Real Estate, Speculation & "Occupancy Fraud"

by: Barry Ritholtz

Wednesday's WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.

The first is the somewhat surprised acknowledgment that speculators were involved in the run up and subsequent deflation of Housing prices.

Of course, every asset class attracts speculators when prices rapidly rise. It's why every big boom ends in a final blow off top -- that's the impact of late-to-the-party speculators -- followed by the inevitable spectacular collapse.

The latest after-the-fact revision (see our discussion on "predatory borrowing") has a new name: occupancy fraud.

This new nonsense word is a way to duck responsibility for failing to do appropriate due diligence prior to lending out money. Here are the details:

"As lenders pore over their defaulted mortgages, they are learning that the number of people who bought homes as investments is much greater than previously believed. Such borrowers turn up frequently in analyses of loans that defaulted within months after origination. In many cases, these speculators lied on loan applications, saying they intended to live in the homes in order to obtain more favorable loan terms or failed to provide the requested information.

Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in."

Speaking of fraud -- I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:

- Do you presently own your primary residence?
- Is your home currently listed for sale? Or, are you in contract? What is the asking price? Who is your real estate agency?
- RE Agent name? What's their phone number?

Of course, none of these questions was asked, and no due diligence was performed, as these lenders were whoring clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."

If there was any genuine interest in not lending to speculators, it's easy enough to verify . . .

Not surprisingly, all of this unchecked speculation ended badly. This has led to a big upswing in empty houses:

"Nationwide, the homeowner-vacancy rate, which measures the number of vacant homes for sale, rose to 2.8% in the fourth quarter, the Census Bureau recently reported. That matches a record set in the first quarter of 2007 and is the highest since the government began tracking vacant homes in the 1960s.

The current vacancy rate could be the highest since the Great Depression, when an exodus of Americans left the Dust Bowl states for the West Coast, says Mark Zandi, chief economist at Moody's Data "strongly suggest that vacancies are at their highest level since the 1930s," he says, adding that the empty homes aren't only depressing property values, "they are weighing on the collective psyche of communities. ... It's kind of like playing for a losing team. It's debilitating."

High vacancies in Florida, Nevada and California partly reflect overbuilding during the housing boom along with rising foreclosures. Cities in the Midwest have some of the highest vacancies, due not only to foreclosures but also to weak economies and population declines. In Cleveland, for example, the number of vacant homes has reached as many as 12,000, about 10% of the city's total housing stock, according to the treasurer of Cuyahoga County, which includes Cleveland."

Astonishing. Zero adult situation across the entire process, and now, wild ass covering and blame shifting.

Ongoing Impact of the Housing Sector
Assigning blame for all of the problems in the credit market

Tuesday, August 28, 2007 | 11:45 AM

Speculators May Have Accelerated Housing Downturn
Rising Number of Defaults Also Could Complicate Effort to Help Homeowners
WSJ, February 6, 2008; Page B8

As Houses Empty, Cities Seek Ways To Fill the Void
WSJ, February 6, 2008; Page B1