Shares of Washington Mutual tumbled a little over 17 percent today as a result of a probe initiated by New York Attorney General Andrew Cuomo. Subpoenas were issued today by Cuomo to Fannie Mae and Freddie Mac, two large government-sponsored mortgage investors, to investigate mortgages that they purchased from Washington Mutual. Cuomo alleged that Washington Mutual pressured a major real estate company to inflate home appraisals. The New York Attorney General stated, “Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest. Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”
This puts a whole new spin on the mortgage fraud fiasco. Everyone has been saying for months that banks were unaware that they were being defrauded. The wool was pulled over their heads, so to speak. This may not have been the case after all. In fact, they may have been pulling the wool over someone else’s head and running them into a wall. Ouch!
If these allegations turn out to be true then Washington Mutual will be in a world of pain. Fannie Mae and Freddie Mac will no longer buy their mortgage loans which will leave Washington Mutual with no other choice but to leave these loans on their books. Not a good scenario.
Miami-Dade County Implements Mortgage Fraud Task Force
Miami-Dade County implemented a Mortgage Fraud Task Force division to combat the high number of mortgage fraud cases in Miami-Dade County. The Mortgage Fraud Task Force website reveals that the division will be comprised of the following five committees:
Law Enforcement Committee – responsible for the detection, investigation, apprehension and prosecution of the mortgage fraud subjects and enterprises.
Legislative Committee – responsible for enhancing current laws, and creating new laws and ordinances.
Regulatory Committee – responsible for enhancing and enforcing regulations of all parties involved in the mortgage transaction.
Business Partnership Committee – responsible for creating and transmitting effective business practices to enhance cooperation with law enforcement and between different professions involved in the mortgage transaction.
Education Committee – responsible for creating public awareness through printed literature, newspaper articles and television reports.
It’s about time something like this was enacted. Maybe now I won’t need to worry about finding new fraudulent transactions in the MLS anymore when compiling my monthly indices, in particular the Brickell Condo Index. Hopefully, this action will put a stop to this type of activity.
Some arrests have been made recently. Take a look at Case #1 and Case #2 to view a nice illustration of how the fraudulent activity took place.
crack crack…That’s the sound of the whip on the hind side of those who partook in fraudulent mortgage activity. These people participated in inflating the real estate bubble well beyond the point of insanity. It’ll be nice once mortgage fraud becomes less commonplace. Now, we’ll finally be able to get an accurate picture of the market.
Governmental Intervention in the Housing Market
Yesterday, President Bush discussed his plan to aid homeowners at risk of losing their homes. Most of the plan focused on assisting borrowers to refinance their adjustable-rate loans to more conventional loans provided by the Federal Housing Authority.
I took a look at his recommendations and of particular interest to me was his proposal to temporarily suspend the tax liability that is owed by homeowners when performing a short-sale. As of now, the IRS has the right to tax the loan amount that is forgiven by the lender. It is considered a forgiveness of debt.
Short-sales have become very popular, as of late, because home prices have dropped in recent years and adjustable-rate mortgages have begun to reset. It has become more common for the value of a home to be less than what is owed to the bank. For example, let’s say that you purchased a 2 bedroom condo in 2005 for $500,000 and financed 90 percent of the purchase price. Two years later the value of your home has dropped and you have fallen two months behind on your payments. In the past, when homeowners were in this situation they would tap into the equity on their home by refinancing to take cash out. This is no longer an option, however, to most, because home prices have fallen. Oftentimes, two possibilities exist: lose your home through foreclosure or sell your home through a short-sale.
In the example above, let’s say that the price of your 2 bedroom condo has fallen to $400,000. You owe the bank roughly $450,000. You’ve talked to some knowledgeable acquaintances and they’ve advised you to do a short-sale. Basically, a short-sale means that the bank is willing to accept a pay-off amount that is short of what is owed to them. You contact a local real estate agent to list your property and within a few weeks an offer of $380,000 is submitted.
What is important to note is that two parties need to accept the offer: the seller and the bank. The reason why the seller has to sign off on the offer is because the IRS has the right to tax them on the amount of the loan that is forgiven. In this case, a tax on the $70,000 forgiveness of debt will be due the following April.
The bank also has to approve the offer because they are the ones who are accepting the shortfall in the original amount owed. The banks will ask the homeowner to have an appraisal performed at their expense. Banks are not stupid. They realize that the market has declined but they aren’t going to accept just any offer.
Recently, I’ve come across a few short-sales in the MLS that just don’t make any sense. For example, there’s a 2 bedroom/2 bath listed for $295,000 at Vue at Brickell. There’s also a 1 bedroom/1 bath listed for $217,000 at The Club at Brickell Bay. I’ve written about both buildings in the past and how prices in each building are inflated due to the mortgage fraud that has occurred. However, these prices are a step in the wrong direction and are unjustified. The 2 bedroom at Vue at Brickell is the best priced unit in the entire building, including the 1 bedroom units. The 1 bedroom condo at The Club at Brickell Bay is better priced than even the studios.
Listings like these are a waste of time for everyone involved in the transaction: the seller, the buyer, the bank and the two real estate agents. Just because it is a short-sale doesn’t mean that you can list a property at a price that will get you an offer within a week. As of right now, it is also doing a great disservice to the seller who will have a large tax bill come next April should the offer get accepted by the lender.
As I mentioned earlier, however, President Bush has proposed to temporarily suspend the tax that is owed to the IRS on the amount that is forgiven when a distressed homeowner performs a short-sale. If this becomes a reality it will alleviate a lot of problems for distressed property owners. Short-sales will become more common.
It wouldn’t surprise me, however, if we start seeing mortgage fraud occur in reverse. Appraisals will start coming in very low to justify the offers that are submitted to the banks. It’ll be a nightmare for banks. Accredited local appraisers need to be in place for these banks to be able to cleanly wash themselves from the mortgage mess at hand.
Miami Condo Index – Brickell – August 2007
I just finished compiling the data for this month’s Miami Condo Index for Brickell. Last month I revealed that the 18 buildings below had a total of nine closed sales from June 19, 2007 to July 18, 2007. That number surprised myself and many others who follow the real estate market in Brickell. Be prepared to be surprised some more because this figure has dropped. There were a total of eight closed sales from July 19, 2007 to August 18, 2007 in the 18 condo buildings below throughout Brickell. Eight!
Of the eight closed sales, one appears to be yet another fraudulent transaction. A one bedroom/one bath condo with 825 square feet sold for $625,000, or $758 per square foot, on August 3, 2007 at The Club at Brickell Bay. It doesn’t even have a direct water view! The same broker represented the seller and buyer in the transaction. What is really crazy is that a different brokerage had the condo listed for $425,000 in May. It was later canceled and relisted with the broker who sold it for $625,000.
If you think that transaction has the word “fraud” written all over it then take a look at the one bedroom/one bath condo that closed on May 18, 2007 at The Club at Brickell Bay. It too had 825 square feet of interior space and a view of the water from the balcony. The buyer of that unit paid the full asking price of $680,000, or $824.24. The Club at Brickell Bay now has the highest price per square foot of condos sold in the past six months of the 18 buildings included in the index because of these fraudulent transactions. When is somebody going to step in and do something about this? Supposedly the Miami Herald and the FBI are investigating the situation but I’ve been hearing those rumors for months. What is taking so long?
The average price per square foot of condos listed in the 18 Brickell buildings covered in the index went up slightly to $529.05. Last month this figure was $528.84. The weight-adjusted average, however, went down to $537.67 from last month’s weight-adjusted average of $540.17.
Average price per square foot of units currently listed on the MLS:
The average price per square foot of condos sold over the past 6 months actually went down slightly to $471.94 from June’s average of $473.95 despite the fraudulent transaction at The Club at Brickell Bay. Take note that The Club at Brickell Bay now has an average price per square foot of $720.15 for condos sold over the past six months. That is simply ridiculous. This average is based on the three transactions that have occurred at The Club at Brickell Bay over the past six months, two of which appear to be fraudulent. A little over 20 percent of the building is available for sale but nothing is moving. Hmmm…maybe it’s because the list prices there don’t make any f@&#ing sense!!!
Average price per square foot of units sold in the past 6 months:
Atlantis – 2025 Brickell Ave | 33129 | $335.12
Brickell on the River – 31 SE 5 St | 33131 | $409.44
Solaris at Brickell – 186 SE 12 Ter | 33131 | 14.30%
The Club at Brickell Bay – 1200 Brickell Bay Dr | 33131 | -11.98%
The Mark on Brickell – 1155 Brickell Bay Dr | 33131 | 4.41%
The Palace – 1541 Brickell Ave | 33129 | 3.39%
Villa Regina – 1581 Brickell Ave | 33129 | 36.73%
Vue at Brickell – 1250 S Miami Ave | 33131 | 2.85%
I noticed that a handful of fraudulent transactions will be falling off next month so I’m expecting the average price per square foot of condos sold over the past six months to go down in September. That is, however, assuming that other fraudulent transactions don’t appear in the next 30 days to take their place. We shall see.
Vue at Brickell – Overpriced or Insanely Overpriced?
I’d have to go with the latter on this one. A look at the current inventory of condo units for sale at the Vue at Brickell will show that the average price per square foot that these units are currently listed for is over $550. $550 per square foot! That’s for a non-waterfront condo unit, with partial bay views at best, in a building that is, by most standards, NOT a luxury high-rise building. In fact, Vue at Brickell was formerly known as Summit Brickell View when it was a rental building. The acquisition of the Summit Brickell View was made in December 2004 and conversion of the 323 units to condos began quickly thereafter. Grant it, the Summit Brickell View had recently been completed when the acquisition was made, and almost 70% of the units had never been occupied. Either way, it had, and in most cases still has, the features of a rental building. The majority of the units currently for sale still have the ceramic tile and carpeting throughout just the way they were sold when the units were sold as condos. The pictures below will show you a typical unit at Vue at Brickell.
Keep in mind that this is a typical unit at Vue at Brickell. I realize that some units have upgraded flooring and appliances, but the majority of units listed at Vue at Brickell look like this. Some units are even listed at over $700 per square foot! Those better come with marble floors, a Sub-Zero refrigerator, a Miele dishwasher, and a butler and maid! But they don’t even come close. In fact, two of those listings priced at over $700 per square foot come with ceramic tile and carpeting throughout, just as they were when the building was known as Summit Brickell View. One of those listings says “motivated sellers”. Motivated? Maybe they’re motivated to WAIT. Even the three bank-owned listings in this building are overpriced, ranging from $436 to $510 per square foot.
So what made this building so insanely overpriced? Did everyone get together and smoke the wacky tobacky without me or is something more afoul going on here? A look at closed sales for 2007 in the building reveal that mortgage fraud may have been the culprit. Three of the eight closed sales in 2007 sold for prices much higher than the asking price. Here they are below:
List price: $549,995
Sales price: $720,000
List price: $619,000
Sales price: $770,000
List price: $647,000
Sales price: $830,000
These types of cash-back deals have been the focus of a recent mortgage fraud investigation throughout the country. A cash-back scam occurs when a buyer offers to pay a significant amount more than the asking price, with the difference returned to them at closing. Most banks like to keep the cash-back amount to no more than 3% of the purchase price, and almost all lenders have a ceiling of 6%. In most cases, the seller and the listing agent are not aware that anything wrong is occuring and are just happy to have finally sold the property. Lenders, on the otherhand, are unaware of these large cash-back payments because the details of the arrangement are concealed within an addendum that does not get submitted to the bank along with the rest of the sales contract. Unscrupulous appraisers are often used to justify the inflated value of the property and the bank lends based on the purchase price stated on the contract after review of the appraisal.
It is no secret that Florida is well known for the mortgage fraud that has been running rampant throughout the state. In fact, according to a report released by the Mortgage Bankers Association, Florida led the nation in mortgage fraud in 2006. Hopefully, the mortgage fraud investigation throughout the state, and the rest of the country, will put an end to this nonsense so property values can return to an equilibrium state as dictated by the law of supply and demand.
If my assumptions are correct, and previous condo owners at the Vue at Brickell did fall prey to this sort of cash-back scam, then prices there will come in for a crash landing. There’s another building in Brickell that I feel may have a similar fate but I’ll leave that for an upcoming blog entry.
