Looking Out for Short Sale Fraud; why it happens and how it happens

Short sales are talked about more and more, but you may not have heard about short sale fraud.  It seems that short sale fraud would be hard to do, but there are actually a few types of short sale fraud that occur.  I am going to tell you about them, and how they happen. 

The first and biggest concern with short sale fraud is that it is happening with the lender.  Let me clarify; short sale fraud has occurred as a result of second mortgage lien holders requesting money outside of the closing.  The primary lien holder always takes priority over the second because they obviously have first position.  So, if there is a second mortgage, that has to be negotiated out of the funds that the first lien holder gets in the short sale. 

According to Diana Olick, a real estate report that did a special with CNBC back in January, the second lien holders have been asking for money off the HUD settlement statement.  They were requesting the money on the side from the real estate agents or the buyers in the short sale, and they were asking for this in cash.  The idea behind this arrangement was to ensure that the first lien holder never saw it.  The money was requested in the form of a cashier’s check prior to the closing.  Once they would receive the payment, they would allow the short sale to go through.             

RESPA says it’s not legal, and as Diana Olick stated, they know firsthand that there were representatives from CitiMortgage and JP Morgan Chase involved in this already.  While these companies made claims to support their companies, this is still under investigation.

The second form of short sale fraud is happening when the perpetrator creates a straw buyer.  This is the form of short sale fraud that seems virtually impossible to commit, but it happens.  In a short sale scheme, no one has to bid on the property competitively, so they can use short sales to recycle for future schemes.  They are hard to detect since the lender agrees to the transaction, and the extent of this form of short sale fraud is unknown.

The perpetrator uses a straw buyer to purchase a home for the sole purpose of defaulting on the mortgage loan.  The hard to part to understand is how this loan is approved with fraudulent documentation and income regarding the straw buyer.  Then, the payments are never made on the mortgage causing it to default. Prior to the foreclosure sale the perpetrator offers to purchase the property from the respective lender in a short sale agreement.  Unfortunately, the lender agrees to the short sale, never knowing that this short sale is premeditated. 

This is truly sad, given the situation that we are in today, and the weight of this economic crisis is staggering, yet people are still interested in thinking only of themselves.  It is hard for us to understand why this would ever happen, but it happens every day.  While we can’t control what others do, we can make good decisions for ourselves. 

With the stress and emotional pain that you are already experiencing you need an expert to help you handle this.  The short sale process requires a professional that you can trust.  When beginning the process you may not know where to start or who to speak with, so it’s important that you have someone working with you that has a vested interested in helping you and your family. For more information, go to www.inlandempireshortsaleresource.com.