Short Sale Fraud Or Poor Documentation?

By
Real Estate Appraiser with PahRoo Appraisal & Consultancy
https://activerain.com/droplet/Jnb

 

According to reports by the Mortgage News Daily website, misuse of the FHA Pre-foreclosure Sale Program, may have cost the Department of  Housing and Urban Development (HUD) over $1 billion in claims that did not meet program requirements.  Was it short sale fraud or was it poor documentation and enforcement?

The program was introduced in December of 2008, with the release of Mortgagee Letter 2008-43. It is supposed to give home owners relief, by allowing borrowers in default due to an adverse and unavoidable financial situation sell their home at fair market value and use the proceeds to pay off an FHA-guaranteed mortgage loan, even if the debt exceeds the proceeds, and therefore avoid foreclosure, i.e. a short sale.  The letter laid out in detail the qualification requirements for mortgagees, conditions of the sale and procedure to be followed. The stipulations include: Property must be owner occupied, homeowner must be 31 days or more delinquent at the time of the closing, and hardship must be verifiable through documentation.  In addition, Seller can receive cash incentive of up to $1,000 dollars if closing is within 90 days of acceptance into program, lender automatically agrees to waive their right to pursue the deficiency, and lender also pays 6% real estate commissions to participating agents.

According to an audit released this week by the HUD's Region 7 Office of Inspector General (OIG), FHA paid claims on nearly 20,000 short sales from September 1, 2010 to August 31, 2011 totaling more than $1.7 billion. For the audit, OIG reviewed a sample of 80 claims from among 16,976 pre-foreclosure claims submitted by the nine largest lenders, and of the files reviewed, 76.3% were ineligible because they did not meet the participation criteria based on borrower finances. By projecting these ineligible claims to the 16,976 submitted by the lenders, it was estimated that at least 11,693 of the claims were ineligible and therefore costing HUD a loss of approximately $1.06 billion. Of the problems found, the audit determined that HUD did not have adequate controls in place to enforce the program requirements, which were found to be not well written.

 In the past five years, the loss per short sale has increased as the volume of short sales has, and as this trend is expected to continue, OIG believes that HUD will continue to pay improper claims unless it changes its approach in implementing checks to ensure the qualification of participants. OIG also made recommendations to HUD that include: requiring lenders to reimburse the FHA insurance fund for some of the improper claims, strengthening controls of the pre-foreclosure sale program, including the mortgagee letter, and educating lenders on the appropriate and proper use of the program.

If the recommendations are put in place, OIG expects that HUD could save $781 million dollars.  However, what would the changes mean for homeowners in need of selling their homes in a short sale? Given that some of the recent changes in mortgage lending have made it almost impossible for many home buyers to qualify for financing, could adopting the recommendations by OIG mean bracing ourselves for yet another round of unintended consequences?

 Michael Hobbs, SRA, LEED GA, PahRoo Appraisal & Consultancy

 Twitter @Pahroo

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Tags:
fha
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fraud
debt
incentive
preforeclosure
owner occupied
audit
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mortgage
short sale
oig
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Rainmaker
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Shanna Day Team Leader AZ & UT - Call 480-415-7616
Keller Williams Realty EV (AZ) & Keller Williams SLC (UT) - Mesa, AZ
Top .0033% of 40,000+ Realtors in our MLS

Thank you for the stats.  I'm surprised at the percentages!   I'm sending this over to my short sale negotiator now.  I'm curious if he will be surprised by the percentages as well.    Thx and have a great day.    Shanna

Sep 29, 2012 12:18 AM #1
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Janna Scharf
Keller Williams Realty Coeur d'Alene - Coeur d'Alene, ID
Coeur d'Alene Idaho Real Estate Expert
Holy cow! That's mind numbing to think about. 2/3 of the short sales should have been denied? Wow.
Sep 29, 2012 12:22 AM #2
Rainmaker
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Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ
EXPERIENCE & INTEGRITY - WE TAKE THE HIGH ROAD

Anything our gigantic goverment gets into is ripe for fraud.

Sep 29, 2012 01:16 AM #3
Rainmaker
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Elite Home Sales Team
Elite Home Sales Team OC - Corona del Mar, CA
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It is a problem when we take out the need to be ethical and moral in our society. 

Sep 29, 2012 01:42 AM #4
Rainmaker
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John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Micheal - This is very interesting. Thanks for the information about FHA Pre-Foreclosures program short sale froud or poor documentation.

Sep 29, 2012 03:14 AM #5
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Chris Ann Cleland
Long and Foster REALTORS®, Gainesville, VA - Bristow, VA
Associate Broker, Bristow, VA

Why am I not surprised that a government entity has poorly written guidelines that they don't follow?

Sep 29, 2012 01:49 PM #6
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Michael Hobbs

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