CoreLogic has just introduced a new software program designed to catch real estate brokers and agents who commit short sale fraud by providing a low bid to lenders in order to get a second commission by flopping the property to a higher bidder.

The new CoreLogic Short Sale Monitoring Solution is designed to help lenders maximize what they are earning on short sales by alerting lenders about all offers made on the property.  The software also monitors the property after the sale is complete.  If it is “flopped” for a higher price, the lender is notified and can pursue the agent or broker involved for fraud.

CoreLogic says it estimates that lenders are currently losing over $40,000 per short sale transaction – or a total of $310 million in 2010.  The company estimates there will be in excess of 400,000 short sales negotiated through real estate agents this year.

Bank of America has announced a co-op short sale program, targeted at homeowners who have failed to qualify for mortgage modifications under HAMP or HAFA.

BofA is launching the new program with 2,000 homeowners who have already been pre-screened because they applied for mortgage modifications under HAMP or HAFA.  The bank is offering them the short sale as an alternative to foreclosure.

Letters to homeowners asking them to participate in the new short sale program have been sent out.  They have 120 days to list their property.  BofA says it will assign a short sale specialist to work with homeowners and their real estate agents on each short sale.

Once the home is sold, the homeowner gets a $3,000 relocation fee, and the agent receives a six percent commission on the sale.  If the home does not sell, the bank will accept a deed-in-lieu of foreclosure.  BofA is also waiving deficiencies.

To learn more about the program, go here.

The Sacramento Bee reports that as the number of short sales in the area rise, so do the imaginative ways some people can come up with to exploit them.

The SacBee article warns of these schemes:

• Unlicensed short sale “negotiators” are approaching homeowners, asking for thousands of dollars up front to negotiate with lenders, said Tom Pool, spokesman for the California Department of Real Estate. Only attorneys and licensed brokers can ask for money up front – and only after the DRE approves the agreement with an individual seller. The DRE recently published a consumer alert about this and other scams.

• Real estate agents or these negotiators are lowballing offers to overwhelmed banks, a practice called “flopping.” After the bank approves a short sale at a low price, the agent or negotiator quickly flips the house to a new buyer for much more. Elizabeth Weintraub, a Sacramento short sale agent with Lyon Real Estate, said would-be floppers often want to use their own title companies. That’s a red flag.

• Real estate agents say banks are illegally seeking extra money in hidden side deals before approving short sales.

• Some homeowners, especially savvy, well-off owners who owe far more than their houses are worth, are hiding savings and income to persuade lenders to agree to short sales. Many can afford their mortgages, said Coldwell Banker short-sale specialist Mike Toste of Roseville. But they also know it will take years to recoup their 2006 values.

A short sale fraud scheme known as “flopping” is on the rise across the U.S. and two Connecticut real estate agents may be on their way to prison for their involvement in this illegal activity.

Flopping is when an investor or homebuyer hires a broker to assess a property for less than its market value (certainly not hard to do these days) and convinces the lender to sell at that price.  The buyer hides the fact that he already has a higher offer and then flips the property for the higher price and a profit.

According to an article in BusinessWeek:

“A majority of the short-selling fraud is related to LLCs and investment companies trying to make a quick profit,” said Tim Grace, vice president of fraud analytics at CoreLogic. LLCs refer to limited liability corporations.

The Treasury has “put reasonable protections in place” to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days, said Laurie Maggiano, policy director of the department’s Homeownership Preservation Office in Washington.

Suspected property-valuation fraud almost doubled from the end of 2007 through the first quarter of this year, according to a June 8 report by Interthinx Inc., an Agoura Hills, California- based company that sells mortgage fraud detection software.

In addition to banks losing money, “flopping” may hurt homeowners who complete a short sale and face higher deficiency judgments as lenders seek to recover unpaid mortgage balances, Ann Fulmer, vice president of Interthinx, said in an interview on Bloomberg Television.

Investors often use real estate broker opinions, which may rely on drive-by inspections instead of full appraisals, to persuade lenders to sell at a low price, Fulmer said. She suggested an Internet search of “How to influence a broker price opinion,” which yielded 74,800 results.

Lender Processing Services, a technology firm that reports on loan delinquencies, says that its data – based on 40 million first loans and 5 million home equity loans and lines of credit — points to an escalation in prime loan delinquencies across the U.S.

According to LPS analyst Steve Berg, there is a huge inventory of delinquent loans and more deteriorating every day.  Using 2005 as a base year, LPS says that prime loans have deteriorated 305 percent, which outpaces subprime loans at 230 percent and FHA loan delinquencies, which have been flat.

From a post at Inman.com:

Berg uses Los Angeles County, home to a significant number of very high-priced residences, as an example. Looking at the data at the end of last year, the number of “dirty sales,” either short sale or REO, as a percentage of all total sales in the $250,000-and-below bracket, reached as high as 78 percent. However, the number of homes in that bracket that were in default or foreclosure was relatively modest, meaning the pipeline was shrinking.

In the lower-price home bracket where short sales and REOs had been concentrated, prices are not going to drop much more because it is already totally saturated with REOs and short sales — and the damage has been done.

As a comparison, in the highest price band, $750,000 and greater, only 16 percent of transactions were dirty sales. But, the number of properties in default and foreclosure are now higher than in the low-priced bracket and that, says Berg, “is going to whipsaw the home-sale market.”

The five states with highest volume of prime jumbo loans outstanding were California, New York, Florida, Virginia and New Jersey. Together those five states represent about two-thirds of total delinquencies.

Last week, DRE issued a Short Sale consumer alert statewide “warning consumers and real estate agents about the perils and potential pitfalls of short sales.”

(Blatantly commercial message:  we’ve had a Short Sale Buyer Advisory posted on our website for awhile now – it’s available at no charge by signing up for a free trial of our Risk Management Program.)

“The number of short sales is on the rise and many consumers do not understand the consequences of such a transaction,” DRE Commissioner Jeff Davi said.  “Moreover, the Consumer Alert educates consumers and real estate agents to recognize the elements of a fraudulent or questionable deal.”

The alert is posted on DRE’s website – go here to fetch it.

If you’ve attended any of our Short Sales presentations, you know this, because we talk about it a lot…but just in case you missed it, Freddie Mac is now making it clear that they are aware of and are taking steps to prevent Short Sales fraud.

From an April 12 press release on their website:

There are many variations of short payoff fraud. The example below is just one way this type of mortgage fraud can occur.

• A seller (delinquent borrower) owes $100,000 on a property that is worth $80,000.
• The short payoff facilitator negotiates with the bank to accept a $70,000 offer to purchase the property. In several instances, Freddie Mac has seen that this offer will be made directly by the facilitator or through an entity under his/her control.
• The lender/investor accepts the offer for $70,000.
• The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000.
• Both transactions close on the same day with the net difference being pocketed by the facilitator and increasing the lender/investor’s net losses.

At first glance, this may look like a legitimate short payoff. However, in this example, the fraud is the failure to disclose the second, higher offer. The facilitator is willfully withholding important information the same way a scam artist would, and the lender does not realize they are walking into a premeditated short payoff fraud scheme. Because the facilitator is deliberately withholding the higher offer, Freddie Mac also experiences a larger than necessary loss on this sale.

Appraisers — who have seen their fees cut in half in recent years as a result of a mandated clearing house approach to appraisal assignments which was a knee jerk reaction by the Legislature resulting from lender fraud cases where the Bank insisted appraisers keep values inflated — are now protecting what is left of their disappearing turf.

According to an article this week at Inman.com:

Industry groups representing appraisers are pushing for a ban on the use of BPOs to value short-sale properties in the Home Affordable Foreclosure Alternatives (HAFA) program, saying they open the door to mortgage fraud.

NAR says the appraiser groups have provided “misinformation” to the Treasury Department about the role of BPOs in mortgage fraud and the application of state laws governing BPOs.

In a letter to Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan, NAR president Vicki Cox Golder said :

“NAR is concerned about misinformation that has been provided to the Treasury Department by the Appraisal Institute with regards to the use of BPOs and the real estate agents who provide this service…

There is no evidence to support the assertion that appraisers are more or less likely to engage in mortgage fraud than real estate agents…

While misconceptions in the industry persist, there is no evidence that a BPO exacerbates mortgage fraud or abuse.”

With transaction counts way low, and with Banks resorting to BPOs for REO and Short Sale decisions (which also represent the vast majority of real estate transactions), this dust-up seemed predestined.

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Short Sales are called that for a reason: somebody is going to take it in the shorts! Just be darn careful it’s not you (the agent).

In California, the fiduciary duties create almost impossible barriers for risk avoidance. If you represent the seller, you have duties to present ALL offers to the seller – but not the bank.  If the seller doesn’t present the alternate offers to the Bank, the Bank can have a claim against the seller — especially if the second offer was for more.

Then there are the duties owed to a buyer.  If you represent the first buyer, do you use CAR’s, SSA (Short Sale Addendum) – which (arguably) gives the seller the right to back out if the Bank doesn’t waive any potential deficiency?  That’s “bad” for your buyer.

What if you represent a second buyer who has an offer, which is for more money than the first?  Do you push to bump the first buyer out of place?  The SSA implies you can, if you can get the Bank’s attention.  Do you force the listing agent to present?  The seller?

What if you represent that first buyer, and there is a second buyer with a better offer?  Do you try to keep them at bay?

Then – what if you are a dual agent?  For the seller and first buyer?  Or, even worse, for the seller and the second buyer with a better offer!

Real Estate today sure is FUN!

“Walk Away Mortgages.”  A “new” Federal Program?  Nope.  A new financial reality.

When houses are worth less than the debt owed against them (“negative equity” in bank parlance), it becomes a sound financial decision to simply ‘walk away” from the house, and rent the same model down the street for about half the cost.  Sure, it trashes your credit rating, for about five years.  But, what the hell, you’re likely already late on several payments, and your credit is already trashed.  Is the “moral” obligation to keep making payments worth the additional $150,000- $200,000 in value difference?  Not to most people. And that’s the problem the Feds and the Banks are facing.

Every contract (like a loan agreement) can be breached.  The “consequences” in many cases, is the loss of the security – the house.  In some cases, the loss to the Bank is more than the house is worth (negative equity, indeed), and in some of those cases, the Bank has the ability to go after the defaulting homeowner/borrower.  That’s called “recourse.”

In some states, California among them, if the loan was purchase money in a 1-4 unit, owner-occupied property, the Bank loses the right to go after the homeowner/borrower for any deficiency.  But, in an era where re-financing to take money out was common, many homeowners lost that protection, because a re-finance is NOT “purchase money” – even when the amount re-financed was the exact same as the original amount borrowed.

In cases where the original “purchase money” loan is being modified, some banks take away the “non-recourse” protection as part of the modification.

Where the loan is non-recourse, is it the smart thing to “walk away?”  In some cases – yes!  Is it the “moral” thing to do?  Hey, I’m a California real estate lawyer; can you define “moral” for me?

Before you do, let me ask you if the same definition applies to Countywide, or Washington Mutual, or any number of sub-prime lenders.  I can’t help but think it’s hypocritical of the Banks that just got billions of dollars of Federal Bailouts, that created the lending environment that originated these loans, and that are now at risk of being shut down and put out of business, to claim the “moral” high ground.