There are three main reasons that real estate has attracted so many unscrupulous people in recent years.
First it is an asset that can be highly leveraged. Homes can be purchased for a relatively small amount down and the balance financed. When property goes up in value this confers wild profit on the owner. For example, say you buy a home for $100,000 and pay 10% down. When the transaction closes you have purchased a $100,000 asset for an expenditure of one tenth its value. Putting aside transactional costs, if the property increases in value 25%, you have gained $25,000 in value on an original investment of $10,000. You more than doubled your money on a 25% increase in value of the asset.
The second aspect that attracts the criminally inclined, is that these very valuable assets are often owned by people who are not sophisticated in real estate financing. This is an area where people typically just given themselves to the grinding wheels of commerce without knowing a lot about what is going on in a real estate transaction. Thus there is great opportunity for duplicity behind a mask of convention.
This area is also relatively unpoliced. In the early 1900’s the scam of choice was securities fraud. So many people were falling victim to fraudulent securities schemes that the federal government created the Securities Exchange Commission and in the 1930’s passed legislation imposing severe penalties for securities fraud and implementing broad disclosure requirements.
Many equity skimmers would probably have been selling bunko stock one hundred years ago. The equity skimming schemes of today occupy a relatively unpoliced area without much in the way of legislation (although states such a Washington are passing legislation to thwart this form of fleecing). In short home sales is an area where a lot of money passes hands, there is potential for fast profit and there is not a great deal in the way of scrutiny — similar to stock sales before the Security Exchange Commission.
There have always been lots of real estate scams but for our purposes the story starts in the 1970’s. There was a recession in the early 70’s (or something that looked remarkably like one). An average house in Seattle could be purchased for $15,000, due in large part to local economic problems. This was followed by a period of inflation and breathtakingly high interest rates.
The inflation encouraged people to sell their real estate profitably, but the high interest rates prevented many people from getting loans to buy real estate. These pressures created an era of seller financing. The buyer would give the down payment to the seller and make monthly payments to the seller with an agreement to pay the purchase price off in full in three to five years, when financing could be obtained. This sort of arrangement was commonplace.
The buyer got the house and with it the obligation to pay payments to the seller and the obligation to continue to pay the seller’s mortgage. The buyer could assume FHA loans but usually the buyer just agreed to make the payments for the seller after the sale. The malevolent instincts that had been somewhat suppressed by federal laws in the area of securities sales were revived in this situation.
All sorts of bad things happened. Crooks would buy homes with faulty seller financing documents so sellers could not foreclose if they were not paid by the buyer, while at the same time they remained obligated on the mortgage which the buyer might choose not to pay. Companies were formed that bought real estate on seller financing, then just stripped the property of everything of value and left the barren property for the sellers to foreclose upon.
Seller financing deals could be structured to protect the seller, but there is always a portion of the population that does not consult a lawyer before entering into a transaction of this sort. It is this group around which financial vultures circle.
There was nothing of the magnitude of the massive systematic fraud of recent years, so the legislature was relatively slow to address the problem of equity skimming. In 1988 Washington passed a law that criminalized equity skimming and declared it to be a violation of the Consumer Protection Act. The forward to the bill states in part:
The legislature finds that persons are engaging in patterns of conduct which defraud innocent homeowners of their equity interest or other value in residential dwellings under the guise of a purchase of the owner’s residence but which is in fact a device to convert the owner’s equity interest or other value in the residence to an equity skimmer, who fails to make payments, diverts the equity or other value to the skimmer’s benefit, and leaves the innocent homeowner with a resulting financial loss or debt.
Financial institutions had their hands full in the 1980’s. Seafirst Bank, the biggest bank in the Northwest was going bankrupt until it was purchased by Bank of America. Other big banks swallowed smaller ones into the nineties. Two of the biggest Seattle banks, Peoples Bank and Old National Bank, were bought by U.S. Bank of Oregon and merged into U.S. Bank of Washington. This activity seemed to occupy attention much more than occasional fraud on homeowners.
The opportunity for homeowner fraud errupted like never before during the Bush Administration. The administration’s laizes faire, anti-regulation bias allowed this situation to reach international economic crisis proportions, despite obvious abuses all along the way. (The policies that created the situation were constant between Clinton and Bush, but Bush’s response to the financial crisis made Katrina relief look adequate and timely.)
The subprime era was awash in home loan money; lenders could hardly give it away fast enough. Home loans were obtained without a great deal of review for as much as the full purchase price of a home. This was like a petri dish for raising a culture of financial fraud.
People were so eager to get at the money there were numerous seminars given on equity skimming. Small fortunes were made on the price of admission alone. These week-long seminars were packed with local real estate people, real estate agents, brokers and miscellaneous others. People from Seattle, Everett, from all over the Western part of the state attended.
Recently indicted Charles Head (California based) advertised on the internet, sent faxes to mortgage brokers and people in the real estate industry and nurtured relationships with lenders and escrow companies. He had dozens of companies that were nothing more than names to confuse the public. Sometimes the companies described themselves as facilitators, sometimes as lenders, sometimes as lenders’ agents, sometimes buyer’s agents, sometimes both lender and buyer’s agents and often not at all.