Ooh la la…now things are really starting to get interesting…

Yesterday, the Washington Post ran a story on what's being referred to as "one of the biggest mortgage fraud cases in history."

The mastermind behind the scheme was one man, Phillip Hill, from Atlanta, Georgia. And it involved "400 fraudulent loan applications; nearly $100 million in mortgages; and 120 closing attorneys, appraisers, mortgage brokers and others who prosecutors say were in on the scam."

Basically, Hill and the others involved hunted down short-term loans from friends and acquaintances, mainly pulled from Atlanta's elite crowd. With these loans, the fraudsters bought houses and then transferred them to "straw buyers" - fake loan applicants who are paid for the use of their name and credit information to obtain a home loan.

The Post continues: "The ring used inflated appraisals and other doctored papers, and took out big mortgages that allowed it to repay the short term loans and pocket hefty sums."

While this scheme was highly elaborate, it was also highly effective - that is, until Hill got busted. Before he was caught though, it is estimated that Hill's personal gain was $14.5 million.

And it doesn't stop there…think about the effect that these inflated home prices had on the other homeowners in the neighborhoods Hill hit. He never had any intention of actually living in the homes that he purchased - and most ended in foreclosure, driving down the value of the other homes in the neighborhood.

So right now, honest homebuyers are being hit hard by schemes like these. They refinanced their homes, and when they refinanced they were told the inflated price…but now are finding that their home is not worth quite that much. And they still owe every penny. Take the case of one of Hill's victims. He bought a home in 2001 for $213,000. Hill started flipping them at around $400,000. All of the units were foreclosed - and now these homes are selling for $130,000.

"It [inflated home appraisals and mortgage fraud] happens everywhere and anywhere," said Anne Fulmer, vice president of Interthinx, an anti-mortgage fraud company. "If the true scope was discovered, I think it would cause a major crisis."

Looks like the second wave of hurt in the housing meltdown is coming sooner than some expected:


"Short Fuse"
The Daily Reckoning

Kate "Short Fuse" Incontrera is the managing editor of The Daily Reckoning. Each Saturday, she also brings you The Daily Reckoning's Views From The Fuse, a weekly wrap-up of contrarian insights and ideas. Kate studied literary theory and writing at Towson University and the University of Cambridge. After receiving her degree in English, Kate joined The Daily Reckoning team in 2004. Copyright © 2007 Kate Incontrera