Real-Estate Sleight of Hand

Itzhak Ben-David is a Ph.D. candidate in finance at the University of Chicago’s Graduate School of Business. (Levitt is one of his dissertation advisors.) While pursuing his original research idea — the degree to which housing prices efficiently incorporate anticipated tax increases — Ben-David stumbled upon a slightly juicier topic: a real-estate sleight of hand known as the “cashback transaction,” in which the seller gives the buyer a clandestine rebate that the lending bank never finds out about.

Yes, it’s illegal.

Our current New York Times Magazine column is about Ben-David’s research. Here is his paper on the subject. Not only is the subject matter interesting, but the detective work he employed — a sort of mashup of the methodologies in the Levitt/Syverson real-estate paper and the Duggan/Levitt sumo paper — is really impressive.

As always with our N.Y. Times columns, we’ve posted some complementary research materials on the subject.

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  1. mpearl says:

    As implied by others, the payment itself is not per se illegal. The illegal part is submitting a signed mortgage application in which you attest that no such payment was made.

    Similar things have been done very above board for years. CitiBank used to have a program, they called it key-loans, which was called tiered-payment mortgages in the secondary market. A seller would deposit some money with the lender. That money would be used to subsidize the borrower’s monthly payments for the first 24 or 36 months of the mortgage. The mortgage payment sfor the borrower would be one amount for the first 24 or 36 months (and that amount would be used to determine the borrower’s ability to pay) and a different, higher amount (equal to the normal amount for a level pay mortgage) for the remaining 324 or 336 months. One would expect a relatively high degree of prepayments, and delinquencies right around the time the payment changes.

    There are other similar programs going on. Look for “buydown mortgages” in your favorite search engine.

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  2. mpearl says:

    As implied by others, the payment itself is not per se illegal. The illegal part is submitting a signed mortgage application in which you attest that no such payment was made.

    Similar things have been done very above board for years. CitiBank used to have a program, they called it key-loans, which was called tiered-payment mortgages in the secondary market. A seller would deposit some money with the lender. That money would be used to subsidize the borrower’s monthly payments for the first 24 or 36 months of the mortgage. The mortgage payment sfor the borrower would be one amount for the first 24 or 36 months (and that amount would be used to determine the borrower’s ability to pay) and a different, higher amount (equal to the normal amount for a level pay mortgage) for the remaining 324 or 336 months. One would expect a relatively high degree of prepayments, and delinquencies right around the time the payment changes.

    There are other similar programs going on. Look for “buydown mortgages” in your favorite search engine.

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  3. dwolf says:

    I suspect that there is little incentive to legislate any change- as increases in property sales prices leads to increases in property taxes- The victims may be both the buyer and the neighbor whose comparable value just went up and so did both of their taxes.

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  4. dwolf says:

    I suspect that there is little incentive to legislate any change- as increases in property sales prices leads to increases in property taxes- The victims may be both the buyer and the neighbor whose comparable value just went up and so did both of their taxes.

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  5. spicey says:

    In the UK you sometimes see cash back in new build developments, particularly those aimed at first time buyers, to help with moving in expenses.

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  6. spicey says:

    In the UK you sometimes see cash back in new build developments, particularly those aimed at first time buyers, to help with moving in expenses.

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  7. Bruce Hayden says:

    Let me note that with good credit, you can, or at least could, essentially get a zero down loan legitimately. I did so in AZ about 6 years ago. The down payment was a 2nd, through the same (initial) lender.

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  8. Bruce Hayden says:

    Let me note that with good credit, you can, or at least could, essentially get a zero down loan legitimately. I did so in AZ about 6 years ago. The down payment was a 2nd, through the same (initial) lender.

    Thumb up 0 Thumb down 0