The conventional local wisdom blames the Bend real estate bubble and bust on greedy people (mostly from California) buying homes they couldn't afford and borrowing against their equity to buy boats and Hummers and fancy vacations.
But according to real estate fraud expert Richard Hagar, there was a different culprit: Crooks. Specifically, corrupt mortgage brokers and appraisers who conspired to inflate the paper value of homes far beyond their real worth.
In an eye-popping piece in The Atlantic headlined "Robust Oregon Real Estate Market Poisoned by Fraud," correspondent Christina Davidson writes that according to Hagar, the fraud was far worse, and more widespread, than anybody wanted to admit.
"So much discussion about the real estate boom and bust focuses on irresponsible buyers, who overextended themselves in purchasing homes they couldn't actually afford, often with dreams of re-selling and making fortune off ever-increasing market values," Davidson writes. "But during a seminar Richard Hagar gave in Bend [one recent] evening, he pointed his expert finger at one insidious culprit: fraud.
"Hagar expounded on this theme for me in a two-hour phone interview last night, after which I hung up somewhat disillusioned that most of the crooks who created the housing bubble would likely escape punishment, while their victims will struggle for years to regain footing after foreclosure, bankruptcy, and complete emotional and financial destitution."
(Footnote: Although Bend's Only Daily Newspaper listed Hagar's Sept. 30 seminar in its business calendar, it has carried no follow-up story about it or his allegations.)
I was utterly shocked - shocked! - at the mere suggestion that anyone here in our little Paradise on the Deschutes could have been dishonest, but Hagar seems to know what he's talking about.
What happened, he said, is that mortgage brokers pressured appraisers to approve grossly overinflated valuations. "According to Hagar, in the early 2000s he first started hearing from his law enforcement contacts about this kind of problem popping up with increasing frequency in Bend. The corruption seemed to grow a little more pervasive with each passing year, until 2004 when it accelerated rapidly."
If one appraiser wouldn't go along with the fraud, Hagar said, it was easy for the broker to find another one who would. The appraiser would "have an order coming in with a 'minimum value needed,' and if you couldn't make the value, the mortgage broker would just go down the street. He wouldn't hire you again, or wouldn't pay you," Hagar said.
Buyers who got mortgages based on these phony appraisals were underwater on their homes before they even moved in - their mortgage was far bigger than anything they could realistically expect to get if they sold the house. Even if they didn't take out any home equity loans, they were screwed.
"At this stage," writes Davidson, "it's difficult to estimate what percentage of Bend's real estate bubble would be more appropriately described [as] an illusion created by false valuation of properties. In an environment plagued by an inflation deliberately orchestrated by a loose conspiracy of those profiting from higher prices, the term fair market value becomes almost meaningless."
Starting in 2005, at the request of state law enforcement officials Hagar began giving quarterly seminars in Bend warning about mortgage fraud and how to avoid it. That didn't make him popular with the local real estate crowd.
"One time in late 2006 or early 2007," reports Davidson, "a Bend real estate agent reached him on his cell phone, launching into a full-throated tirade as soon as he answered. 'She yelled, "There's no fraud in Bend. You can't say that. We're not scammers. We wouldn't do that. You'll destroy our real estate market,'" Hagar recounts, adding his own response: 'Hmmm, actually, you're destroying your market.'"
Although Hagar says mortgage brokers and appraisers bear the brunt of the blame, banks also were complicit for not being more vigilant about handing out loans.
How many local brokers and appraisers were involved in this massive scam?
"Off the top of his head, Hagar can think of at least 30 Bend residents who would deserve to be indicted, tried, and convicted for their role in the fraudulent activities that artificially inflated the local community's housing bubble," Davidson writes. "However, he says, 'The reality is only about 5% will ever be caught.'"