Straw Buying

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. This buyer 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 the unscrupulous to obtain mortgages, with the deliberate intent to disguise the true buyer's identity or the true nature of the transaction.

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," 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—that is, more than 90 days delinquent or into a default status in its first year. 
• A first-time homebuyer with a substantial increase in housing expense
• The buyer does not intend to occupy the property, has an unrealistic commute, or seems incongruous given the size or condition of the property
• No real estate agent is employed (a non-arm's length transaction)
• Power of attorney may be used
• "Boilerplate" contract with limited insertions not reflective of a true negotiation
• Income, savings, and/or credit patterns are inconsistent with the applicant's overall profile
• A high loan-to-value ratio, limited reserves, and/or seller-paid concessions
• Inconsistent signatures found throughout the file
• Use of gift funds for the down payment and/or closing costs, minimum borrower contribution
• The 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, in which 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 they pose as the buyer and get approved for the loan. A monetary award is usually provided to the straw buyer in exchange for their participation in the fraud.

Straw buying is also used to make auto purchases. 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 apply for a loan with or through another individual. can result in scams where the purchase contract has high interest rates. Such arrangements can be legit in some instances—say, if the co-signer has good or better credit, ensuring the financing gets approved. However, if the co-signer has a lower score or a shaky credit history, it could be a scam—an excuse to impose a higher interest rate or other less-favorable terms on the contract. As result, dealer-initiated straw purchases are generally considered illegal.