Wherever there is a crisis, there will be a line of unscrupulous people poised to take advantage of it. The housing crisis is no exception. According to CoreLogic, fraud occurs in one in every 53 short sales. And sometimes, it's not the homeowner but the lender who is targeted in the scam.While hearing that lenders have gotten burned may not exactly bring fret to the brow of the underwater-mortgage crowd, a fraud is a fraud is a fraud -- and it actually does undermine home sellers, who may be taxed on the difference between the loan balance owed and the price the house fetched in a short sale or foreclosure auction.
The scam that seems to most plague lenders is known as "short sale flopping," although it is a pattern being applied with equal gusto in foreclosure resales. It works like this: Real estate agents hide their affiliations with third parties involved in the transaction and then rig the sale for a lower price to that buyer, not disclosing better offers to the lender (and the distressed home seller if he's still in the picture). Then, after the house is sold, the agent flips the property back on the market at a higher price and, once it sells, walks away with a profit to be split with the straw partner.
Federal law prevents the buyer and seller from having a hidden relationship from the lender, and agents withholding bid information from lenders are committing fraud and can be prosecuted.
How often does that happen? Apparently not very often, since the scam continues to thrive.
If the short sale is through the Home Affordable Foreclosure Alternatives (HAFA) program, the buyer isn't allowed to resell the property within 90 days of closing.
Neighbors are frequently the best whistle-blowers in these cases and do have a horse in the race: a low comp on the books will impact the value of their own homes. Neighbors should watch for "investors" buying way below market in their area, especially if the home is quickly put back on the market at a higher price. It may mean that someone just got a great deal, but it also could mean that there was collusion on the part of the agent representing the property. (To report suspected fraud, Fannie's tip line is 800/7-fannie, or e-mail: mortgagefraud_tips@fanniemae.com.)
Flopping houses isn't the only scam going on, of course.
Fannie Mae reports seeing a lot of what it euphemistically calls "reverse staging," where homeowners willfully trash their home to intentionally lower its value. Someone they know makes a low-ball offer and buys it for a song, makes the cosmetic repairs and flips it for the true market value.
And then there are buyers who sell on a short sale to a friend or relative, with the intention of lowering the principal loan amount on the property to something more affordable. Once the short sale closes, the original owner pays the new buyer until the point his credit is repaired and he can once again qualify for a loan. In the meantime, he stays in his house for a lower monthly mortgage. It's a way that parents have been able to help their children and grandchildren, or vice versa.
For more on related topics, see these AOL Real Estate guides:
All About Short Sales
Spot Foreclosure Scammers Before They Spot You
Also see:
