ben-David said a cash transfer is likely to have taken place, because the property was sold for its full asking price, $80,000, and financed with an $80,000 mortgage. The market value of the property is likely to be $72,000, so the buyer actually borrowed 111 percent of the value of the home.
Over time, these types of inflated transactions became increasingly popular in the Chicago area. In the entire sample period, the average rate of seller hints was about 3.4 percent of all highly leveraged transactions (where buyers borrowed more than 80 percent of the home price). But they could have reached up to 9.2 percent of all highly leveraged transactions between 2005 and 2008, results showed.
Ben-David confirmed that houses sold with seller hints did indeed have inflated prices. By examining repeat sales, he found that homes involved in these transactions had prices of 3 to 9 percent higher than other comparable home sales.
The results were not good for buyers. Results showed that the foreclosure rate of highly leveraged borrowers who engaged in inflated transactions was higher during the first year by 0.6 to 3.9 percent compared to other highly leveraged borrowers.
“Most of these buyers are not bad people. They just wanted to buy a house and don’t realize that this type of transaction may be illegal. They also don’t realize that by getting a mortgage that is worth more than the house they’re buying, they are overextending themselves and may not be able to keep up with payments,” Ben-David said.
They just wanted to buy a house and didn’t understand what they were doing? Count me among the deeply skeptical.
Academics often have a tendency to underestimate – badly underestimate – the larcenous tendencies of struggling city dwellers. Where I grew up in New Jersey, few of my friends and neighbors would pass on working a con or a hustle, and none of them failed to understand exactly what they were doing. Most of them were not “bad people,” but they often did bad deeds.