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Let the Buyer Beware


House buyer beware graphicYou've heard the pitch a hundred times: "Bad credit? No problem! You can qualify for a mortgage or we'll give you $100." It sounds too good to be true. In the recent case of one mortgage company, it was.

After a two-year investigation by a state regulator of financial institutions (unnamed pending trial of the case), the U.S. Department of Housing and Urban Development and the FBI, the company's owners and their co-conspirators were charged Aug. 5 with swindling home buyers and deceiving lenders by using inflated property values, "phantom" second mortgages and bogus "gift letters" that said the buyers had been given money by rich relatives for down payments.

The mortgage brokers, in cahoots with a realtor and real estate appraiser, preyed on first-time home buyers with poor credit histories and modest incomes, those who would not normally qualify for a mortgage.

One typical scam? It's often called "flipping": A home buyer and his girlfriend responded to the company's newspaper and and were shown two homes that the company said were available for purchase. The couple agreed to buy one of them for $95,000. What they didn't know was that the house needed major repairs and that the owners of the mortgage company had bought it for $57,500. The mortgage brokers overstated the value of the couple's assets in the loan application and falsely told the lender to whom they sold the loan that the buyers would carry a second mortgage of nearly $24,000 in lieu of a downpayment -- duping the lender into financing 100% of the home's cost. The brokers actually paid the $24,000 themselves, but because of the home's inflated purchase price, they still made a healthy
profit on the deal. The couple, thrilled at the prospect of owning their own home and inexperienced in the process, didn't question the brokers and signed the papers. Unfortunately, they were later unable to make the payments on the home and the lender foreclosed.

What tipped investigators off? The high rate of foreclosures on the company's loans.

If they are found guilty of the 17 counts of wire fraud and conspiracy with which they are charged, the owners of the now-defunct company and their accomplices could be sentenced to as much as eighty-five years in jail, fined a total of $1.8 million, and ordered to pay nearly $450,000 in restitution to individual borrowers, lenders and others they defrauded.

But the bottom line for first-time home buyers? Let the buyer beware.