Editor's Note
June 2, 2010The Potential Perils of Short Sale and Mortgage Fraud
By Jennifer Harmon
California Real Estate commissioner Jeff Davi issued a consumer alert warning consumers and real estate agents about the perils and potential pitfalls of short sales. The alert educates consumers and real estate agents to recognize the elements of a fraudulent or questionable deal.
The number of short sales is on the rise and many consumers do not understand the consequences of such a transaction, said Davi.
To put it simply, a short sale transaction involves the sale of a property wherein a seller receives an offer from a buyer that is less than the amount of the mortgage loan on the property.
In order to complete the sale, the seller requests the lender to accept less than what is owed in order to allow the transaction to close. While short sales are a popular alternative to foreclosure, like all real estate transactions, they are complicated and sellers need to look out for the pitfalls.
For example, the DRE warns in some instances a seller may be required to pay taxes on the forgiven debt. In addition, a seller may be an unwitting participant in a fraudulent transaction wherein an unscrupulous agent or a short sale negotiator working with a straw buyer will make a lowball offer to the seller and in turn misrepresent the true market value of the property to the lender.If the lender accepts the offer, the straw buyer immediately resells it at the true market value, with the profits split among the conspirators. Had the property been sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished and the lender would have received fair market value.
Its important to remember that short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker.
Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid outside of escrow, this may be the red flag that the payment is illegal.
If an agent explains that the buyer is a fictitious person or entity, or your buyer is purchasing the property under a power of attorney or is a limited liability company, this may be a red flag that fraud is involved in your transaction.
If the potential buyer is told that an unlicensed processor, negotiator or facilitator is handling the short sale, this is a red flag that unlicensed activity is taking place. Only real estate licensees, California lawyers acting as lawyers and investors acting on their own behalf can engage in short sale negotiations.
With foreclosures, housing vacancies and mortgage fraud at all-time highs, the Justice Department's Office of Justice Programs released a new report outlining strategies for government and law enforcement officials in responding to these challenges.
The report provides an overview of law enforcement and government responses to mortgage fraud, foreclosure and abandoned property, drawing on focus groups which included representatives from Indio, Calif., Dallas, Indianapolis, Baltimore and Miami, as well as researchers, policymakers and advocates from financial, housing and law enforcement organizations.
The report is a detailed snapshot of mortgage fraud and foreclosures, their causes, their impacts on neighborhood safety and jurisdictions' responses.
According to the report, in many jurisdictions, the number and location of foreclosed and vacant properties is changing so rapidly that officials have trouble counting them, let alone formulating a meaningful response. The city of Cleveland, for example, estimated in early 2009 that at least 10,000 (or one in 13) of its houses were vacant while the county treasurer estimated that the number was 15,000.
In addition, it says the complexity of mortgage transactions makes it easier to mask fraud. Even when an instance of mortgage fraud involves the loss of $1 million or more, the crime can be hard to detect. This is at least partly because mortgage fraud usually involves industry insiders who know how to structure the deal to avoid discovery. Fraud is like a cancer because it is always spreading, and its always mutating, said Ann Fulmer, vice president of industry relations for Interthinx.
The bottom line is that mortgage fraud correlates directly with foreclosure. If a loan is originated fraudulently, it is eight times more likely to defaultand its 20 times more likely to go into the foreclosure process within the first year after origination, Fulmer said.
Often when one house on a block becomes vacant, others follow. Or as Brad Ramos, chief of the Indio Police Department, said, As one home goes, so goes the neighborhood.
The reports authors say empty housesoften overgrown and boardedare unsightly; worse, they attract crime. This not only makes neighborhoods more dangerous but lowers property values, giving the remaining homeowners multiple reasons to flee.
Under normal circumstances, it can take 15-plus years for a neighborhood to transformeither from a stable one into an undesirable one, or vice versa, said Ron Wilson, an analyst with the National Institute of Justice.
But concentrated foreclosures can accelerate that process and lead to the creation of bad neighborhoods more quickly, Wilson explained.
Once a neighborhood reaches a tipping point, its difficult to reverse. Businesses close or leave, and new people moving in dont necessarily want to live there, but thats all they can afford, he said.
A bad neighborhoodis next-to-near impossible to try to undo. So, its ever more important to try to make sure that these properties dont slide into blighted properties, rundown properties and become bad neighborhoods.
Other Editor's Note items.
In Colorado, short sale negotiations on behalf of a homeowner can only be conducted by a licensed real estate broker. Norberto is a licensed broker and certified Short Sale and Foreclosure Resource. He can be reached at 877-566-5808.
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