A few years ago, the Pasadena real estate market offered something for everyone. It did not matter if you classified yourself as an investor, a speculator or just a homeowner, the opportunity was there to buy real estate with Monopoly money. The late night TV infomercials refer to it as OPM or “other people’s money”. Create wealth, build your portfolio and retire rich, just don’t use any of your own cash.

Generally speaking, if money is readilly available the chance of abuse will likely increase. As we have seen, the easy credit policies of the past failed to suffuciently factor in the increased cost of risk. As a result……well you know the story because we are living the “as a result”.

To see how easy it was to manipulate the real estate market look no further than right here in Pasadena. Let’s take a company, a mortgage broker. Their primary function is to find loans for home buyers. In addition to originating loans they also have a couple of real estate agents. Not uncommon. Many companies vertically integrated themselves, offering buyers one stop for all of their real estate needs. Nothing strange about that, but what does seem out of the ordinary is what has transpired several months after the transaction has closed.

Here is a scenario that seemed to repeat itself a couple of times:

Purchase offers were typically made on Pasadena homes offering a price in excess of the listing price with the seller providing a credit back to the buyer in the amount of a couple of percent. Again considering the market at the time this was not that uncommon. On a $700,000 home, a credit of $14,000 would usually insure the buyer would not have any out of pocket costs. Therby buying real estate with no money down. Depending on the profitability of the loan the lender had some autonomy to influence their commission in the process.

Once the house closed, the originator of the loan was paid generous commissions to originate the loan, in addition to the employed real estate sales people who were also paid a commission. Title to the new property was typically taken in the name of one individual.

After the property was purchased, the new owner never moved in, instead opting to lease the home. The advantage of 100% financing allows someone to own a home that may not have the required downpayment. It will not cover the principal, interest, taxes and insurance at current market rents. Principal and interst would exceed $4100 / month. The market rent woud be about $3000 / month.

Almost one year to the purchase date, the house is relisted as a short sale. The listing company is the same company that represented the buyer in the original purchase. A homeowner facing default can usually choose the real estate agent they prefer to sell the house. Once the house becomes bank owned, most banks have their own list of preferential brokers.

It’s very hard to say if there was any shananigans going on here. Maybe it is just a strange set of circumstances. The real estate market had some amazing appreciation in the previous years and the thought could have been that the market would continue to increase. After all, nobody seemed to predict the house of cards that the lending and housing industry was based upon.

If someone’s intention was to create deception but fly under the radar this would be a much more easier way to pull it off consistently as opposed to other forms of mortgage fraud, previously reviewed here. However if you can get in with nothing down, then the opportunity for appreciation may outweigh the risk for decline, especially if you have nothing to lose. After all, its other people’s money.