Short sale fraud

It’s becoming a problem.


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.”


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2 responses to “Short sale fraud

  1. Jimbo

    “Government programs offering incentives to both parties…”

    That’s the problem. This whole house-price mess would sort itself nicely — with disruption for some homeowners and big losses for the a-hole bankers — if the government would stay out of it.

  2. Taylor

    And house prices would fall too levels that consumers could actually afford on real market based credit terms. Once prices become artificially inflated people get it into their heads that this is what their home is worth and they can’t accept that it was only valued so highly because the market was so manipulated. Lots of people are convinced that for real estate values to fall to historical levels (historical relative to incomes or rents or net worths or any other reasonable measure) would be a catastrophe. No we can’t let that happen, we must keep these artificially inflated prices propped up forever. Of course it would have been better if they had never gotten so propped up – but thats another story. What people don’t seem to realize is that prices are STILL artificially high. A real correction would be a good thing, with winners and losers, but overall a good thing.