Because What Could Go Wrong With Fake-Identity Condo Purchases In 2008?

One of the horribly fascinating things about following the real estate market from 2006 until, well, today actually, has been watching how long the body managed to keep running and twitching after the head was blown clean off.

Calculated Risk highlights a new development in a fun swindle uncovered last year by VoiceofSanDiego.org. As late as 2008, more than a score of greedy buyers and multiple careless lenders in San Diego got taken for more than $12 million in a series of overpriced-condo purchases. The convoluted deal, in which the buyers lent their good credit records for too-good-to-be-true purchases (which apparently included an expectation that some other party would be making the monthly payments), was organized by a Bay Area adventurer with the on-the-nose name of McConville (Baron von Shysterberger apparently having recused himself). The gist, from a 2009 story:

Over the next several months, [Jim] McConville's team arranged for Jenkins to obtain five mortgages. The loans were used to purchase five condos in Escondido in March and April last year, four for $337,000 and one for $370,000, while other similar units in the same complex were listed or sold for much less.

McConville had already agreed to buy those five condos for $187,560 each from the project's developers. The difference allowed McConville's company to collect more than $120,000 out of each of the five transactions after paying the developer, according to the developers' records.

But, Jenkins and five other buyers said, he never made good on his promises. McConville didn't pay the $10,000 per condo for their identities, they said. After making no more than three of the mortgage payments on Jenkins' units and those of several other buyers, McConville quit paying, the buyers said. The defaulting loans left the buyers to deal with ruined credit, the lenders to absorb more toxic loans, and North County neighborhoods to brace for more foreclosures.

[…]

Over the course of several months last year, McConville picked up at least 81 condo conversions from distressed developers and orchestrated their sale to more than 20 buyers who'd rented him their identities, according to a review of hundreds of public and private records and interviews with lenders, developers, former McConville employees, and six of the more than 20 buyers.

By arranging purchase prices well above market value, McConville was able to pay off the developers and capture what the developers' records state as more than $12.5 million.

The performance by then-government sponsored enterprises Fannie Mae and Freddie Mac was exactly as heads-up as you'd expect:

[Real estate appraiser Todd] Lackner had already tried to sound the alarm as the deals were closing throughout Sommerset Villas and Sommerset Woods in Escondido and Westlake Ranch in San Marcos earlier in 2008.

He submitted a report to Fannie Mae and Freddie Mac warning them not to buy any of the loans and alerting them that the deals seemed to indicate potential fraud.

Lackner received a form letter back from Fannie Mae. "Thank you for you (sic) inquiry," the e-mail read. "In order to better assist you, your email has been forwarded to the appropriate party here at Fannie Mae. Please be assured that it will be handled properly and we will responded (sic) appropriately."

But that was the last he heard from the company, even after he followed up with a phone call. Freddie Mac, on the other hand, called him at 8 a.m. the next day and soon sent an investigator to San Diego to review Lackner's documents.

Lackner was on to something. But despite those warnings, dozens more condos sold over the next several months to the buyers who listed that same Baumberg address. The loans on those condos likely sold to Freddie Mac or Fannie Mae. If the units make it all the way through foreclosure, it'll be known for certain which one — Fannie or Freddie — bought the loans.

The news today: These bad loans have cost you $7.8 million to date.

The one bright point is that Fannie and Freddie, which since their September 2008 bailout have been government-owned rather than government-sponsored, may be able to prove fraud and send some of these loans back down to the original parties, many of whom no longer exist. Calculated Risk's discussion describes how the GSEs are trying to get many banks to absorb more losses on bad real estate loans. As the magnitude of real estate losses grows larger than even interplanetary interventionists can handle, the government and its public/private excrescences may have to consider a revolutionary idea: that the risks and rewards of a deal should be limited to the people who willingly participated in the deal.