Short sales invite fraud

Perhaps with the end of the nation’s housing crisis, a previously seldom-heard term — the short sale — will go away. And with its departure, banks will be relieved of the short sale frauds that investigators with federal mortgage guarantor Freddie Mac say costs lenders nationwide hundreds of millions of dollars a year.

Mississippi hasn’t had any prosecutions of short sale fraud, but the Mississippi Real Estate Commission has acted t o stop instances of what looked like a short sale fraud unfolding. “We have had any number of complaints” that “had to do with whether or not offers were presented,” said Robert Praytor, the Real Estate Commission’s executive director.

A short sale fraud occurs when real estate agents fail to disclose other parties involved in the transaction. Sales are rigged at a low price and better offers hidden from lenders and the distressed homeowner.

After the house is sold, the fraudster can flip it a few hours later for the better price and walk away with the profitable difference, Freddie Mac says.

Here is how CNN described the process in a report last year:

The scam artists, usually real estate agents, will secure a legitimate bid on a short sale home. Then they arrange for an accomplice investor, acting as a straw buyer, to make a lower offer on the home.

The agent, CNN says, then presents the lower bid to the lender without disclosing that there was a higher bid made on the home. Once the short sale is approved, the scammer then sells the home to the higher bidder, often on the same day.

“These same-day resales are on average nearly $50,000 greater than the lender agreed upon short-sale price,” said Tim Grace, senior vice president of product management and analytics at CoreLogic, in an interview in the CNN report.

He put the cost of short-sale fraud to U.S. lenders at about $375 million annually.

CoreLogic, a real estate research and financial analytics company based in Santa Ana, Calif., projected at the start of the year that $7 billion in originated mortgages in 2012 would show some signs of fraud.

New schemes are ever evolving, many of which are involving potential fraudulent flipping and flopping of properties, CoreLogic says.

The short sale became part of the nation’s everyday language a few years ago as banks let upside-down homeowners bail out of their mortgages by approving the sale of the homes for substantially less than the amount still owed on them.

As short sales rise, the fraud that accompanies them is rising as well, Freddie Mac says.

The scam is a double hit for banks. First, the bank is losing out on gaining repayment of a mortgage balance. And with a fraud played against it, the reduced amount the bank was to get on the short sale is reduced even further.

Many real estate professionals in Mississippi stay away from short sales because of the time and effort they require. “There’s nothing short about a short sale,” said Greenville real estate broker Betsy Alexander.

Jo Usry, CEO of the Jackson Association of Realtors, said her organization has not received reports of short sale fraud occurring in the metro Jackson area.

The Mississippi Real estate Commission’s Praytor said the huge number of short sales across the country make it easy to see why the frauds are occurring as well. “I think nationally it is one of the major scams going on,” he said.

Likewise, the volume of short sale transaction makes it difficult for authorities to follow up on them, he said.

Praytor emphasized that the real estate commission only initiates investigations after a complaint is received. “We’ve had that complaint several times,” he said of suspicions of short sale scams.

He said the commission has suspended licenses of real estate professionals when an investigation showed cause to suspect a fraud was unfolding. The suspensions were for two years, he said, and estimated the commission has initiated as many as 10 disciplinary actions relating to short sale irregularities.

“In ours, we either stopped it or it never did go to fruition or the lender got suspicious of it.”

Had the commission concluded a short sale fraud had occurred, it would have revoked the license of the real estate professional and referred the matter to the U.S. attorney’s office for prosecution, according to Praytor.

A failure of the real estate professional to understand his role in the short sale process has been behind a number of the complaints received by the Real estate Commission, Praytor said. “With some of the complaints we have had the real estate licensees don’t understand that it is the seller they are obligated to.”

The most common problem with short sales in Mississippi, according to Praytor, involves buyers in short sales who sign documents that they will live in the homes but have no intention of doing so. These are flippers posing as people who want a house in which to live, he said.

Federal guidelines are designed to keep the short-sale homes from sitting vacant after they are sold. The investor, in collusion with the real estate agent, will try to circumvent this rule, Praytor said.

The Feds “prefer that the person who is to benefit from this is someone who is going to own and live in the property and not somebody who is just doing a flip fraud.”

A real estate professional who knows going into a short sale that the investor plans to flip the house would be culpable, Praytor said.

Often it is the legitimate buyer pushed out of the sale by the flipper who files the complaint, according to Praytor. “They get really hacked off because they didn’t get to buy the property.”

The flipper may not face trouble later but the real estate professional involved in the deal won’t be as fortunate, Praytor said. “Our recourse is against the real estate licensee.”

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