Covid-Era Loan Fraud Plays Significant Role in Home Price Inflation

Fraudulent applications for the government’s Covid-era Paycheck Protection Program helped push home prices higher in some markets. That’s the conclusion of new research from the University of Texas at Austin. It says that fraudulent PPP loan recipients increased their home purchase rate more than non-fraudulent loan recipients, and that that corresponded to higher home prices. (1)    Hi, I'm Kathy Fettke and this is Real Estate News for Investors. Please remember to subscribe to this podcast and leave us a review.   The research paper shows that home price growth was much faster in areas with a high amount of “suspicious lending per capita.” In other words, areas with higher rates of loan fraud correlated with fraud recipients who also bought property. That may have increased prices due to competition among well-funded buyers, or maybe because it was easy to spend a little more on a home with easy money.   Loan Fraud Impact on Home Prices   So what was the estimated size of this impact? The report says: “at the zip code level, house prices in high fraud zip codes increased 5.7% more than in low fraud zip codes within the same county.” The analysis also accounted for land prices, historical home pricing trends, remote work impact, migration, population density, and how close the homes were to business districts.   The PPP loan program distributed more than $793 billion dollars from April 2020 through May 2021. Research done previously at the Austin university labeled $117 billion of those PPP loans as “suspicious.” Study co-author and professor of finance, Sam Kruger, says: “The fraud was highly concentrated geographically. And because of that concentration, there may have been spillover effects in some of those local areas.” (2)   Why Did This Happen?   Government data shows that home prices rose 24% nationwide from November of 2019 through November of 2021. Many factors contributed to those high prices including remote work, migration from crowded urban areas, and a desire for larger homes with yards, but this new research says that money handed out by the government to help business owners retain employees may have contributed to home price growth.    Kruger says: “This is a very specific type of stimulus that injected cash into certain areas, and it seems to have played a pretty significant role.”   How Did This Happen?   The report also blamed lax loan standards among Fintech companies, which had a higher rate of fraudulent loans than traditional lenders. It also suggested that social media was used to spread the word about getting fraudulent loans from those Fintech loan providers. In a zip code map of the country, areas where much of this fraud occurred was along the sun belt, as you might expect. If you’d like to read more about the study and check out that map, you’ll find links in the show notes at newsforinvestors.com.   You can also learn how to buy real estate legally as a member of RealWealth. It’s free to join for access to our housing market data, investment counselors, and referrals to real estate professionals that you might need to help build a portfolio of rental properties.    Thanks for listening, and please remember to subscribe to the podcast!   Kathy Fettke   Links:   1 - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4487877   2 - https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-price-inflation-in-certain-markets.html