A better fix for housing – Update I

December 14, 2008

A reader to my recent housing market fix proposal correctly points out the potential for fraud.

The scheme would go like this (using the coverage limit for worse case scenario):

I buy for 1,000,000, four years later it is worth 800K fair market (20% lower).  So I have a 100K covered loss for which program would reimburse 50K.

I find a complicit buyer willing to pay me 720K, or 10% below market (less would raise flags and easily be investigated), so I can get an additional 40K reimbursed, and he pays me some amount under the table.  This makes sense only if buyer gives me more than 40K off-the-book, and to the buyer if he gives me less than 80K.  Say we split the take and he gives me 60K, and each make 20K on the deal.

Is this amount worth committing fraud and exposing oneself to jail time?  Is it worth for the buyer to report lower equity and to draw down 60K from cash or investments (mortgage was for lower, reported sale price).  Maybe, but only slightly, so a few simple, low-enforcement-cost guidelines would probably eliminate it completely:

1) Require seller to use an approved appraiser and a licensed realtor, and list the property on the MLS (so bids are open and recorded by realtor).

2) 20K isn’t much, but speculators could try doing it repeatedly, flipping multiple properties for small but quick successive gains.  So change tax code so buyers in such a transaction have to pay taxes on gains over 10% if property is resold within 2 years.

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