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Home Loan Scamming Is Still Going Strong -- and Now You're Paying for It

Welcome to subprime swindle 2.0: the feds' desperate attempt to reinflate the popped housing bubble.

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The model homes were fully furnished, and looked like they came out of a Martha Stewart magazine with a theme of "the antique and modern in harmony." I had to hand it to them, it worked. It felt like home, as long as you didn't look out of the master bedroom window. The mini-highway and a barren desert wasteland dotted with high-voltage power lines squashed that comfort feeling.

These houses were clearly a step up from the entry-level McMansion I lived in just a few blocks away. But were they worth the extra $100,000 that you could be saving if you tried to get one of few foreclosed properties that are on the market? The sales lady assured me they were, and besides I'd never get a house for that price in Victorville.

"I have a lot of people coming in here that have been bidding on foreclosures until they are sick of it. They bid and they bid and they bid, and 20 other people are bidding, too. You throw a number out, and you never get anywhere. So they say 'I want my tax credit. I want my new home. I'm gonna pick my own carpet. I know it's under 10-year structural warranty and two-year cosmetic warranty.' "

Are the news reports about the increase in home sales true, I asked. She nodded. "I've been here for three years. Last year was really slow going, but this year has been really good. I've had four sales last month, three sales the month before that. First-time home buyers, that's what I'm getting. People are like ‘prices are down, the rates are low ... time for me to get a house.' So why not? People are not afraid of getting into homeownership. So that's a good sign, right?"

Of course, I nodded. Great for the economy. Great for Victorville. But the longer we talked, the more obvious it was FHA loans were at the core of a real estate scam of frightening proportions that was reinflating the real estate bubble with taxpayers' money, all in the name of economic recovery.

"Oh yes, we work with a lender. All you have to do is come in and let me worry about the paperwork. Right now you'll probably be able to get a 5 percent interest loan, which is good. And credit history is not much of a problem. We are doing just FHA loans, so we don't even go by a FICO score. If you haven't been late in the last 12 months on anything, you are eligible. People get in here with credit scores of 580s and 600s, but they've been on their job for 15 years, and they got a good history. The FHAs, that's what's helping out the first-time home buyers."

The FHA was helping the developers out, too. Even with boosts like the new accounting rules that allow banks to keep existing homes off the market (which boosts banks' assets and inflates home values by limiting supply) and taxpayer-funded cash perks for purchases of newly constructed homes, it could only work with zero-risk loans. No bank would consider giving a loan on obviously overpriced homes these days, especially with people with borderline bad credit. But thanks to the FHA, lenders literally cannot lose on these high-risk customers. So they are happy to hand out loans to all comers. In fact, places like Braeburn only sell to people who qualify for an FHA-backed mortgage: first-time home buyers. Fact is, FHA loans were the only reason places like Braeburn were still open for business. And that may not be such good thing.

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