Researchers at Ohio State University say the ethically murky tactic consisted of inflating the selling price of a home but offering the buyer some incentive, often cash back, whereupon the buyer would often use the cash as a mortgage down payment.
Many of these transactions occurred in poor neighborhoods and allowed people to buy homes they probably couldn't have purchased otherwise, the study author, OSU finance Professor Itzhak Ben-David, said.
In a study of home sales in Chicago between 2005 and 2008, 16 percent of sales where the buyer borrowed more than 95 percent for the purchase had inflated prices of up to 9 percent, Ben-David said.
"Without these kinds of transactions, many buyers would have no means of buying a house, and sellers may not have been able to sell their houses," Ben-David said.
"In many cases, it was a type of mortgage fraud. There are worse types of fraud, but this is still fraud."
It is considered fraud when buyers and sellers transfer cash or other assets without notifying the lender.
Highly leveraged home buyers who borrowed more than 80 percent of the home price were up to 3.9 percent more likely to default on their loans in the first year if they engaged in one of these inflated-price deals, the study found.
"Overall, this is a symptom of the housing bubble. People were willing to borrow more than they can afford and these transactions helped them do it," Ben-David said.
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