During the boom years, fraudulent property-flipping schemes bedeviled the mortgage industry. As the housing market recovers, the scourge du jour is called flopping.
In his quarterly report to Congress Tuesday, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), urged that the Treasury Department stiffen appraisal requirements for the administration's Home Affordable Foreclosure Alternatives program.
Recent revisions to the program, which encourages short sales (liquidation of the home for less than is owed on the mortgage, with the lender's consent), could give rise to flopping schemes, he warned. In flopping, home values are fraudulently deflated for the purpose of decreasing the cost of a short sale to a straw purchaser.
The property is then quickly resold for its true market value, "leaving the difference in the crook's pocket," the inspector general said in the report. (Conversely, when a property is flipped, a house is sold at an inflated price, sometimes to an unwitting buyer but more often to an insider.)
The inspector general came down on the side of the Appraisal Institute, a trade group for appraisers, which sent a letter to Treasury Secretary Tim Geithner in March urging "independence in the valuation process" and the use of full appraisals.
Barofsky recommended that Treasury adopt a uniform appraisal process similar to that of the Federal Housing Administration (FHA) for all the department's loan modification and foreclosure alternative programs.
As it stands now, servicers are allowed to use broker price opinions rather than a full property appraisal, making the program vulnerable to such schemes, the inspector general said.
BPOs are cheaper at about $40 per property, compared with the $350 to $500 for the cost a full appraisal.
The Appraisal Institute said in its letter that real estate agents and brokers are not trained in property valuation and have "an inherent bias toward quick results and actions which produces a fee for themselves irrespective of whether the lender, servicer, investor, property owner or borrower gets a fair return on the short sale."
The inspector general warned that the recent doubling of the incentive fee to $3,000 for borrowers who complete a short sale (meant to cover moving costs) without adding antifraud protections "increases the incentives for those participating in criminal short sale scams."