The Changing Face of Short Sale Fraud

Industry examples are now pointing to the next generation of mortgage fraud: short sale manipulation. It is happening in a variety of ways and companies like mortgage finance giant Freddie Mac are investigating how to stop it.

“Fraud is heating up like a wildfire right now,” said┬áKathy┬áMehringer, risk management director and short sale advisor for Coldwell Banker Residential Brokerage in southern California as quoted in the OC Register . “We’ve got to be aware that this fraud is changing directions, is jumping containment lines.”

Since the housing market collapse several years ago, short sales have been a very common sight in the mortgage world. In fact, the total number has tripled in the past three years. With housing values having fallen so far from their peak, when homeowners need to get out of their house they are typically unable to sell for as much as they still owe on their home loan. Sometimes banks will agree to a short sale, selling the home for less than the value of the mortgage, forgiving the rest of the loan balance. This helps the homeowners avoid foreclosure and saves the banks money and time in repossessing and reselling the house themselves.

So how are people scamming short sales these days? One of the worst is the idea of “flopping.” You’ve heard of flipping a house? Buying it cheap, fixing it up and selling for a big profit? Well, flopping means trashing the house first in order to lower the value of the home even more before a short sale to an accomplice who will then flip the property.

A CNN Money article even cited one homeowner spreading possum urine around a home, turning up the
heat and closing all the windows for a few days in order to make the place less sellable.

“It smelled like a Hazmat site,” said Ann Fulmer, a mortgage fraud specialist with Interthinx.

Homeowners have also tried things like painting “water damage” on ceilings, taking doors off cupboards, removing appliances, and even claiming that there are plumbing and electrical problems that don’t really exist.

Sometimes realtors are complicit with these deals and purposely don’t advertise in local markets or will play up all the down sides to potential buyers. Then they can tell the bank that no one is interested and the price needs to be lowered. If the scheme works, the price is dropped and the friend or relative comes in and scoops up the house at deep discount and fixes it up with minor effort for a big sell.

Mortgage information company CoreLogic estimates that floppers in 2011 made an average gain of 34 percent on short sale flips with an average profit of $55,000. Freddie Mac is continuing to investigate and welcomes any reports of fraud.

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