Mortgage Fraud 101 – Short Sale Fraud

By
Real Estate Agent with RE/MAX Paramount Properties 165062
http://actvra.in/4kP6

Short Sale FraudAll too often in real estate we focus on the sensational stories and neglect the most obvious abuses of mortgage fraud.  Since fraud is involves stealing something that's not yours there are many ways to take something that you are not entitled to.  It starts with deception, and ends with the possession of ill gained goods.  Since short sales en-masse are so new, everyone assumes the process is transparent and legal.  I am taking the position it isn't, and it is mired in deception and fraud.

Real Estate has always been know for change - it is our only constant.  Right now in real estate the current item we are now dealing with  in most of our markets is short sales.  All of a sudden everyone is an expert and a negotiator.  Just a few years ago short sales were the oddity and seldom seen even by the most experienced agent.  They were not worth the time to deal with in our every day business.  Today short sales have become a house hold word - they are trite.  "Short sales" are the new buzz word in real estate. 

In the past agents that normally would not get involved in a short sale because there was no guarantee of a commission or that the deal would even close.  It is already identified at the beginning of the listing  here is no money even to pay them a commission if the home could be sold at full list price. So a really bad taste is left in your mouth when the deal closes and it is anticlimactic.  For those agents that devoted months of their life concentrating there efforts in a high anxiety game and then find out their reward was only a fraction of a commission -  it's depressing.  It was not worth the effort given the odds of successfully closing a short sale were only less than 1-in-20 after the lender made your life unbearable for 7-8 months.  Such an event would not be repeated by most agents.

OK here is where the crime begins.  Many agents thinking they are creative, but in fact they are actually criminal - devised a way around this.   Enter the agent that contacts you on your listing and asks if your seller would mind giving their buyer / investor an option on short selling your listed property.  The pitch is that they will take your short sale, and negotiate directly with the bank and negotiate the short sale.   After all they are already skilled at negotiating short sales.  Sounds OK so far?  OK here's where it gets interesting. 

Your seller owes more than the home is worth.  They owe 150K on a home that worth 120K - 140K.  The investor / buyer negotiates with the bank to accept 100K and explain they have a buyer.  The buyer is ready to go and will pay them 100K.  What the investor / buyer neglects to tell the banks and the owner is that they are in a position to buy the home for 100K and sell it immediately to the buyer they have for 145K.  This fraud contains a lack of proper disclosure issue. There is willful holding back of pertinent information the same way a con man would do it.   The lender does not realize they are being set up for a pre-meditated fraud.   Short sale fraud is now on a list of growing mortgage fraud for the FBI. When you think of it...this type of fraud is no different than a real estate agent telling a buyer client that they have a great property for them, and the price is 500K.  As a buyer you show up to your real estate closing early and find out your agent has just finished purchasing the property for 250K and is going to flip it to you within the next hour for 500K.  This fraud is punishable for a loss of licenses in most if not all jurisdictions.  There is not difference except that a Federally insured banks is not give all the details.

Many of the new fraud cases regard tweaking old cons and repackaging them to fit the times.  These are old schemes with new twists and combinations of fraud that include property flipping, builder-bailouts, short sales, and foreclosure rescues. They prey on those in dire need, yet still target the lender that is not in a position to take on more losses.  Short sale fraud is now recognized by the FBI as real estate fraud, and persons involved will soon be prosecuted for this type of fraud and the willful taking advantage of others.  They have cheated the banks and the current owner by failure to disclose their true interests and intentions.  Nothing is more heinous than taking advantage of those in our society that are under pressure and unduly stressed out. 

Many agents are participating in this fraud and just because they do not understand their role maybe in for a very unpleasant surprise shortly.  Ignorance of the law is not bliss when you are breaking the law and defrauding banks.

FBI MORTGAGE FRAUD REPORT

"Short-Sale Schemes:Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown. A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage. The mortgage is secured with fraudulent documentation and information regarding the straw buyer. Payments are not made on the property loan causing the mortgage to default. Prior to the foreclosure sale, the perpetrator offers to purchase the property from the lender in a short-sale agreement. The lender agrees without knowing that the short sale was premeditated. The mortgage owed on the property often equals or exceeds 100 percent of the property's equity."

From the FBI "2008 Mortgage Fraud Report "Year in Review""

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James Crawford ABR, Broker Associate

RE/MAX Paramount Properties

1605 Mansell Road Suite 106

Alpharetta GA, 30009

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Rainmaker
31,698
Kim Bartells
TC Business Management, LLC - www.TCMandD.com - Perkasie, PA
Result Driven Real Estat - Marketing Expert

Wow... what a topic!  I think it's safe to say that a lot more eduction is needed in this area. 

Most of the investors I have encountered (I do a lot of Transaction/Short Sale Processing for realtors) are doing everything legally and yet a lot of agents who responded to this post seem to think that anyone who calls up asking to buy their short sale for cash is being fraudulent.  That's crazy talk! 

As agents you need to educate yourself on what is legal and what isn't otherwise you are doing your sellers a disservice.  Turning away legitimate buyers probably doesn't comply with your fiduciary duty to the seller.  It's my understanding that realtors MUST present all offers.  They aren't attorneys and shouldn't act as ones.  If you get an offer you're unsure about have the seller consult an attorney (in some states like NJ they have to anyway).  That's your job - not providing legal advice.  Some buyers may be proposing something illegal, sure, but those who explain everything in writing to all parties with full disclosure usually aren't.

Actually, that proposses an interesting question.  If, as a realtor, you think a buyer is fraudulent, but your seller still wants to go through with the deal, what do you do?  All you have is suspicion - no proof...  They could be completely legitimate.  If you tell them not to accept and it turns out the buyer was completely legitimate - what does that mean for you?  What if the buyer calls an attorney?  Who's in trouble now?

These investors have such extensive networks of home buyers that they can sell homes faster than most realtors.  That's why it DOES work for them. 

Banks are in a bad spot and NEED to sell (selling for 80% of the BPO).  BUT REMEMBER, selling at 80% of the BPO usually SAVES THE BANK MONEY!!!  Foreclosure isn't cheap.

Just because someone buys something for less than market value doesn't mean it's illegal.  My opinion on market value is this:  the price that a ready, willing and able buyer is willing to pay and a seller is willing to sell at.  With full disclosure, if they match up, it's a deal!  Plain and simple.

Don't think of all investors as 'bad guys'.  The good ones can really help agents out a lot.  They ask to do all the negotiations b/c they can do it a lot better and sometimes, a lot faster.  They know the 'ins and outs' of these loss mitt depts which isn't a small feat.

 

Jul 31, 2009 03:08 PM #156
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Teresa - No worries. We all do what we feel comfortable doing. I love a great debate and to share how I do things and the logic behind it. I don't take any of it personal. Likewise, thank you for expressing your concern and sharing your thoughts. Regarding Jay, I was pointing out the irony of his stance. Like I said before... There is nothing good about a short sale as the short sale itself is inherently evil. We agents, just work with what we have and do the best we can to make it a successful transaction. The devil is in the details and those of us who do short sales must have an impartial moral compass to find our way through it.

Jul 31, 2009 04:44 PM #157
Anonymous
Shane

Why would a short sale negotiator require the seller to place his home in a revocable living trust, making the negotiator the trustee, as a condition of working on behalf of the seller? 

 

Aug 03, 2009 11:17 AM #158
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Because that way the investor has ownership of the property and the listing agent can represent the investor to find a retail buyer. The other method, using a purchase option, does not give the investor equitable title so the real estate agent will be violating their fiduciary responsibility to the original seller if they market the property to a find a retail buyer.  

Aug 03, 2009 11:58 AM #159
Rainer
4,785
Teresa Pringle
KWIK Homeowner Solutions - Souderton, PA

There are reasons for doing this but I will say that many times it is not necessary. The only reason we ever use a trust is if we have an FHA buyer and they are looking for seller assist and the short sale is an FHA short sale and their maximum assist does not allow enough for the buyer. It's a complicated scenario but the short sale lenders make it that way.  They really don't know what they are doing in many cases and have guidelines set up to practically prohibit buyers from purchasing with certain kinds of financing.

I do realize that most of these loans are insured and that the lender makes out better if they just get paid their insurance claim and then sell it as an REO.  However, does this EVER stand a chance at helping the housing market?  It just forces values down even lower, with the volume of bank REO's we are going to see in 1-2 years the REO divisions will look like the short sale departments look now.... like a deer in the headlights.

Even so - try being an FHA buyer and bidding on an REO - next to IMPOSSIBLE since most require 10% down at signing.  They (short sale lenders) are going to need to open their eyes and sniff around - there really ARE first time buyers out there and they'd do much better if they didn't force them out of this nicely competitive market.

Ok I'm off my soapbox.

Aug 03, 2009 02:39 PM #160
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Just my 2 cents chiming in. Homeowners should seek legal counsel not real estate agents to answer legal questions.

Aug 04, 2009 01:18 AM #161
Anonymous
Shane

I appreciate the comments regarding my question concerning revocable living trust. However, I'm still confused. This is the situation:

My son lost his job in September 2008 and immediately listed his home through a Realtor friend.  He was unable to make payments beyond December, was given notice of a sheriff’s sale and is now in a six month redemption period. His home is currently listed at just enough to satisfy the sheriff’s deed and to pay selling costs and a broker commission of six percent.

Shortly after the sheriff’s sale, my son entered into a contract with a group representing themselves as short sale specialists who offered to resolve his mortgage dilemma by negotiating a satisfactory deal with the lender. This involved a purchase option contract giving the “short sale specialist” exclusive control over all negotiations regarding the sale AND transfer of the property, and a revocable living trust making a third party (someone my son never heard of) the trustee.

When my son was presented with an offer close to his asking price, he gratefully allowed his Realtor to turn it over to the “specialist” as required by the contract he’d signed. Several weeks passed before the “specialist” announced that they had been unable to negotiate an acceptable arrangement with the lender. 

My son now calls me for advice. I explained that although I once had a real estate license in the early-1990’s, terms like “short sale” and REO weren’t a part of my vocabulary. I expressed my concern that this arrangement seems to be unconventional, but so are the economic conditions we’re living with.  I suggested that he have his Realtor provide an explanation as to why the offer was rejected. 

In violation of his agreement with the “specialist” the Realtor made contact with the lender and learned that the offer presented to the lender was approximately thirty-five percent lower than the offer presented to my son.  The lender turned down the proposed offer because it was too low and because of suspicion that the “specialist” was not presenting the true offer.

.

Aug 04, 2009 02:40 AM #162
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

SHANE You should not be asking Realtors for legal advice or accounting advice.   Speak to a lawyer, and have him review the contracts.  REALTORS cannot give you legal advice.  Your are signing contracts, which can only be prepared by and Attorney!

Aug 04, 2009 09:30 AM #163
Rainmaker
142,016
Mike Linkenauger
LinkUp Realty - Jacksonville, FL
Short Sale Realtor - Jacksonville FL

Jim, I couldn't agree with you more.  As the founder of the Short Sale Specialist Network, I work with hundreds of the top short sale agents around the country, and thousands of deals.  We are constantly bombarded by these types of individuals.  These investors are VERY manipulative, and of course want to be right.  Nobody wants to think of themselves as a scammer.  I call out and challenge them in a confrontational article I just wrote the other day, the results are excellent!  Still waiting for more to join in there!We as agents must stand up for injustice in the industry.  Its time for short sales to be done in an honest and above board manner.

http://activerain.com/blogsview/1291605/the-10-option-contract-short-sale-scam

Oct 19, 2009 09:37 AM #164
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Jacksonville Florida Realtor Mike Linkenauger (First Coast Realty Associates)  Thank you. I like your choice of words..."Manipulative!" I will check out your post.

Oct 19, 2009 11:19 AM #165
Rainer
4,785
Teresa Pringle
KWIK Homeowner Solutions - Souderton, PA

Hello all,

It seems that Title companies are starting to catch on to the way there ARE legal and ethical short sale flips being done and here are the guidelines.  FANNIE AND FREDDIE ARE TELLING US HOW TO DO IT. It's all about DISCLOSURE and we should all be aware that these guidelines are out there.

UNDERWRITING BULLETIN TO: ALL FUND MEMBER AGENTS FROM: UNDERWRITING DEPARTMENT – Attorneys’ Title Fund Services, LLC RE: Short Sale Transactions - Guidelines Revised DATE: September 4, 2009 On June 8, 2009 The Fund issued an “Underwriting Alert” regarding Short Sale Transactions. The Alert indicated that certain transactions involving an intermediary purchasing, negotiating and flipping a short sale property where the “true sales price/value” has not been disclosed to the original lender should not be insured. While these transactions are still an area of concern, it is no longer required that the “true sales price/value” be disclosed to the original lender as long as the intermediary’s “right to sell” is disclosed in the purchase contract. Before you insure any kind of transaction involving a short payoff to the existing lender, or a simultaneous closing, make sure that the following requirements have been met: 1. There are no violations of any restrictions listed in the short sale payoff letter or closing instructions. 2. There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser. 3. All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to the parties involved in this specific transaction. 4. Each half of the simultaneous closing must be kept separate and stand on its own. The sale from A to B must be fully funded and disbursed with money coming from and going to all appropriate parties. The sale from B to C must also stand on its own. The money from C’s lender must not be used to fund any portion of the A to B transaction. 5. The intermediary’s “right to sell for profit” is appropriately disclosed in the purchase contract. 6. The short sale lender is an institutional lender. If the circumstances of your transaction do not meet the above requirements, you must contact a Fund underwriting attorney for prior approval. If you have any questions or experience any difficulties in regards to this Bulletin please call The Fund’s Underwriting Department at 800-432-9594 For Georgia call 877-770-1819; for South Carolina call 800-561-1151. Instructions Select a News and Announcements item or a Fund Alert from the lists above. Each link will: • display the News item here, or; • take you to the appropriate section of thefund.com, or; • take you to a third-party site for more information; Note: Please review the Online Service Agreement for details of The Fund's policy regarding third-party sites.

Oct 20, 2009 04:32 AM #166
Ambassador
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Teresa Pringle (KWIK Homeowner Solutions)  Thank you very much for this update!  It is greatly appreciated. 

Oct 20, 2009 08:39 AM #167
Rainer
80,613
Gary & April Greer
Century 21 Wright - Temecula, CA
Real Estate Professionals

I was searching for blogs on short sales and yours came up.  Very informative!  Thank you.

Nov 21, 2009 06:54 AM #168
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Gary & April Greer (Tarbell Realtors)  Thanks!   I am glad you enjoyed it.

Nov 21, 2009 08:14 AM #169
Rainmaker
158,506
Kevin Vitali
EXIT Realty- Massachusetts Short Sales & Residential Sales - Tewksbury, MA
Helping Massachusetts Home Buyers and Home Sellers

As a fairly active short sale agent in Massachusetts,  I run into short sale investors who obviously are buying to flip.  They put in low ball offers and insist on negotiating their own short sale or there is no deal.  I have had several of them get extremely mad at me. 

Number one they offer me a commission on the sale (as a buyers agent) but also promise me the resale.  I find that highly unethical and tell them so.

Number two I tell them my seller will look at all offers but the short sale must go through our negotiating attorney.  They get extremely mad.  I tell them our attorneys interest lies with the seller and I ask them where their interest lies.....

They are like vultures and of course their offers are way lower than purchasers that are looking to live in the home.

Apr 16, 2010 12:41 AM #170
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

Rich Jacobson Your Kitsap County WA Real Estate Agent (Windermere West Sound, Inc.)   It is sad isn't it?   You are doing things the right way, and the attorney is a smart way to go including liability...

Apr 16, 2010 01:57 AM #171
Rainmaker
990,648
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Jim I just wrote a fairly detailed article that adresses this topic! Like Kevin mentions I am very active with short sales in Massachusetts and from time to time will get a call from an investor who wants to do what Kevin describes. My answer is always the same - NO Way! Check out my article: Beware of short sale mortgage fraud

Aug 17, 2010 11:02 AM #172
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Jim Crawford
RE/MAX Paramount Properties - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
Rainer
1,025
Rick Stamper

I might add that many homeowners, as well, have jumped on this fraudulent bandwagon. Yes, unfortunately, they are upside down with the bank/mortgage company and with the help of a relative/good friend Realtor buy back the property disguised as an investment company or an alias and carry on. The financier takes the loss and the homeowner is out nothing. No risk=Big reward. These folks are in for the same unpleasant surprise as the Realtors involved. The FBI has a task force assigned to this issue as the cases are piling up to epidemic proportions across the US. This obviously hurts so many Americans trying to buy a home legitimately as the financial institutions suffering these losses have tightened the reins to qualify. Such a shame. 

Jan 23, 2014 02:58 PM #174
Rainmaker
1,020,133
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Los Angeles CA

Unfortunately, I agree, there are a lot of agents saw $$ opportunities when many homeowners just tried to survive and needed someone to tell them what to do to get out.

Mar 30, 2014 06:33 PM #175
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