Short sales increased rapidly over the last several quarters, but wherever there are home sales, there are home sales fraud.
Sales of properties on the verge of foreclosure tripled over the last two years and will increase another 25% this year, according to analysis from CoreLogic.
Analysts found one in every 52 short sales conducted in the first half of 2010 were “suspicious,” meaning the lender may have incurred unnecessary losses from fraud. Over the first six months of last year, banks showed $150 million in losses from these suspicious transactions. By the end of 2011, banks could face $375 million in losses from short sale fraud, according to CoreLogic.
Short sales pose a suspicious risk in a variety of ways. One example occurs when the buyer flips the property for a 10% profit less than one month after the bank unloads it.
Analysts also found any property flipped less than three months after the transaction for at least a 20% profit as suspicious. Even at six months after the transaction, a short sale can be suspicious if the buyer flips the property for 40% more than the short sale price.
Analysts said not all of these transactions were fraudulent. Buyers, often investors, can quickly rehabilitate the property, which poses no significant risk to the bank. However, as CoreLogic analysts looked through hundreds of thousands of short sales, some were resold on the very same day.
Nearly one in six suspicious short sales are resold on the same day. On average, these transactions that were flipped within 24 hours showed a 34% profit between what the short sale went for and what the investor flipped the property for, CoreLogic said.
“This same day turnaround of a short sale can be achieved by what is known as a ‘back-to-back’ closing,” analysts said.
In these deals, the investor has two separate contracts. One is the purchase contract with the lender. The other is a separate agreement the investor has with a third-party buyer. The two transactions are choreographed and presented to the title company on the same day with the short first executed, followed by the flip to the third-party buyer.
Overall, roughly 65% of the resales after the originally short sale transaction were deemed “suspicious” and caused direct and unnecessary losses to the bank.
States with the highest short sale volume showed the most suspicious activity. Roughly 34% of the suspicious short sales found in the first half of 2010 occurred in California, followed by 17% in Florida and almost 10% in Arizona. The rest of the country accounted for about 38% of all suspicious short sales.
Most of these occurred on properties that were sold to investment companies. Of the short sales conducted with investors, 28% were suspicious, compared to 1.9% for all short sales.
Craig Focardi, senior research director of consumer lending at The TowerGroup, said the study validates an industry perception related to limited liability company buyers in a short sale transaction.
“While they comprise only two percent of all buyers, they comprise more than 25% of buyers in suspicious short-sale transactions,” Focardi said.
CoreLogic provided some ways to mitigate the risk. Analysts recommended lenders review all short sale documentation, including any disclosures to resell the property at a higher price. They must ensure the short sale buyer is not aware of any other parties involved with the transaction, validate claims significant renovation was actually completed before the flip.
But most importantly, banks should apply the proper due diligence in order to understand the current market value of the property, analysts said.
“Identifying risk and monitoring distressed asset sale trends is absolutely essential for lenders to preempt potential losses,” Focardi said.
This is realtor fraud, or specifically, listing-agent fraud.
Listing agents have several ways to prevent an open-market sale, and the local association of realtors is doing nothing about them.
1. Don’t put listing in MLS at all.
2. Put listing in MLS, but then prevent showings, and/or just mark it contingent/pending and don’t return calls.
If we don’t police ourselves, nobody else will. But there is no attempt whatsoever by the local realtor associations to do anything about short sale fraud.
Here is an example of that.
Here’s another way to mitigate the risk:
(1) Lenders should get the BPO on the property as soon as it moves into the 90+ delinquency bucket;
(2) Lenders should foreclose and auction the property for 80-85% of the BPO.
“If we don’t police ourselves, nobody else will. But there is no attempt whatsoever by the local realtor associations to do anything about short sale fraud.”
The worst case scenario for Realtors would be the government getting involved with regulation because the local organization fails to do anything. Government regulation would certainly be thought out poorly and put an undue burden on realtors. Of course it would be nice if we could find somebody willing to just prosecute the “Fraud” crime already committed, but nobody seems interested in doing that.
Funny how it’s fraud when investors cook the numbers to screw banks over on short sales.
But, it was completely acceptable for banks to inflate buyers info on mortgages sold to Frannie/Freddie.
It’s just different ends of the same candle.
Note to self: Attempt to work up some righteous indignation over the banks getting a good seeing to on some short sales they negligently, perhaps criminally, loaned against.
NEW YORK (AP) — Fixed mortgage rates hit the lowest point of the year for the third straight week.
Freddie Mac said Thursday the average rate on the 30-year loan fell to 4.60 percent from 4.61 percent. That’s the lowest point since mid-December. The average rate on the 15-year fixed mortgage, a popular refinance option, slipped to 3.78 percent from 3.80 percent. That marked the lowest level since late November.
Rates have fallen for six weeks in a row. They tend to track the yield on the 10-year Treasury note, which crept lower this week on worries over Europe’s ongoing debt crisis.
The reason people get worked up is not because the bank is getting its well deserved comeuppance, but because they want a shot at those houses. I don’t know how many houses I have seen show up pending in minutes and then close awhile later at $50k or $100k less than I would have gladly paid. There was another one this week.
And this is in Pheonix, on the coast it is 10x that. Jim pointed one out in RSF last year that had to be $1M too low, and I bet he had a client who would have been happy paying it too.
If they’d come on the market legit you wouldn’t get em for the insider fraud price, you’d hafta pay retail just like all the others that hit the MLS ex-fraudulent. This issue is just about the banks getting bent which makes a tear run right down my….leg.
We just had another house close about a week ago that we made an offer on. The listing agent double-ended it and our offer was $25K higher than close price. Maybe it sold for all cash but it makes you wonder…