Study: 1-in-53 short sales is fraudulent

Jeff Collins, OC Register 08/11/2010

Short sales are tough enough these days without this latest bit of news.

Just this week, Altera Real Estate’s Steve Thomas reported that the backlog of Orange County short sales is dizzying. About half of O.C. short sales — or sales in which a home is sold for less than is owed on the mortgage — take two months or more to get a lender’s approval, Thomas reported.

Now comes a report from Santa Ana-based CoreLogic concluding that lenders have one other thing to be cautious about: Short sale fraud. The study concluded that:

  • 1.9% of all U.S. short sales over the past two years — roughly 15,000 nationwide — are fraudulent. That’s one out of every 53 deals.
  • That banks and other lenders incur about $310 million in “unnecessary losses” each year because of short sale fraud.

The most common type of short sale fraud outlined in the study is the deal in which crooked agents collude with buyers to sell a home below its current market value, then quickly resell the home at a profit. In many of those cases, the study said, the agent withholds a higher offer from a lender, then contacts a buyer who submits a lower offer. After the deal, they sell the home to the buyer who is willing to pay more. (See chart)

The study warned, however, against concluding that all short sales to speculators are fraud:

“Lenders must be careful not to judge all such transactions the exact same way. If lenders were to exclude investors from short sale transactions or require them to not resell properties within a certain timeframe, they would be turning down significant numbers of cash offers — liquidity that they need.”

The study examined over 250,000 single-family home short sales and determined that 4% of the deals resulted in the resale of a home within 18 months. The firm then analyzed whether sufficient time had passed, or sufficient investments made, to justify a high profit from those second sales.

In addition to the conclusion that the mortgage industry loses $310 million on just under 2% of the deals, the study revealed some interesting facts:

  • U.S. short sales have tripled in the past 1 1/2 years.
  • 55.8% of all U.S. short sales occur in California, Florida, Texas and Arizona.
  • Based on the premise that there are about 400,000 short sales a year, then almost two out of every 100 U.S. short sales (1.6%) occurs in Orange County.
One example of short sale fraud
Step Action
1 Agent hired to sell property. Mortgage=$150,000
2 Agent gets $120,000 offer, but doesn’t tell lender
3 Agent contacts non-arms-length investor
4 Investor offers $100,000
5 Agent submits $100,000 offer only
6 Lender accepts investor’s offer
7 Agent arranges sale to first buyer for $120,000

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