Thanks to the several people who sent in this article, from CNNMoney.com:
In this latest twist on short sale fraud, scammers have found a way to rip off mortgage lenders by tens of thousands of dollars — sometimes in a matter of hours.
The scam artists, usually real estate agents, will secure a legitimate bid on a home, one where the borrower owes far more on the mortgage than the home is worth. Then they arrange for an accomplice investor to make a lower offer on the home.
The agent then presents the lower bid to the lender and asks them to forgive any remaining balance owed — without disclosing that there was a higher bid made on the home. Once the short sale is approved, the scammer then sells the home to the higher bidder, often on the same day.
“These same-day resales are on average nearly $50,000 greater than the lender agreed upon short-sale price,” said Tim Grace, senior vice president of product management and analytics at CoreLogic, a financial analytics company based in Santa Ana, Calif.
Such transactions are expected to cost lenders more than $375 million this year, up more than 20% from last year, according to CoreLogic
The anatomy of a scam
Most of the time, pulling off one of these scams involves a real estate agent and an investor acting as a “straw buyer.” Sometimes, the owner of the home is involved as well, but not often, said Robert Hagberg, an investigator for the mortgage giant Freddie Mac.
“In most instances, the sellers are apathetic; they’ve, basically, already lost their homes,” he said. With nothing to gain or lose, they allow agents to handle the entire deal.
To get the banks to approve low bids, appraisals or broker price opinions are manipulated. Home prices have plummeted in many housing markets and the house may be worth far less than what the seller paid.
Sometimes, said Hagberg, fraudsters bribe appraisers or brokers to get the prices they want but they can employ sneakier methods as well. One method: Misstating the home’s location so it’s compared with much cheaper places.
One case in California last year involved an expensive Malibu property that the agent said was in Riverside, Calif.
“It didn’t cause any alarm bells to go off at the bank,” said Grace. “The short sale went through at $200,000, which was a fifth of its value. It was turned around for $1 million.”
Sometimes an agent will point out every defect in the home to get appraisers to reduce their values, according to Hagberg. In Wisconsin, an agent left the windows open during spring rains and flooded the basement. He told the appraiser the plumbing burst and would need expensive repairs. All it really needed was a pump.
“When the flippers say there’s something wrong with the electricity, the plumbing or the roof, the appraiser can’t tell whether they’re being deceived or not,” said Hagberg.
Fraud ultimately hurts homeowners
Five years ago, when the housing market was thriving, lenders rarely heard of a short sale fraud. But as the housing market crumbled and beleaguered homeowners increasingly turned to short sales to get out of their underwater mortgages, the frauds increased as well.
Now, 13% of all existing homes sales are short sales, according to the National Association of Realtors. And last year, frauds associated with short sales comprised half of all fraud investigations for mortgage companies like Freddie Mac, according to Hagberg.
The impact of short sale fraud goes well beyond the direct losses to banks. These frauds have become so common, it has become more difficult for legitimate short-sale transactions to go through.
That hurts sellers because it forces more of them into foreclosure. It hurts banks by adding to their costs and it can make all the parties more cautious.
The frauds “defeat why we do short sales in the first place,” said Hagberg.
In the Bridgeport, Conn. scam, two real estate agents were arrested. It was just one of four similar frauds that were listed in their indictment, which netted them a total of more than $180,000. They pled guilty and are awaiting sentence.
They may be out of business but with home prices off about a third from their peak nationwide and down 50% or more in many post-bubble communities, there are opportunities for other short-sale fraud artists to take their place.
Reforms?
Regulations?
Capital gains needs a time component. Holding a house for 1 day would fall into the 110% tax category. Capone was taken down this way with tax law.
I would think this type of fraud would be easy to spot. Existing laws should be enforced with fines and jail time. Take away all the profits.
Yo Dawg!
With both federal and state looking for additional funds, why not strengthen the tax laws to catch more cheats and collect more fines?
The Federal Trade Commission says it will exempt real estate brokers and agents assisting clients in obtaining short sales from most provisions of new rules intended to protect consumers from foreclosure rescue scams.
Real estate brokers and agents complained that the “consumer specific” disclosure forms the FTC introduced as part of its Mortgage Assistance Relief Services (MARS) rule were confusing, because they addressed services provided by loan modification companies, not real estate agents.
“You may stop doing business with us at any time,” the FTC’s model language for one disclosure reads. “You may accept or reject the offer of mortgage assistance we obtain from your lender (or servicer). If you reject the offer you do not have to pay us. … Even if you accept this offer and use our service, your lender may not agree to change your loan.”
The FTC says it will exempt licensed brokers and agents assisting clients with short sales from the disclosure requirements, which took effect Dec. 29, and also from a ban on the collection of upfront fees, which was put in place Jan. 31. Short-sale brokers and agents will continue to be subject to MARS prohibitions against making misrepresentations to clients.
“As a result of the stay on enforcement, these real estate professionals will not have to make several disclosures required by the (MARS rule) that, in the context of assisting with short sales, could be misleading or confuse consumers,” the FTC said in announcing the policy.
“As more and more American homeowners seek short sales, it is especially important that the (MARS rule) not inadvertently discourage real estate professionals from helping consumers with these types of transactions.”
The FTC announced the final MARS rule in November, after bringing more than 30 cases against companies that allegedly made false claims about their ability to negotiate loan modifications, short sales or other foreclosure relief.
When the MARS rule was proposed, the National Association of Realtors expressed concerns that it would have unintended consequences for real estate brokers and agents engaged in short sales and other transactions. But the FTC decided that an explicit exemption for real estate brokers and agents was not necessary.
“Real estate agents customarily assist consumers in selling or buying homes and perform functions such as listing homes for sale, showing homes, and finding desirable homes for consumers,” the FTC said in announcing the final rule in November. “The commission is aware that real estate agents may perform these functions when properties are bought or sold through a short-sale transaction, but does not consider these services to be MARS.”
But after the rule went into effect, NAR received calls from members who worried that in the process of assisting clients with short sales, they engaged in activities that might make them subject to MARS.
Real estate agents assisting clients with short sales may also discuss their delinquent mortgage situations and their need for assistance with mortgage servicers, and may refer clients to companies that specialize in loan workout solutions, which some worried would make them subject to MARS requirements.
The FTC said the stay on enforcement does not apply to real estate professionals who provide other types of mortgage assistance relief, such as loan modifications, and the FTC said it will continue to enforce prohibitions against unfair and deceptive practices against all other providers of mortgage assistance relief services.
This is the very principle behind why short sales were traditionally hard to approve by the bank – no reliable way to know the true market value of the home.
As Buffet said, the only way to know the value of an asset is to offer it for sale. In the case of houses, that’s handled by the very real estate agents who may or may not act in the bank’s interest.
Hmm, I dunno. Is there something in the purchase contract that says you aren’t going to resell it? Otherwise how is this fraud, or illegal at all?
Seems to me, this is just another form of arbitrage, traders do this for a living all day, every day, with any physical good, commodity, financial instrument that exists. You simultaneously secure a buyer and a seller and pocket the difference. If you can exploit an inefficiency in the marketplace, you add liquidity and pocket the spread.
The spread here should shrink as the banks begin to wise up. Once they know of the losses they are leaving on the table it’s not hard to have someone oversee these short sales a little better.
The fraud isn’t in the arbitrage the fraud is in the failure to disclose. It’s not illegal for an investor to go down to the court house steps buy a property with cash, rehab the property or not rehab the property, and sell it for more to somebody else. The fraud is in lying to the banks about the best offer, conspiring with appraisers or bank officers to fraudulently value the property at below market prices so the arbitrage opportunity exists.
In the stock market everybody can see the bids and offers, and generally if a broker fails to give you the best bid/offer you can be sued for failing to disclose the best offer. The pension funds that are now suing over bad Mortgage Backed Securities (MBS) are suing because of a lack of disclosure which is the fraudulent activity.
What I’m saying is you could do it totally legally if you are careful. Give the bank a short sale offer. Willing buyer, willing seller, middle man. An arrangement as old as the silk road.
Jakob,
The problem is that the agent (middle man, as you call it) is contracted by the seller (bank) to find the best buyer. However, they’re colluding with a straw buyer to take money that should be going to the bank if the agent properly disclosed all offers they received.
Nobody is necessarily saying that there aren’t loop holes in the laws and regulations that are being “legally” exploited, but apparently you could care less about basic morality. It’s just business?