One of the more curious new trends in real estate is called "reverse house staging." Instead of bringing in a professional to make a home look better, some real estate agents make it look worse. They fake water damage, put faux-finish "cracks" on the walls, tear up the lawn, and remove furniture.
Their objective? To convince the lending bank to agree to sell the home at a loss. Then broker and buyer resell the home at a much higher price.
"We call them 'flops,' because they're the opposite of flips," says Tim Coyle, senior director of financial services for LexisNexis Risk Solutions, a risk-information service based in Irvine, Calif. "They'll sell the house to a straw buyer, generally a friend or connection of the real estate agent who will buy the house for, say, $150,000. But they will already have a borrower set up who has agreed to buy the house for $300,000."
This is illegal, of course. It's also one of the new pitfalls in a housing market colored by fraud. Officially, mortgage fraud is down from the heyday of the housing boom. But it may just be that the statistics are not keeping up with the new schemes. Home buyers, lenders, and borrowers have to adjust to the new threats.
"The game has changed, and we're seeing things that people have never done before," says Mr. Coyle.
Collusion is one of the areas where fraud is clearly on the rise. Industry insiders perpetrate an estimated 80 percent of all real estate fraud, and they have the background knowledge and networks to find the necessary allies to pull off a scam. The reverse-staging phenomenon is one example of collusion. Another is a short sale to a wife or other relative with a different last name, who lets the seller live in the home. Before 2009, less than 5 percent of real estate transactions were fraudulent collusions, according to LexisNexis, which released its annual mortgage fraud report in late July. In 2010, the figure nearly doubled, then slipped to a still-high 6.8 percent last year.
Homeowners are seeing new pitfalls, too. Although the days of dangerous subprime mortgages, when banks pushed risky loans on unqualified buyers, are gone, the aftermath is proving to have other pitfalls. If anything, banks have become too risk averse – and too ready to foreclose, consumer advocates say.
"The important issue to focus on now is mortgage servicing," says Geoff Walsh, an attorney with the National Consumer Law Center, a Boston-based advocacy group. Many of the problematic loans that originated at the height of the housing market are "being foreclosed unnecessarily by mortgage servicers for investors who bought them."
Mortgage servicing departments within major lenders like Bank of America and Wells Fargo "make money by collecting a lot of fees, and get more by doing foreclosures quickly," he says. "There's a lack of rational decisions on a loan-to-loan basis."
Wells Fargo says it tries to keep borrowers in their homes. "We help 7 out of 10 customers who choose to work with us to avoid foreclosure," Jim Hines, a Wells Fargo spokesman, writes via e-mail. The bank has granted two loan modifications for every foreclosure sale between 2009 and 2012, he says, and forgave $5 billion in principal debt in the past three years.
Another pitfall confronting homeowners: title claims. One Florida woman bought a beach condo at a foreclosure auction, only to be sued by two other banks laying claim to the property, says James Kowalski, a consumer litigator in Jacksonville, Fla. Florida is a judicial foreclosure state, which means foreclosed homes are supposed to come with clean titles. Nonjudicial foreclosure states may see even more of these problems, he says.
There is some reason for hope. Home loans are much more secure these days. State laws push loan modifications and court mediation before a home fore-closure. Homeowners are far more educated than they were a decade ago.
Also, lenders now have "escalation departments," where borrowers can file formal complaints, requiring banks to resolve cases quickly. Fannie Mae, Freddie Mac, and the US Treasury's Home Affordable Modification Program also provide third-party escalation services.
Mr. Walsh recommends documenting everything mortgage-related, including information on income and household budget. "Keep detailed phone notes of all contacts with a servicer, including names of staff," he says. "Keep copies of everything you send to a servicer, and demand written answers and confirmations of statements."