by Calculated Risk on 7/22/2009 10:24:00 AM

From the Herald Tribune series on mortgage fraud in Florida: Flipping fraud ignored by police and prosecutors

In November 2005, when the real estate market in Florida had just begun to slow, the state’s top law enforcement agency issued a warning that mortgage fraud was about to wreak financial havoc.

In sober language, a 36-page Florida Department of Law Enforcement report explained that banks would collapse and losses would be counted in “hundreds of billions of dollars.”
...
The report, which was not released to the public but was sent to prosecutors and law enforcement officials across the state, laid out a series of responses to help prevent or lessen the disaster.

But instead of heeding the warning, most law enforcement officials ... did nothing.

Even the most basic recommendation in the FDLE assessment — posting a notice at the county courthouse warning that mortgage fraud is a criminal offense — was ignored in Sarasota County.

Today ... the scope of fraud has overwhelmed state and federal law enforcement agencies to the point that only the most egregious cases are likely to be prosecuted.

In addition to the FBI’s 2,500 cases, state agencies, including the Attorney General and FDLE, have pursued a few hundred more dating back to 2000.

But the amount of fraud dwarfs the number of cases being pursued, the Herald-Tribune found. The Herald-Tribune analyzed nearly 19 million property transactions looking for one type of housing fraud — illegal property flipping. The newspaper found more than 50,000 transactions in which prices increased so much, so quickly, that fraud experts interviewed by the newspaper deemed them highly suspicious.

Here are the first three in the series:

'Flip that house' fraud cost billions

Flippers' toll: On Gulf Coast, half a billion in defaults

The king of the Sarasota flip

Note: And from Tanta in 2007 (my former co-blogger): Unwinding the Fraud for Bubbles

by Calculated Risk on 7/22/2009 08:37:00 AM

The MBA reports:

he Market Composite Index, a measure of mortgage loan application volume, was 528.9, an increase of 2.8 percent on a seasonally adjusted basis from 514.4 one week earlier.
...
The Refinance Index increased 4.0 percent to 2089.7 from 2009.4 the previous week and the seasonally adjusted Purchase Index increased 1.3 percent to 262.1 from 258.8 one week earlier.
...
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.31 percent from 5.05 percent ...
emphasis added

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 2002.

Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.

Mortgage rates increased last week, but will decline again with the Ten Year yield falling this week.

by Calculated Risk on 7/22/2009 01:44:00 AM

From Reuters: U.S. architecture billings index down in June - AIA

... The Architecture Billings Index fell more than 5 points last month to a reading of 37.7, after a slight increase in the prior month, according to the American Institute of Architects.

The index has remained below 50, indicating contraction in demand for design services, since January 2008. ...

"It appears as though we may have not yet reached the bottom of this construction downturn," AIA Chief Economist Kermit Baker said. "Architecture firms are struggling and concerned that construction market conditions will not even improve ... next year."
...
Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions. The AIA's Billings Index, which began in 1995, is considered a measure of construction spending nine to 12 months in the future.
emphasis added

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index is still below 50 indicating falling demand.

Historically there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on commercial real estate (CRE). This suggests further dramatic declines in CRE investment later this year and next.

Earlier this month, the AIA lowered their forecast for commercial construction, from Bloomberg: U.S. Commercial Construction to Drop 16% This Year, Report Says

Construction spending on offices, retail centers and hotels is likely to fall 16 percent this year and 12 percent in 2010, more than previously forecast, the American Institute of Architects said.
...
Hotel construction is likely to decline 26 percent this year and 17 percent in 2010, the institute said. Industrial spending is forecast to dip 0.8 percent this year and 28 percent in 2010, according to the report.

by Calculated Risk on 7/22/2009 12:41:00 AM

“We’re dumbfounded. We’ve been working on this deal for four-and-a-half years. I don’t know how, all of a sudden, the numbers don’t work.”
JMW Development Principal Mark Johnson

From the Minneapolis / St. Paul Business Journal: SuperTarget planned for Woodbury now on hold (ht Arnold)

Target recently informed JMW that it would not proceed with the project unless it receives “a pretty significant discount” from its previously negotiated deal, JMW Principal Mark Johnson said.

“We’re dumbfounded,” Johnson said, noting that Target officials had told him as recently as June 24 that the project was on track.

Maybe Target has lowered their retail sales estimates for the store? Just saying ...

by Calculated Risk on 7/21/2009 10:11:00 PM

The Herald Tribune has a series of article on mortgage fraud in Florida (ht Ed)

Here are the first three in the series:

'Flip that house' fraud cost billions

Fraudulent property flipping ran rampant during this decade's housing boom, with $10 billion in suspicious deals in Florida alone, a Herald-Tribune investigation has found.

The deals -- many of them inflated sales among friends, family and business associates -- drove up property values and tax bills during the boom, fed bank bailouts and failures after the boom, and fueled the foreclosure wave that has gutted property values.

Unscrupulous property flippers would buy houses or condos, then drive up the price in a few days or weeks by selling it to someone they knew. Buyers used the inflated price to get bank loans for more than the property was worth, leaving money for flippers to split as profit.

Flippers' toll: On Gulf Coast, half a billion in defaults

More than 100 properties from Palmetto to North Port doubled in price in a single day during the recent real estate boom. Proposed condos -- no more than ideas on paper -- flipped two or three times before anyone moved in.

The king of the Sarasota flip

Instead of selling properties to outside buyers, [Craig Adams] created a real estate market where his hand-picked buyers and sellers could set the price they wanted, and repeated flips made Adams hundreds of thousands of dollars in real estate sales commissions.

In some cases, Adams and his associates bought a house, marked up the price and quickly sold it to another associate ... Using the inflated sale price, they qualified for a mortgage that more than covered the actual purchase, then divided the remaining cash among themselves, according to seven people familiar with the deals.
...
"They had a joke," said Melone, who did property deals with one of Adams' associates. "They said: 'We're getting low on money. Let's go buy a property.'"

The Herald Tribune has a graphic on hot spots for flipping fraud in Florida, and some supporting documents.