Mortgage lenders are being ripped off in droves by investors committing short sale fraud, according to a new CNN Money article. However, as noted in the article, lenders aren’t the only ones suffering. Homeowners and the market as a whole are taking a big hit from the new scam.
What is Short Sale Fraud?
Short sale fraud has become a major issue in the U.S. housing market. It occurs when scam artists, usually real estate agents, secure a legitimate bid on a home that is considered a short sale–one where the borrower owes more on the mortgage loan than the home is currently worth.
The agent arranges the bid on the home on behalf of an investor at a low price. Because the bid is coming from an agent, the lender assumes this is the highest bid they’ll receive. The lender doesn’t know that the investor bidding (which is sometimes owned by a separate real estate company) plans to resell.
After purchasing the home at the lower price and asking the lender to forgive the remaining balance, the first agent makes his commission. Now the investor turns around and sells the home for up to $50,000 more–sometimes within hours–to a true home buyer who may have already been lined up before the short sale deal.
Short Sale Fraud Hurts Homeowners Most
According to CNN Money, short sale fraud has become commonplace, largely due to the ailing housing market. With more homeowners than ever looking for a short sale to get out of their underwater mortgages, scammers have been looking to make a quick buck.
Figures from the National Association of Realtors found that while 13 percent of all existing home sales are short sales, fraud associated with short sales comprise half of all fraud investigations for mortgage companies. They have become so common, in fact, that it’s difficult for legitimate short sale transactions to go through.
This has a tremendously negative impact on homeowners looking to sell because, in many cases, it forces them into foreclosure.
Law enforcement is pushing to crack down on agents who commit short sale fraud. In Bridgeport, Conn., two agents were arrested for netting more than $180,000 in fraud. But many are still concerned that, despite the fact that some scammers are being caught, there are always more willing to take their place.
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What you describe isn’t fraudulent..unethical if it is not disclosed to the lender that the buyer is intending to resell the property. What would constitute fraud is if the valuation the bank depends on (appraisal or Broker Price Opinion) to make its approval decision was intentionally low in order to support the sale. If the lender is fully aware of actual market value, and it has been disclosed that the buyer intends to re-sell the property, then the lender has the information it needs to make a decision in its best interest based on the facts.
To know local real estate values one merely has to be local.
Banks obsess over this issue – and their fear, uneven management of sales processes, and incompetence, has far more damaging effects on the housing market then the handful of “fraud.”
That said there are many unseemly person constantly feeling there is profit in “getting over” on the banks. This is also untrue. Banks order 2 appraisals on each hous they do a short sale on. Banks have an army of negotiators painstakingly taking time to wrench every penny out of the buyers, sellers, agents, mortgage insurance companies, HOA’s municipalities, etc to safeguard that they are getting maximum value.
Banks have been ripping people off for too long. Even on a short sale where the current homeowner is “upside down” the bank is not loosing money, because how mortgages and lending practices work, the bank is still making profit. What these agents/investors is doing cannot be considered fraud, unethical perhaps, but since when does a buyer have to “reveal” their purpose of purchasing the property, whether to live there or flip it, only reason banks consider it fraud is because someone else is makeing a profit off the deal, and the bank isn’t getting as big a cut. Just another classic example of shrewd and smart people making huge proffits from the uneducated masses who are willing to pay full “market value” for their house.
Ok the article doesn’t give the full picture of what the real estate agent does. This scenario is absolutely illegal, it’s called bank fraud. What happens is there is an actual appraisal given to the bank. Then the realtor, either himself or his buddy “investor”, comes up with a story of why the property isn’t worth the appraisal amount then submits their lowball bid into the bank. With a couple of fast talking phone calls the bank doesn’t know any better because the appraiser generally is only doing an outside appraisal. The bank wants to get the bad debt off of the books and wouldn’t generally want to spend even more money on repairs, so they may settle on the lowball bid. The real estate agent is already in the process of aggressively showing the property so if the bank ok’s the lowball deal the real estate agent will hopefully already have an end buyer ready to buy by the time the paperwork is ready. If the bank doesn’t approve the lowball offer the real estate agent will still list and sell the property, but proably won’t be as enthuastic about it because he could have made $50,000+ on his deal, instead of just commission. It’s amazing that within the few hours between him signing the paperwork and the “actual” buyer signing all the problems that devalued the property seemed to disappear. This is ILLEGAL and these scam artists will eventually be caught.