Most mortgage fraud takes place in the short sales and REO space, according to Rob Hagberg, associate director of fraud investigations at Freddie Mac. “This area is ripe with fraud,” he said during a webinar hosted by CoreLogic.
While servicers and others in the industry have adapted to some fraud schemes and put measures in place to detect and prevent fraud, schemes continue to evolve as fraudsters find new ways to manipulate sales.
For example, many fraudulent REO and short sale transactions involved the use of a straw buyer who temporarily purchased a home at an undervalued price and then sold it to a third party at a higher price.
These transactions would be immediately suspicious to anyone reviewing property records, which would show a home was sold for one price one day and then almost immediately resold at a higher price. Savvy perpetrators are now eliminating the second buyer. Property records will not reveal a middle buyer, but they will reflect a higher price than the servicer agreed to.
Another growing trend in short sale fraud is what Hagberg calls the “short sale and stay.” This occurs when an underwater homeowner wishes to keep his or her home but wants to lower his or her loan amount.
The homeowner will recruit someone—often a friend or family member—to purchase the home through a short sale, and the original owner will remain in the home.
Sometimes, a wife will use her maiden name to purchase the home from her husband, and the couple will stay in their home.
Both short sale and REO fraud often require fraudsters to convince servicers a home is worth less than it actually is.
To accomplish this, fraudsters have attempted to bribe REO brokers, manipulate MLS data to lower the prices of comparable properties, and have engaged in reverse staging to make a property appear in worse condition than it is.
In cases of reverse staging, Hagberg has seen cabinet doors removed from kitchen cabinets, garbage left lying around the home, and sometimes old fish hidden behind refrigerators to create pungent scents.
Sometimes BPOs include false property stigmas such as high crime rates, and in a few instances Hagberg has seen properties undervalued by as much as $40,000 under inaccurate statements that the home had been a meth lab and would need to be entirely gutted.