Last year I had a client that was the victim of a Straw Mortgage scam artist. I handled the short sell on the property and in the process learned more about straw mortgages than I ever cared to.
One thing that was clear, there is no shortage of homes that were sold in this manner. Typically they involve an inflated appraiser, an unscrupulous mortgage broker, and a very crooked closing agent (usually an attorney).
In the end obviously the home is "sold" for far more than it's worth (almost always a FSBO). Then a few months later the home is abandoned and foreclosed on. What was also apparent was that often comps were skewed by the presence of such homes in some areas. In one case I saw 2 such homes on one block, and the other homes for sale weren't selling because they were over priced. The prices were based on the sellers and agents belief that homes on the street were selling for far more than they actually had.
I've warned many clients that are licking their chops looking at the list of foreclosures to be careful. Just because there's a debt of 700k on the home and you may be able to get it for 80% of that, doesn't mean it's a deal. It may have only actually sold for 80% of that and the difference was pocketed. Often the seller was still paid more than it was worth (even at 80%) as an enticement to go along with the scam.
So in the end you're buying homes you can't preview, can't inspect, and have to pay cash for; for possibly more than it's worth. I'm certainly not saying most repossessed homes fall into this category, but one never knows. I tell them to look and see how long the owners had it before walking away; that can be a clue.
This type of activity certainly played a role in the collapse of the mortgage industry.
I'm certain this was in one of The Soprano episodes. Maybe that's when it caught on.
Years ago I had a listing that wouldn't sell at $149,000 that had been refinanced at $259,000. Other than that, which I don't think was one of these schemes, I haven't run into these.
True Straws involve the use of a third party's credit. Often the person who's credit is used and subsequently ruined is paid a fee of around 20k. Sometimes they're people that have become addicted to drugs, or simply have nothing to lose but their credit score. Sometimes, as with my client, they're duped into believing they're partnering up with an expert house flipper that's going to make them rich. They're told by the con artist that his credit is all tied up in other properties and he merely needs to "use" her credit to acquire the property.
She thought he was actually paying 500k for it, when in fact he paid 360k for it. He vanished with all of the cash and she was left with a beat up 1952 house on a busy street and a $5,000 a month mortgage. She was so distraught she would often call while contemplating suicide over it. It's not a victimless crime, and it's not only the big banks that get hurt. That guy did that same trick 3 times in a row and pocketed about half million cash in 9 months.
Well, I think in the beginning many were trying to be legit, to an extent. After time it dawned on some it was more profitable and faster to just walk away; it wasn't their credit after all. As with my client, he had given her a bit of cash after closing and told her it was just an early cut of her upcoming profit.
Later of course when she realized she had been had, it was more like "Hey, your in it too, you cashed the check so you better keep quite". I convinced her to go to the police anyway, it was obvious she wasn't knowingly a participant. She was never charged, and he is under DFI investigation. Like Dog Chapman says, sooner or later truth and justice must prevail.