What Is Straw Buying?
Straw buying is when an individual makes a purchase on behalf of someone, who otherwise would be unable to make the purchase, and this purchaser has no intention of using or controlling the purchased item. In many cases, straw buying is an illegal activity.
With respect to mortgage fraud, straw buyers are loan applicants used by fraud perpetrators to obtain mortgages and are used to disguise the true buyer or the true nature of the transaction.
- Straw buying is the use of a another individual or fictitious name to make purchases of goods.
- Among the characteristics identified by Fannie Mae for straw buyers are inconsistent signatures found throughout the file, a tendency to opt for loans with an early payment default, etc.
- Straw-buying is considered an illegal activity.
Understanding Straw Buying
Straw buying can take place in a variety of situations. For instance, if there are legal restrictions imposed on a person preventing them from buying a specific asset class or security, they may employ a straw buyer to make the purchase on their behalf. For instance, if a Chinese citizen is restricted from buying real estate overseas, they may hire an agent to circumvent that regulation.
A straw buyer may also refer to the creation of a fictitious person who will appear to make a purchase or obtain a loan, for example in the case of a so-called "air loan," where an unscrupulous broker obtains a mortgage in a straw buyer's name on a non-existent property in order to collect the loan proceeds illegally.
According to Fannie Mae, straw buyers looking to effect mortgage fraud may have the following characteristics:
- Mortgage payments are made by an entity other than the borrower
- The loan is usually an early payment default
- First time home buyer with a substantial increase in housing expense
- Buyer does not intend to occupy, unrealistic commute, size or condition of property, etc.
- No real estate agent is employed (non-arm's length transaction)
- Power of attorney may be used
- "Boiler plate" contract with limited insertions not reflective of a true negotiation
- Income, savings, and/or credit patterns are inconsistent with the applicant's overall profile
- High loan-to-value ratio (LTV), limited reserves, and/or seller-paid concessions
- Inconsistent signatures found throughout the file
- Use of gift funds for down payment and/or closing costs, minimum borrower contribution
- Title to the property is transferred after the sale closes
Examples of Straw Buying
One type of straw buying is a form of mortgage fraud, where a "straw buyer" applies for a mortgage for a property that someone else will actually control and live in. The straw buyer typically has better credit, so he or she poses as the buyer and is approved for the loan. A monetary award is usually provided to the straw buyer in exchange for his or her participation in the fraud.
Straw buying is also used to make purchases of cars. An individual who is unable to buy a car due to certain reasons, such as poor credit, uses the services of another individual to make the purchase. After the sale, the first individual becomes the car's primary user and is responsible for making loan payments.
The arrangement can also occur in a reverse manner. Dealers can initiate straw purchases by convincing a person with bad credit to sign up for a loan through another individual. Dealer-initiated straw purchases can result in scams where the purchase contract has high interest rates. Such arrangements are generally considered illegal but they can be legal in some instances. For example, if the co-signer of the purchase is an individual with good credit, then the arrangement is considered legal.