Wednesday, July 15, 2009

Shaky Loan Modifications That Turn Into Questionable Short Sales?

A new form of foreclosure rescue involving purported loan modification services coupled with questionable short sale arrangements has arrived on the scene and possibly gaining in popularity, according to DESPERATE HOMEOWNERS: Loan Mod Scammers Step In When Loan Servicers Refuse To Provide Help, a recently issued report by the National Consumer Law Center:
  • Information is beginning to surface about a new variety of foreclosure rescue involving the sale of a house that is upside down (that is, more is owed on the house than is worth). Indeed, some loan modification websites tout their expertise in short sales.

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  • In one version of a short sale scam, the realtor and the buyer collude to conceal the full price of the sale from the lender so that they can pocket the difference, often by using option contracts and back-to-back closings.(1) This version is aimed primarily at defrauding the lender, though the homeowner is also hurt by an artificially low sales price, either by being liable on a deficiency or by paying taxes on a higher forgiven balance.(2)

  • In another version of a short sale scam, the buyer takes over the mortgage without satisfying the due-on-sale clause and the sale is concealed from the lender.(3) The owner of a We Buy Houses franchise explained at trial that these deals work when the homeowner is only 10% to 15% upside down, because the home is sold to a buyer who cannot qualify for a regular loan and so is willing to pay a premium above fair market value to avoid a credit check. Depending on how the transaction works, the homeowner may be out cash, lose the home, and still end up with a foreclosure on the credit report.

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  • These transactions may begin as traditional loan modification contracts, in which the homeowner pays a fee in the hopes of saving the home. The rescuer may then pressure the homeowner into agreeing to the sale—and into paying a sales commission to the rescuer. Thus, the homeowner has to pay two fees, loses the home, may still have her credit blemished by a foreclosure if the new buyer defaults, and may be exposed to liability for violating the contract.

For more, see What Else Are They Selling? Loan Mods That Turn Into Questionable Short Sales? (begins at page 17 of the report).

See also ATIF Refuses To Issue Title Insurance On Controversial Short Sale Deals Involving Simultaneous Investor "Flips" - involving the recent decision by title insurance underwriter Attorneys' Title Insurance Fund to refuse to issue title insurance policies on deals made using the controversial method for closing flips of short sales (possibly recognizing the potentially fraudulent nature of these transactions).

(1) Also known as "flipping."

(2) The NCLC report cites three media reports indicating the existence of this scam. See Nick & Cindy Davis, Sellers Beware of Short Sale Scams (Apr. 21, 2009); Bill Gassett, Short Sale Scammers We Buy Houses (Aug. 14 2008); New "short sale" scam taking root?, St. Petersburg Times (April 22, 2008).

(3) The NCLC report cites an article appearing on several real estate investing websites which explains how the due on sale clause is avoided. "The game for us is how to transfer ownership to the property without getting caught by the lender." Attorney William Bronchick, There's No "Due on Sale" Jail (an article which pre-dates the foreclosure crisis and the loan modification explosion).