Lying speculators abounded in boom

Although we've continued to hear a lot about unethical mortgage brokers and real estate agents chasing commissions at any cost, we've heard less about the speculators who lied about their intent to occupy properties, making it much easier to obtain loans with no money down. Now it seems that the previous estimate by builders that 10% of their buyers were speculators is much too low, and it was in fact as high as 25%. Frankly, I don't know why this would surprise anyone -- this is also what happened in the late 1980s when flipping new homes in between phases became a popular way for buyers to double or triple their annual incomes. Still, it's difficult to tell a potential buyer to their face when they're lying, although I remember an agent in the Inland Empire telling me he didn't believe that a potential buyer from Newport Beach was really willing to give up that community for Perris. Nevertheless, according to this story in the Wall Street Journal, it seems that chasing volume became more important than truly vetting potential speculators:

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.

Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers.

The high number of hidden speculators helps explain some of the problems roiling the housing and mortgage markets. The loans backing these speculator purchases turned out to be riskier than ratings agencies and investors who bought mortgage-backed securities once thought. Investors tend to be more likely than borrowers who live in the homes to walk away from their purchases when home prices fall. "We couldn't understand what was driving so many borrowers to default so early in the life of their mortgage," said Glenn Costello, a managing director at Fitch...

Lenders typically allowed investors to finance no more than 90% of a home's value, but if borrowers said they planned to live in the property, they could buy a home with no money down, even if they had scuffed credit and didn't document their income, said Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., and president of the California Association of Mortgage Brokers...

Once there was a whiff that prices could no longer rise, this speculative demand evaporated, sending prices falling in some markets. The housing boom would eventually have cooled, anyway, but investors amplified the boom and bust.

Rising defaults among speculators may complicate government efforts to assist home buyers. The Bush administration has said it wants to help only homeowners facing foreclosure, not speculators. But foreclosures of investor-owned properties can create ripple effects in neighborhoods, pushing down prices and making it tougher for people who live in those communities to refinance or sell their homes if they can't make their mortgage payments...

While it is true that occupancy fraud can sometimes be difficult to detect, fraud experts said lenders and builders could have vetted their borrowers more closely. Pulling a borrower's credit report, for instance, may reveal multiple mortgages. In other cases, appraisal reports will sometimes indicate that a tenant lives in the property, and Internet searches can also turn up indications that a borrower owns multiple homes.

"There's a lot of telltale signs," said Frank McKenna, chief fraud strategist for BasePoint, which develops computerized fraud-detection tools. But "the industry was very focused on volume," he said.