Real Estate Department warns of rise in short sale fraud
BY COURTENAY EDELHART, Californian staff writer
cedelhart@bakersfield.com | Monday, Sep 13 2010 05:48 PM
Last Updated Monday, Sep 13 2010 05:48 PM

The California Department of Real Estate says it has noticed an alarming escalation of short sale fraud and will step up education and enforcement efforts to combat it.

A short sale is an agreement between a homeowner and a mortgage holder to sell a home for less than the borrower owes on the loan. When a property has declined significantly in value, banks and real estate investors are sometimes willing to accept less than they are owed.

Because the vast majority of real estate in California is worth far less than it was four years ago, a significant number of sales transactions these days are short sales.

The state issued six “desist and refrain” orders last month against real estate professionals it says are exploiting that situation.

“It’s just starting to take shape,” said Department of Real Estate spokesman Tom Pool. “I kind of equate it with the loan modification fraud, where we started out with just a few complaints and saw a swelling of it over time.

“The fraud has shifted over to the short sales.”

This market is getting renewed interest since the federal government announced its new Home Affordable Foreclosure Alternatives program.

Under HAFA, borrowers receive preapproved short sale terms from lenders before putting houses on the market. The streamlined process includes incentives for borrowers and lenders to avoid foreclosure.

A variety of deals have come up since then that cross legal or ethical lines, Pool said. That’s why this week, California Real Estate Commissioner Jeff Davi sent letters to lenders warning them to be on guard.

For one thing, a growing number of short sale negotiators are demanding upfront payments to work out an agreement with a lender on a borrower’s behalf, then failing to do anything in return for that fee.

Upfront payments are illegal without prior approval from the state, which mandates that money is held in escrow until after services are rendered and there’s a full accounting of how the money was spent.

Some short sale negotiators also are compelling buyers to pay their fee and failing to disclose that payment to lenders.

A more costly form of fraud is short sale flipping. That’s when a lender is told of a short sale purchase offer that is described as reflective of a property’s fair market value, when in fact the offer is much too low.

The lender accepts the offer, believing it’s the most it can get, and after the deal closes the house is immediately resold for its true, higher value. The perpetrators of the fraud, who could be agents, brokers, appraisers or straw buyers, then pocket the difference between the two sale prices.

That’s problematic for many reasons.

“That first lower offer affects the comps for later sales in the area, so it drives down property values,” Pool said. “And because a lot of these transactions involve incentives paid for with federal money, when banks don’t get full value, it just adds to the bailout burden we all have to shoulder as taxpayers.”

It’s harder for banks to catch this type of fraud since reforms introduced last year put appraisal management company middlemen between appraisers and lenders, said Bakersfield appraiser Eric Bonilla, who says about half of the transactions he’s involved in are short sales.

The reform was aimed at preventing people with a financial interest in higher appraisals from pressuring evaluators to fudge their reports, but as a result of the firewall, “We really don’t talk to each other anymore. We assume the offers they’re being presented are fair market, but we don’t always know,” Bonilla said.

The California Mortgage Bankers Association says it has definitely seen an increase in short sale fraud, and appreciates Davi’s effort to call attention to the problem.

“It affects everyone,” said spokesman Dustin Hobbs. “It disrupts the market and takes business away from honest brokers and agents, because the majority of the perpetrators in these cases are unlicensed people who really shouldn’t be operating in the first place.”

http://www.bakersfield.com/news/local/x649814781/Real-Estate-Department-warns-of-rise-in-short-sale-fraud