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Short Sales Fraud Becoming a Significant Source of Liability

Freddie Mac short sales have risen from about 4% of completed workouts in 2000 to nearly 14% in 2010.  Not surprisingly, the amount of fraud involving short sales has also risen dramatically. Some of the most common schemes include:
– Falsely indicating on a new short sale listing that there is an offer on a property in order to discourage legitimate offers and protect an accomplice’s planned low bid;

– manipulating the short sale listing price by making the house look more distressed than it really is (“reverse staging”), inflating repair estimates, or using similar tactics designed to obtain an artificially low home value on the Broker Price Opinion;

–  flipping schemes where the fraudulent party buys a house at a short sale without putting down any of his own money and then sells it a few hours later to a legitimate buyer at a much higher price.  This scheme usually involves a falsified title and/or loan documents to fool a lender into approving the ultimate buyer’s mortgage;

– manipulating the HUD-1 so that the fraudulent party can skim away net proceeds from the sale for himself or other parties in the transaction with the seller’s knowledge.

Other signs of Short Sale fraud can include:

1.  Sudden borrower default, with no prior delinquency history, where the borrower cannot adequately explain the sudden default and is current on all other obligations.

2.  The short sale request and the borrower’s qualifying financial package originates through a third party.

3.  Title to the property has been transferred to a Trust, LLC, or Corporation, prior to the short sale closing.

4.  The buyer of the property is a Trust, LLC, or Corporation.

5.  The purchase contract contains language that indicates the buyer’s intent to resell the property.

6.  An “Option Contract” is utilized which indicates the buyer’s intent to simultaneously resell the property.

7.  Buyer’s proof of funds letter is from his or her IRA or a transactional funding company.

On Nov. 18, 2011, at the request of NAR and the American Land Title Association (ALTA),  Freddie Mac amended its policy regarding its mandatory short sale affidavits which became effective January 1, 2012.  The purpose of the affidavit is to prevent fraud by requiring the buyer, the seller, the real estate brokers, the escrow/closing agent, and any transaction facilitator to make various certifications (including that the short sale is an arm’s length transaction and the buyer will not resell within 120 days unless there are substantial improvements). The certification is made based on “the best of each signatory’s knowledge and belief.”  Freddie has retained the statement that a signatory making “a negligent or intentional misrepresentation” agrees to indemnify the servicer and Freddie Mac for losses. The addition of the knowledge standard significantly reduces this liability. Only a signatory who makes a negligent or intentional misrepresentation, based on the best of his or her knowledge and belief, is responsible for indemnifying the servicer and Freddie Mac for any loss.  No signatory is responsible for the certification of any other signatory.  Although Freddie Mac is requiring all signatories to sign one affidavit, the amended policy no longer allows the affidavit to be an addendum to the sales contract. NAR members are advised not to sign a document implying they are parties to the sales contract.

Practice Pointer:  Nevada Real estate agents must be vigilant in their assessment of short sales or may find themselves involved in schemes as unintended accomplices.  Reporting fraud is highly encouraged and can be made to the Freddie Mac fraud hotline at 800-4FRAUD8

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