Fraudulent short sales are threatening the viability of this refuge for struggling home owners.
A recent study by financial consulting firm CoreLogic says one common practice is for a real estate salesperson representing the seller to negotiate with the lender to obtain approval for a low selling price. Then the property is sold to a straw buyer affiliated with the practitioner. After the deal closes, the property is immediately resold for a much higher price. Sometimes the new buyers are victims of identity fraud who don’t even know that their financial information is being used to buy a property.
Another fraudulent transaction involves the borrower deliberately defaulting. A friend or relative of the original borrower purchases the property through a short sale. When the short sale closes, the new owner transfers the property back to the original owner.
Frank McKenna, the vice president for fraud strategy at CoreLogic, say these deals represent only about 2 percent of short sales, but are becoming more frequent. CoreLogic estimates them by counting the number of quick turnaround resales, especially at significantly higher prices.
Source: The New York Times, Bob Tedeschi (09/10/2010)
Short sales seem like a win-win for everyone involved, but as real estate professionals know, short sales can be hard to pull off. It can take months for the mortgage company to respond to an offer, and the lender or lenders often balk at the price.
Why doesn’t the process go more smoothly when it seems like a much better deal for everyone than foreclosure?
- Paperwork. Gathering all the information needed to evaluate a short-sale offer can take time, says Patrick Carey, an executive vice president with Wells Fargo. The loan servicer must first determine whether the homeowner really can’t continue meeting the loan payments, then get an appraisal or broker’s opinion of the home’s value.
- Many steps, approvals. Mortgage servicers also try to ensure that the proposed sale is an “arm’s length” transaction between two parties rather than something like a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off with a short sale than with another solution.
- Complications often arise. There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal – which is a challenge when the sales price may not even be enough to cover the mortgage balance.
- Minimize delays. Carey suggests that home owners contemplating a short sale immediately call the loan servicer to get the approval process started, rather than wait for an offer.
Source: The Wall Street Journal, Ruth Simon and James R. Hagerty (04/17/2008