STRUGGLING homeowners have found some refuge in short sales, in which lenders allow borrowers to escape foreclosure by selling a home for less than what is owed on the mortgage. Government programs offering incentives to both parties will push the number of short sales to 400,000 this year from 100,000 in 2008, according to CoreLogic, a financial consulting firm.
But the jump in short sales has also given rise to a new form of fraud — which, as a recent study by CoreLogic suggests, could undermine the burgeoning practice.
Fraudulent short sales take many forms, but Frank McKenna, the vice president for fraud strategy at CoreLogic and one of the report’s authors, says one arrangement is more common than others.
An agent for the borrower negotiates with the lender to obtain a low selling price for a property, then sells it to a “straw buyer,” or someone with whom the agent is affiliated. The agents are sometimes real estate agents, or employees of businesses that advertise as “foreclosure rescue” specialists, Mr. McKenna said. As the agent negotiates with the lender — and unbeknownst to the original homeowner or the lender — the agent arranges to resell the property at a higher price. The new buyers may not know that they could have obtained the property for a lower price. Or, even worse, they may be victims of identity theft, unaware that their financial information was being used to buy a home.
In other fraudulent transactions, a borrower might purposefully default on a mortgage he or she could actually afford. The borrower arranges to transfer the property to a friend or relative through a short sale, and the original borrower can remain in the home. The new owner can also transfer ownership back to the original owner through a quitclaim deed, Mr. McKenna said.
He estimated that only about 2 percent of the short sales completed in the last two years were fraudulent, but said fraud was becoming more frequent. “It’s happening a lot more in this market because there are so many more short sales,” he said. “There’s more opportunity to go after the quick buck.”