Thursday, June 10, 2010

Debt Problem "Contained" in Europe, Market and Short Sale Fraud

by Bill McBride on 6/10/2010 04:00:00 PM

Quote of the day via Bloomberg (ht Bob_in_MA):

We do believe the recovery is strong,” Dominique Strauss-Kahn said in an interview with Bloomberg HT television in Istanbul. While rising debt levels are a risk to growth, mainly in Europe, authorities in the region “are now really committed to solve it” and “the problem has been contained,” he said.
And this reminds us of Fed Chairman Bernanke's testimony on March 28, 2007:
"[T]he impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
Uh oh, not another problem "contained"!

Stock Market CrashesClick on graph for larger image in new window.

And a market graph from Doug Short of dshort.com (financial planner).

This graph shows the ups and downs of the market since the high in 2007.

And on short sale fraud, from Bloomberg: Banks Face Short-Sale Fraud as Home ‘Flopping’ Rises (ht Mike in Long Island, Brian, Alex)
Two Connecticut real estate agents ... are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed --known as a short sale -- without disclosing that there were better offers. They then flipped the houses for a profit.
There are many versions of short sale fraud. Here is a story I recently heard from a reliable source:

A homeowner in California's Inland Empire bought for $350,000, refinanced during the boom for over $700,000 (cash out), and put in a pool, fixed up the house, and bought some toys. After house prices collapsed, and his loan reset to the fully amortizing rate, he talked his bank into a short sale (the homeowner is a real estate agent) - to his cousin for $350,000! The previous homeowner is now leasing the home from his cousin ...

The house was listed on the MLS for one minute at midnight (to satisfy the bank). And then listed as pending. These one minute listings are a red flag for possible fraud. Whether the transaction is not arms length (as above), or the listing agent is just trying to get both sides of the commission - this is not the best deal for the lenders (and frequently taxpayers).

This is a classic agency problem. As part of a short sale agreement, I think the bank should hire the listing agent - and also require the property to be listed openly for a minimum period.