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Short Sales Are Targets For Mortgage Fraud


Aired 6/24/11

Short Sales Are Targets For Mortgage Fraud

— California investigators say there are a lot of people trying to take advantage of the complicated short sale process. Short sales happen when people try to sell their homes for less than the money owed to a bank. The comment came at a San Diego Association of Realtors roundtable. There are a lot of short sales on the market and most people don't understand the process. That leads to fraud.

Short Sales Are Targets For Mortgage Fraud
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"Basically that amounts to trying to get an unfairly low offer accepted by the lender," said Phil Idhe, investigator for the California Department of Real Estate. "And then turn around and sell it for a higher price to the buyer, who in effect could have bought it for the price that the lender sold it for."

Instead, the seller pockets the difference. Because there's still a lot of distressed inventory on the market, the situation isn't expected to get better soon.

"That's where the fraud is taking place, not in the loan per say, because the buyer who ultimately purchases that property with that loan would still have to qualify. But the fraud's occurring between the lender trying to unload the property and the ultimate purchaser," said Idhe.

About a third of all homes sales in California involve the short sale process. It's not clear when that number is expected to get smaller.

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Avatar for user 'annieytom'

annieytom | June 27, 2011 at 11:50 p.m. ― 5 years, 9 months ago

Understanding the short sale process will guard you from the fraud.

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Avatar for user 'AKR'

AKR | June 29, 2011 at 3:21 p.m. ― 5 years, 9 months ago

Neither the author nor the "Investigator" state what exactly is fraudulent about these short sale transactions. The offer which the bank accepts is not necessarily "unfairly low." It is a CASH offer. It is unlikely that your average owner-occupant is able to make a cash offer for a property. Banks do not accept any offers that they don't want to accept, and no short sale buyer can pay any less than the bank will take. The author also fails to state what is "fraudulent" about buying a house for a lower price and selling for a higher price? "Fraud" requires willful misrepresentation of material facts in a transaction. This article fails to identify the so-called "fraud" in these transactions.

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Avatar for user 'REFRAUDBUSTER'

REFRAUDBUSTER | July 2, 2011 at 1:57 p.m. ― 5 years, 8 months ago

My thanks to AKR for asking some good questions allowing me to clarify what fraud in a short sale looks like and how it affects buyers and sellers like him. Let me provide this example: Bank owed $250,000. Real estate agent or "Short Sale Negotiator" (SSN) finds buyer for $200,000, and then gives the bank an opinion of value (BPO) and then offer to purchase for $150,000 all cash. SSN provides fabricated data to support the $150,000 value. A listing agent can also hold all other offers with seller’s instructions to do so. A lack of other offers (he's holding the $200,000 offer), convinces the bank to accept $150,000 "cash". Escrow #1 set up to purchase from bank for $150,000 "cash". Escrow #2 set up to sell at $200,000 to buyer #2. Escrow #1 is contingent on escrow #2 closing simultaneously with it; thereby providing the "all cash" when in fact SSN/Buyer #1 never had any.

SSN pulls $50,000 out of a transaction in which he defrauded the bank and/or the buyer. Commissions and fees on each transaction increase the profit beyond this example.

This is fraud on a Federally Insured lender as well as those of us who pay taxes. The bank could have reduced the loss on this loan to 20% vs. the 40% loss it took; OR the buyer could have reduced his cost of ownership by 25%.

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Avatar for user 'AKR'

AKR | July 18, 2011 at 11:52 a.m. ― 5 years, 8 months ago


You are right when you say that providing "fabricated data" to the bank is "Willful misrepresentation of material facts" (fraud), and obviously, illegal. There probably are some agents who do this. But most don't.

Your comment does not convey the true information about how it IS possible to buy a short sale property for a lower price and sell it for a higher price. It can be done legally and ethically and there are many trainers who can teach people how to do it (although they should always consult legal counsel).

The bottom line, though, is that a short sale is a "distress sale," and thus, by definition, NOT a "fair market" sale. Furthermore, banks determine what they need to net on these houses, based on their own INDEPENDENT valuations (Broker's Price Opinions and Appraisals). I have seen situations in which BPO agents who "happen" to be REO agents give fraudulent info (high valuations) because they think they might get the listing if the house is foreclosed on.

When banks accept lower offers than some might think proper, they do so because their internal audit process tells them that they will NET more this way than by foreclosing. If a buyer can get a good deal and then re-sell the property, why shouldn't the free market allow this? It happens in other industries every day.

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