I'd like to start this post with something Tanta wrote in early 2007: Unwinding the Fraud for Bubbles

There is a tradition in the mortgage business of distinguishing between two major types of mortgage fraud, called “Fraud for Housing” and “Fraud for Profit.” The former is the borrower-initiated fraud—inflating income or assets, lying about employment, etc.—that is motivated by the borrower’s desire to get housing (not the same thing as “real estate”), by means of getting a loan he or she doesn’t actually qualify for. It may require some collusion by the loan originator or appraiser, but it may not. It is usually the least expensive kind of fraud to lenders and investors, since the goal is getting (and keeping) the property, so the borrower is at least usually motivated to make the payments. The problems come about, of course, because these borrowers failed to qualify honestly for a reason. Borrower-initiated fraud loans may be considered “self-underwritten,” and such loans do have a much higher failure rate than the “lender-underwritten” ones. Their only saving grace is that the lender tends to recover more in a foreclosure than in a fraud for profit case. Penalties to the borrower rarely ever come in the form of prosecution; losing the home and becoming a subprime borrower for the next four to seven years—with the credit costs that implies—are the borrower's punishment.

Fraud for profit is simply someone trying to extract cash—not housing—out of the transaction somewhere. If it is borrower-initiated fraud, it’s not a borrower who wants a house; it’s a borrower who wants to flip a piece of real estate or launder money or in some other way grab the cash and leave the lender holding the bag. Most of it, however, is initiated by a seller, real estate broker, lender, or closing agent (or all of them in collusion). It generally requires additional collusion by bribable appraisers, although it can certainly be initiated by a corrupt appraiser looking for a kickback, or can merely take advantage of a trainee or gullible appraiser. This is the flip scam, straw borrower, equity skimming, misappropriation of payoff funds, identity theft kind of fraud. It may not be as common as fraud for housing, at least in some markets, but it’s much, much more expensive to the bagholder. At minimum, the fraud-for-housing borrower wants to take clear, merchantable title to the property and maintain it at an acceptable level. That’s either unnecessary expense or (in the case of title) a hurdle to be gotten over by the fraud-for-profit participant.

The problem with this traditional distinction is that, recently, we seem to have an epidemic of predator meeting predator and forming an alliance: a borrower willing to commit fraud for housing meets up with a seller or lender willing to commit fraud for profit, and the thing gets jacked up to a whole new level of nastiness.

As Tanta noted, usually "Fraud for housing" isn't prosecuted, but here is an example of that "whole new level of nastiness" from Julie Johnson at The Press Democrat: Former Petaluma man sent to prison for mortgage scheme (ht T. Stone)

A federal judge sentenced a former Petaluma man to 37 months in prison this week for securing a phony mortgage loan that let him buy a home on Muscat Circle in Petaluma, U.S. Attorney’s officials said.

Justin Batemon, 34, pleaded guilty Jan. 31 and was sentenced Wednesday ... Batemon was a client of San Francisco loan officer Jacob Moynihan who federal prosecutors said masterminded a scheme that involved $15 million in fraudulent mortgage loans.

Batemon said he was self-employed at a fake company and inflated his income on the documents, prepared by Moynihan, that helped him buy a single-family home at 801 Muscat Court near Maria Drive ...

It sounds like Batemon's role was limited to, but still egregious, "fraud for housing". But this is an example of "predator meets predator", and Batemon is off to a 3+ year stay at the Big House.

Tanta finished her post writing: "Getting into a bubble is easy. Getting out?"

Five years later we are still trying to "get out".

Earlier:
• Summary for Week Ending May 25th
• Schedule for Week of May 27th