Sarah Palin's New $1.75 Million House Purchase Exposes Another Facet Of The Neverending Housing Scam - Short Sale Fraud
This post has two parts: the first one, or the blue pill part, deals with the mundane, namely Sarah Palin's brand new $1.75 million, 8,000 square foot house in North Scottsdale, which "sits on 4.4 acres and has a home theater, a billiard room, a walk-in wine room and a "resort style backyard" with a gazebo and pool, according to the listing and listing photographs. The brown, stucco-and-stone house, which was renovated this year, has several fireplaces, a six-car garage and mountain views. The property has a circular driveway and desert landscaping." The second part, which is where one takes the red pill, deals with something far more serious: short sale fraud - yet another facet of the ongoing discovery of just how deep mortgage fraud in this country (in this case by real estate "investors") runs. Only this time it is fraud which results in impairments to the banks (arguably). Yet even then, questions remain...
First, a little more on the mundane from the WSJ:
The neighborhood is "as rural as Scottsdale gets," says broker Bob Hassett of Russ Lyon Sotheby's International Realty, who was not involved in the deal but said he was approached in 2007 by a previous owner about listing the home, which he described a "Southwest in feel." Within a square mile of the home, he said, houses are priced between $500,000 and $5 million. Real-estate agent Jeff Sibbach of John Hall & Associates described the area as "low-profile; most of the stuff in there is horse property."
Rumors have swirled for months that Ms. Palin, whom some GOP factions are urging to run for president, has been looking to be based out of Arizona. On Saturday, the Arizona Republic reported that Ms. Palin had possibly purchased the home. She purchased through a limited-liability company that bought the property from Ian Whitmore, who Wednesday identified himself as a real-estate investor. "It was always my intention to sell the home," he said, and declined to elaborate on the work he'd done on the home. Mr. Whitmore bought the property from J,P. Morgan Chase Bank last year for about $800,000, according to tax records.
A little more on Mr. Whitmore:
Why is this important? Because as the second part of this posts indicates, one of the heretofore unreported aspects of mortgage fraud, which incidentally has nothing to do with the beginning of the foreclosure process, but everything to do with the end, or the REO/Short Sale transaction part, will cost banks up to $375 million in 2011. Housing wire reports:
Short sales increased rapidly over the last several quarters, but wherever there are home sales, there are home sales fraud.
Sales of properties on the verge of foreclosure tripled over the last two years and will increase another 25% this year, according to analysis from CoreLogic.
Analysts found one in every 52 short sales conducted in the first half of 2010 were "suspicious," meaning the lender may have incurred unnecessary losses from fraud. Over the first six months of last year, banks showed $150 million in losses from these suspicious transactions. By the end of 2011, banks could face $375 million in losses from short sale fraud, according to CoreLogic.
Short sales pose a suspicious risk in a variety of ways. One example occurs when the buyer flips the property for a 10% profit less than one month after the bank unloads it.
Analysts also found any property flipped less than three months after the transaction for at least a 20% profit as suspicious. Even at six months after the transaction, a short sale can be suspicious if the buyer flips the property for 40% more than the short sale price.
Analysts said not all of these transactions were fraudulent. Buyers, often investors, can quickly rehabilitate the property, which poses no significant risk to the bank. However, as CoreLogic analysts looked through hundreds of thousands of short sales, some were resold on the very same day.
In these deals, the investor has two separate contracts. One is the purchase contract with the lender. The other is a separate agreement the investor has with a third-party buyer. The two transactions are choreographed and presented to the title company on the same day with the short first executed, followed by the flip to the third-party buyer.
Overall, roughly 65% of the resales after the originally short sale transaction were deemed "suspicious" and caused direct and unnecessary losses to the bank.
Let's recall the math on Ms. Palin's purchase: Whitmore buys the short sale from JPMorgan in March 2010 for $805,000. He then flips it just about one year later to Ms. Palin for... $1,750,000. A profit of 118%. Surely, this transaction should set off dozens of "suspicious" red flags at JP Morgan.
Ironically, Palin, who in this case is completely innocent of any wrongdoing, may have tripped the alarm switch on a trick that is being used by mortgage "investors" across the country (with who knows what sources of capital - arguably money from the likes of... JPM?), which are buying up wholesale REOs only to flip them to end buyers at up to 100% profits shortly thereafter.
Then again, it would not surprise us if it was none other than JP Morgan who provided the financing to "real estate investor" Platinum First Realty to purchase the property in the first place and to keep it off the market with a substantially above market price. At this point, it is clear that if any aspect of the housing market can be manipulated, it will be.
h/t Manal Mehta