Every so often, I receive a phone call from a seller who is upside down on the mortgage and wants to sell a home in Sacramento as a short sale to a family member. These callers have a hard time understanding that most banks will insist on an arm's-length transaction, which means they can't sell the home as a short sale to a person who is related to them.

Sometimes, sellers will go a step further and try to make special arrangements with the buyer of that short sale. They ask if they can rent the home back from the buyer. In many cases, they can't. Moreover, they probably can't sell to a business associate.

Why not? Because the bank may demand it.  A short sale seller can't financially benefit, directly or indirectly, from a short sale. A lot of banks have caught wind of the potential for mortgage fraud and are trying to put a stop to it. Whenever people are in financial distress, though, you'll find crooks cooking up ways to capitalize on misfortune.

As a Sacramento short sale agent, it's easy for me to spot potential mortgage fraud in short sale transactions. There's so much of it. You've got investors trying to double escrow short sales as well. But if a bank requires that all parties sign an Affidavit of Arm's-Length Transaction, all parties are required to sign it and could potentially be held liable for mortgage fraud if they violate the terms. Here is a sample Arm's-Length Transaction Affidavit from Wells Fargo (they really need an editor; man, you can send a lawyer to law school but you can't make them English majors):

"All parties to the contract on the premises dated XXXX, Property address: XXXX, hereby affirm that this is an Arm's-Length Transaction.

"No party to this contract is a family member, business associate or share a business interest with the mortgagor. Further, there are no hidden terms or special understandings between the seller or buyer or their agents or the mortgagee.

"The buyers and sellers nor their agents have any agreements written or implied that will allow the seller to remain in the property as renters or regain ownership of said property at anytime after the execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission."

A short sale bank, one of those 3-letter banks, closed a file yesterday because the buyers didn't return the Arm's-Length Transaction Affidavit in a timely manner. I had badgered the buyer's agent until the cows came home, but he couldn't get the documents back to me. We explained to the bank that the buyers were on vacation and couldn't be reached, but the bank didn't care. It just closed the file. This means the short sale process starts over from scratch, even though the bank now holds the fully executed Arm's-Length Transaction Affidavit. Lovely.