TopMortgage Compliance Update (1)
September 14, 2010
Short Sales: Fraudulent Practices

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Overview
According to Nolo's Plain English Law Dictionary, a Short Sale is:

A sale is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Short sales usually occur when the homeowner is facing foreclosure. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what is owed.

While this definition obviously does not tell the whole story or the legal process issues, it is correct in a broader sense.

For example, the overall intent is to avoid foreclosure and the fees attendant thereto; but, the Agreement between the borrower and the lender does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, which is known as the "deficiency." Extinquishing the remaining balance must be clearly stipulated in any acceptance.

Lenders in particular have been increasingly affected by fraudulent practices on the part of various types of companies. Many state banking departments and certain federal agencies have come out with notices for lenders to be aware of schemes and scams to defraud.

One of the most recent such notices comes from the California Department of Real Estate (DRE). This state agency has been consistently proactive in many areas in the fulfillment of its mission of consumer protection, advocacy, and licensing enforcement.

Therefore, we are providing the DRE's recent notice, entitled

"Short Sale Fraud Alert September, 2010: Update to DRE Issued Consumer and Industry Alert(s) Regarding Short Sales Fraud, and Related Issues."

We think the notice is useful as a means to better understand the scope of fraudulent practices involving short sales.

Also issued by the DRE is a letter to lenders from Jeff Davi, California Real Estate Commissioner, entitled

"Short Sale Fraud Warning For Lenders, Servicers, GSEs, and Other Mortgage Owners and Investors (referred to collectively as "Lenders"and individually as "Lender"), and subtitled "A Time for Collaboration and Cooperation."

Virtually all incidents of short sale fraud involve the knowing failure to disclose material information to the short sale lender. As a result, lenders are approving sales based on false or omitted information.

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Highlights
  • Short Sale Flipping: one of the major and recurring schemes is short sale flipping, where real estate agents and brokers have defrauded a short sale lender with respect to the value of a property and purchase offers received, and then, in turn, resold the property for a much higher price. These types of scenarios usually involve a false appraisal or broker price opinion (BPO) that was provided by the listing broker to the short sale lender with the intent of under pricing and falsely stating the value of property.
  • Undisclosed Addenda: in some cases there is an addendum to a purchase agreement that contains conditions of the sale and agreements made between the buyer and seller that are not submitted to short sale lenders with the original purchase contract. One type of addendum that has recently surfaced is one wherein the buyer agrees to pay for the alleged service of a short sale negotiator. Whereas the closing cost credit to the buyer is or may be eventually disclosed and approved by the short sale lender, the ultimate payment of that credit to a third party is not. These payments to short sale negotiators often are not divulged on the HUD-1 statement until after the short sale lender has approved all of the terms and the transaction has funded and closed.
  • Non-recurring closing costs: in agreements wherein sellers are crediting buyers with so-called non-recurring closing costs. This credit is then used by the buyer to pay a fee to the short sale negotiator. Whereas the closing cost credit to the buyer is or may be eventually disclosed and approved by the short sale lender, the ultimate payment of that credit to a third party is not. These payments to short sale negotiators often are not divulged on the HUD-1 statement until after the short sale lender has approved all of the terms and the transaction has funded and closed.
  • Marketing Properties: the DRE is investigating transactions where listing brokers are indicating in their advertisements that only offers where buyers request a non-recurring closing cost credit from the seller to pay for the short sale negotiator fee will be submitted to the short sale lender.
  • Undisclosed monies and credits outside of escrow: occur where buyers and/or sellers are receiving undisclosed monies and credits outside of escrow. These types of disbursements might also be made possible and facilitated by the escrow company handling the transaction.
Visit Library for IssuancesLibrary
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Short Sale Fraud Warning For Lenders, Servicers, GSEs, and Other Mortgage Owners and Investors (referred to collectively as "Lenders" and individually as "Lender"), A Time for Collaboration and Cooperation, DRE California
September 13, 2010

Short Sale Fraud Alert September, 2010, Update to DRE Issued Consumer and Industry Alert(s) Regarding Short Sales Fraud, and Related Issues, DRE California, September 2010

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