Using "Straw Buyers" In Short Sales As A Way To Lower House Payments A New Way To Screw Lenders? Local DA Says The Crime Has Low Priority

In Southern California, this excerpt buried in a recent story in The Press Enterprise reports on what may be a new scam that may be taking hold to screw lenders holding mortgages on "upside down" homes(1):

• In another scam on lenders, homeowners have been lowering their mortgage payments by arranging fraudulent "short sales" at prices less than what they owe their lenders.(2) The buyer whom the seller chooses, who may be a relative or friend or a "straw buyer" paid for his service, agrees to transfer ownership back to the seller, who winds up with a smaller mortgage on the same house and never has to move. In such a short sale, the seller commits fraud by having a side arrangement with the buyer that he does not disclose to the lender.

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• A borrower who takes part in one of these scams can be sued by the lender or criminally prosecuted. The real estate agent involved can be prosecuted and lose his or her license.(3)

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• However, neither the lending industry nor law enforcement has aggressively punished such offenders. Larry Roberts, who leads the real estate fraud unit of the San Bernardino County district attorney's office, said lying on a mortgage application is a prosecutable crime, but it has low priority. He said the office is more eager to prosecute scammers who profit by deceiving consumers into believing they can help them avoid foreclosure than it is in catching consumers who defraud a lender with the intention of buying or keeping a home.(4)

For more, see Homeowner fraud exacerbates mortgage crisis.

(1) Homes having a current value that is less than the current balance owed on the existing mortgage loans.

(2) According to the story, a local lawyer who specializes in recovering losses from mortgage fraud for lenders, estimated that one-quarter of the "short sales" in this market would fail to meet the criteria of arm's-length transactions.

(3) According to the story, real estate agents and brokers can be held liable, said John Giardinelli, a lawyer who represents nine Southern California real estate associations. Reportedly, Joe Cusamano, broker/owner of Pro-One Investments in Riverside and president-elect of the Inland Valley Association of Realtors, said he knows he has clients who have lied to lenders to "buy and bail" and done short sales between parents and children. He said he tells them what the law requires but still works with them because he believes they are good people caught in a collapsing market who are not getting sufficient help from either lenders or the federal government.

(4) Reportedly, wrongdoers might be further insulated by California law, which, according to the story, greatly restricts a lender's ability to sue borrowers to collect the money they've lost in a foreclosure or short sale (ie. obtaining deficiency judgments).