Here’s the latest scam to hit the Real Estate/Mortgages/Credit/FICO market: Buying and Selling FICO scores to qualify sub-prime applicants for tightened standards.
Kenneth Harney explains how this loophole is now being used:
"When your credit scores don’t qualify you for the home mortgage you
want, where do you turn? That’s an especially timely question now, as
banks and mortgage companies tighten underwriting standards for
applicants with less than perfect credit.
federal and state authorities fear that some borrowers are turning to a
fast-growing business on the Internet: companies that claim to boost
credit scores by transplanting the credit DNA of people with excellent
payment histories into the credit files of people with subpar histories
— ostensibly without breaking any law.
The companies claim to
raise FICO credit scores by 50 to 250 points by adding low-scoring
borrowers as "authorized users" on the credit card accounts of people
with FICO scores well in excess of 700. The positive payment
information from such cardholders then flows into the files of the
persons with subpar credit."
This takes advantage of a loophole in the Federal credit law, which does not limit the number "authorized users permitted on any single credit card account."
As this article makes clear, the law does not "prohibit the rental or sale of authorized user designations. Exploiting
that loophole, numerous companies have popped up on the Internet
offering to buy and rent out the credit card "trade lines" or accounts
of credit card holders with high limits combined with perfect payment
The online firm referenced up top markets itself to mortgage brokers, as a way to rehabilitate sub-prime borrowers, making them appear better than sub-prime to lenders.
The potential for fraud is there — especially with the way loan originators offload mortgages. As long as everyone involved keeps the loan going for a few months (3-6 months) prior to default/foreclosure, the loans can get easily sold and not represented to the originator.
Consider how easy it is if a few players are in on the fraud: If the appraisers over-value their estimates of the home, it allows excess purchase prices to be paid. The RE agent gets their commissions, the mortgage broekrs get paid, the originator who did the loan got their fee. The buyer who magically qualified for much more house than they could afford gets a seller’s concession in cash/check. The Washington Post reported this weekend:
"The basic scenario involves real estate agents who
have listed houses that aren’t selling. To move the properties, they
entice buyers or friends to "submit an offer [for the home] that is
$30,000 to $100,000 above the current list price" with the promise that
they will get substantial cash at closing.
The real estate agents
then amend the multiple-listing-service asking price to match the
artificially inflated offer price. A house that had been sitting for
months with no takers at $450,000, for example, might be relisted by
the agent at $525,000.
Then, working with a cooperative appraiser
who has promised to hit the number and an unscrupulous mortgage broker
who simply wants the commission, they "change the [loan] documentation
to reflect the [artificially inflated] sales price." The loans
typically are for 100 percent of the price of the house. The seller
nets the price he or she had originally listed — $450,000 in this
example — and the buyer gets some or all of the $75,000 inflated
differential as cash at closing."
I have no idea how prevalent this might be, but on the margins, its potentially pretty ugly . . .
Psst: Want to buy a better credit history?
Washington Post Writers Group, April 20, 2007 â 12:08 PM
Kenneth R. Harney
Washington Post, Saturday, April 21, 2007; Page F01