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Inflated Deals

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Sean Wagle

Sophomore Member
Joined
Apr 18, 2003
Professional Status
Banking/Mortgage Industry
State
North Carolina
There's always talk on here about how deals are inflated due to lender and REALTORs pressure. But it seems to me that the incentive to either party is pretty minimal.

Suppose the sales agent and buyers agent conspire to push a property up 10% on a relocation deal and the new price is raised from $200K to $220K, with a pet appraiser to make it work. Of that $20K, 94% of it went to the seller. The remaining 6%, or $1,200 is split between the agents and their brokerage, and split again between the agents.

300 bucks? It's worth 300 bucks to commit loan fraud? Not to mention Uncle Sam takes a cut. It's more like 200 bucks in the end, to each agent.

I don't know how the comission structure works for the Loan Originator, but I suspect it's a small fraction too. They'd all have to commit fraud repeatedly and regularly to amass any real returns from this. :huh:

I'm not saying fraud doesn't exist-- it obviously does in heaps. But it just doesn't strike me as a "smart" risk to be taking.
 

Ghost Rider

Senior Member
Joined
Apr 27, 2003
Professional Status
Banking/Mortgage Industry
State
Connecticut
Here's the thing...there is no fraud for a realtor if they are able to get a buyer to be able to offer more than market value for a house they want to buy. I can't think of any Real Estate Board that would try to pull a broker or realtors license if they got a complaint from a buyer "THEY MADE ME SPEND MORE THAN MY HOUSE WAS WORTH"......at worst, they'd get a little slap on the wrist.

Same with the LO on a refi - they aren't responsible for the appraised value, or how much the customer over borrows - they will fall back on the same argument that the realtors will use if they are brought into court, or before a firing squad.....

"I ONLY HAVE THE INFORMATION THE APPRAISER GAVE ME"

the amount the LOs make on a deal varies from lender to lender, the really good places will pay somewhere between 1/4 and 1/2 of a point of the total loan amount. The bad ones will let you make whatever overage you can make on the points you charge (and in CT, I've seen deals maxed out at the state usury limit of 8 point, or 1% of the total loan amount)

Does an extra $20,000 on a deal make a huge difference in the paychecks, no - but I won't sneeze at $300 - it'll pay my gas bills for my car for almost a full month......and when you can add that to every deal you do, well, it starts to add up.....I knew a Mortgage Broker who had his own small shop - good guy, did some shady deals, but overall good.....He LOVED to roll the $3,000-$5,000 in closing costs into every deal, why?? simple......if he did that on every deal he did, by bumping the loan amount of them by an average of $4,000, and doing 60 loans a year, it was like writing an extra $240,000 loan, with no extra work - an extra $2,500 in his pocket.....not bad.....and that was him closing ONLY 5 loans a month - I knew times when he would close 4 times that amount - you do the math!!!

Just remember, realtors have no control over the loan process, if you let them pressure you, it's your ***, and the Mortgage Originators out there have no liability, as they are NOT licensed. If the loan defaults, the bank will come talk to you, not him, unless he is doing something to dummy up the loan docs, but lets not start on that subject.....
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
Realtors pay attention to every dollar. The hype they put out over the prices increasing keep their own ball rolling, brings in more listings, and every time they get the prices up, their commissions keep going up. For the last few years, it's higher than the cost of living. Hyping the price increases in real estate is what keep them going.

Dee Dee in Colorado just posted one earlier this week about the declining market in the Denver area.... where some Realtors are not taking listings because it costs them to advertise and not many houses are selling. Realtors in Denver will be dropping out of the biz. The price increases are over and so is their hype and pay checks.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
If you make the assumption that there is no deflation and inflation will take care of the problem in a year or so, it's not a big issue. However, when you have 10-25% deflation in housing costs, you can end up upside down on a mortgage real fast and not be able to sell your home, and this is happening a lot, especially when you're doing an FHA and have 105% LTVs to start with.

What you are looking at is the tip of the iceberg. I have also seen a deal where the seller and lender are guaranteeing a no-qualifying loan of 80% on a home. The way it works is that the home is selling for $100,000. They run the price on the contract up to $125,000 and show an 80% LTV. There is no $25,000 down, it's all blue-sky and the $100,000 loan is the actual sale price. I reported one of these to the state real estate commission. They said only the buyer could complain and wouldn't investigate what amounts to federal loan fraud. Also you have the mobile homes where the unit is worth $40,000, the lot $18,000, and the total contract is $140,000 - what happens with all the extra money and the loss in value when the homeowner walks?

These are the real problems and they happen every day.

Roger
 

Ghost Rider

Senior Member
Joined
Apr 27, 2003
Professional Status
Banking/Mortgage Industry
State
Connecticut
And just for those of you who think that what Rstrahan just described (everyone getting upside down QUICK on real estate loans) just remember the early 90s real estate crunch......I saw people buying condos here in the mid 90's, and having sellers show up at the closing table with checks for $30,000-$50,000 just to be able to get out from under the loans they had. Add into that the credit card interest rates they were paying.....BLECH.....we're lucky we are in as good a shape as we are not as far as real estate values.
 

John Hassler

Senior Member
Joined
Jul 23, 2002
Professional Status
Certified Residential Appraiser
State
California
Sean

It's not the $200 "extra" dollars the agents make that's driveing this, it the difference between making the deal or not ($12,000+ of gross commissions in your example).

Here are the players as I see them:

1) The seller likes the high sales price for the obvious reason.
2) The buyer tends to be indifferent to sales price and is mostly concerned with getting in for 0%-5% down
3) The agents love it because they made a deal work that shouldn't have and come out with $12,000 to split.
4) the FHA lender makes higher fees on this type loan and, if done by the book, the Government is on the hook if the buyer defaults.

5) the appraiser gets blackballed if he/she doesn't make the deal work OR makes the deal work and has the potential to get sued/delisted by FHA if the buyer defaults.

Actually, most of the above applies to every purchase but the potential for default is much higher with the low/no downpayment.

John Hassler
 

Ghost Rider

Senior Member
Joined
Apr 27, 2003
Professional Status
Banking/Mortgage Industry
State
Connecticut
Agent makes nothing, Loan Officer is supposed to make nothing also, but they usually can pull a little something out for the trouble by pocketing a chunk of the over inflated application fee, which includes the aprpaisal fee, which you probably won't get because you didn't make the deal happen. Welcome to the wonderful world of mortgage banking in the 21st Century
 

Carnivore

Elite Member
Supporting Member
Joined
Jan 15, 2002
Professional Status
Certified Residential Appraiser
State
North Carolina
Sean,

50 deals a year.

Whining takes less time than getting two parties to renegotiate the contract. 50 x $200.00 = $10,000 extra for picking up the phone and whining!

When you put things in proper perspective it all becomes quite clear.
 

Restrain

Elite Member
Joined
Jan 22, 2002
Professional Status
Certified General Appraiser
State
Florida
It's a whole lot easier to threaten an appraiser than to get two parties to renegotiate a real estate contract. They will walk for $500, costing the LO the deal. However, you can always find another appraiser to make the deal, and the appraiser knows it....so the deal gets made.

And that's life in the big city.

Roger
 
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