September 25th, 2010 3:11 PM by Lehel S.
STRUGGLING homeowners have found some refuge in short sales, in which lenders allow borrowers to escape foreclosure by selling a home for less than what is owed on the mortgage. Government programs offering incentives to both parties will push the number of short sales to 400,000 this year from 100,000 in 2008, according toCoreLogic, a financial consulting firm.
But the jump in short sales has also given rise to a new form of fraud — which, as a recent study by CoreLogic suggests, could undermine the burgeoning practice.
Fraudulent short sales take many forms, but Frank McKenna, the vice president for fraud strategy at CoreLogic and one of the report’s authors, says one arrangement is more common than others.
An agent for the borrower negotiates with the lender to obtain a low selling price for a property, then sells it to a “straw buyer,” or someone with whom the agent is affiliated. The agents are sometimes real estate agents, or employees of businesses that advertise as “foreclosure rescue” specialists, Mr. McKenna said. As the agent negotiates with the lender — and unbeknownst to the original homeowner or the lender — the agent arranges to resell the property at a higher price. The new buyers may not know that they could have obtained the property for a lower price. Or, even worse, they may be victims of identity theft, unaware that their financial information was being used to buy a home.
In other fraudulent transactions, a borrower might purposefully default on a mortgage he or she could actually afford. The borrower arranges to transfer the property to a friend or relative through a short sale, and the original borrower can remain in the home. The new owner can also transfer ownership back to the original owner through a quitclaim deed, Mr. McKenna said.
He estimated that only about 2 percent of the short sales completed in the last two years were fraudulent, but said fraud was becoming more frequent. “It’s happening a lot more in this market because there are so many more short sales,” he said. “There’s more opportunity to go after the quick buck.”
CoreLogic does not track the actual number of fraudulent short sales. Rather, it estimates the figure by identifying short-sale transactions in which the house was quickly sold or “flipped” to a new buyer, or resold for a vastly higher price. The company obtains and analyzes publicly available sales and financial information on most of the nation’s home purchases.
Florida, California, Texas and Arizona had the greatest number of suspicious short sales, according to the CoreLogic report. New York ranked fifth, with roughly 5.5 percent of all short sales falling into the “suspicious” category. New Jersey ranked eighth, with about 3.3 percent of short sales categorized as suspicious. In Connecticut, the percentage of suspicious short sales was close to zero.Mr. McKenna said the rising number of suspicious short sales could undermine the use of these transactions as a foreclosure alternative. That, he said, would be unfortunate, since borrowers and lenders have only recently reported some momentum in successfully completing short sales.
But John P. Bonora, a vice president of the Fairfield County Bank in Ridgefield, Conn., said he did not expect this to happen. Noting that CoreLogic also sells fraud prevention services to lenders, Mr. Bonora theorized that its report might overstate the threat of fraudulent short sales.
“I’d forward the report to my folks and say you should have some of these things in the back of your mind,” he said. “But I don’t think this report would deter us from doing a short sale.”
Still, Mr. Bonora said, the report makes him more suspicious of real estate agents who market themselves as foreclosure specialists.
“They’re probably speaking with borrowers on a daily basis about foreclosures,” he said. “And people are opportunists.”