Short Sale Fraud

If you have been looking for any length of time I'm sure you've seem plenty of suspicious short sales. I know I have. The FBI seriously needs to set up a hotline so people can report this crap.

Anyway here is an article from the PE


In the wake of failed attempts at loan modifications, delinquent homeowners increasingly are taking what many consider the next best step to avoid foreclosure: a short sale.

The trend, while also potentially beneficial for lenders, has increased the risk of abuse and fraud, according to real estate experts.

A national report released last week said the red flag is when houses sold short -- for less than enough to cover the mortgage -- are quickly resold for much more, meaning that the original lender probably received less than fair market price.

The potential threat to lenders is increasing with the popularity of short sales. Short sales enable the homeowner to continue to occupy and maintain the home, preserving its value for the lender. By contrast, homes sold in foreclosure are frequently abandoned and exposed to vandalism.

Nationally, the number of short sales in the market has nearly tripled between the second quarter of 2008 and the second quarter of 2010, CoreLogic reports.

The same mushrooming of short sales has occurred in Inland Southern California.

"Two or three years ago, 90 percent of our sales in southwest Riverside County were bank-owned properties, and today about 55 percent are short sales, while bank owned homes are down to about 25 percent," said Gene Wunderlich, government affairs director for the Southwest Riverside County Association of Realtors.

CoreLogic, which issued a report last week about the risk of short sales to the lending industry, described "suspicious transactions" as when a house sold short is resold less than a month later for a price that's at least 10 percent higher or resold less than three months later at a price that's at least 20 percent higher or resold less than six months later at a price that's at least 40 percent higher.

California, with the largest volume of short sales of any state, also has the largest percentage of suspicious transactions in the nation at 34.5 percent, CoreLogic reports.

Wunderlich said there are investor groups active in Southern California that seem to be organized to milk short sales. "Some are negotiating the resale before they close escrow (on the short sale)," he said.

There is nothing wrong if an investor buys a short sale home, fixes it up and then sells it for a solid gain, the report said.

But in analyzing sales by investors, CoreLogic found that "nearly one in six suspicious short sales is resold on the same day, making legitimate increases in value doubtful."

"Lenders are incurring tremendous unnecessary losses in these situations," said CoreLogic. "Short sales that are resold on the same day have an average of 34 percent ($56,947) gain between sale prices."

John Giardinelli, general counsel to eight real estate boards, including four with members in Riverside and San Bernardino Counties, said the boards are educating brokers about how to avoid becoming an instrument of fraud in these situations.

The key, he said, is to make sure all the appraisals and other documents provided to the bank seller of a house are "absolutely accurate" and that all financial arrangements are disclosed in the closing escrow papers.

In some cases, Giardinelli said, investment companies have offered brokers two commissions on the same house, one when the bank-repossessed house is sold to the investors and another when it is flipped to a pre-arranged buyer.