Tuesday, November 17, 2009

Short Sale Flipping Fraud: Use Of Inflated Appraisals, Straw Buyers, Sale Terms Undisclosed To Lenders All Indicate That Scammers Are Still At It

In Central Florida, the Sarasota Herald Tribune reports:
  • Untold millions of dollars that banks could have recovered from the sale of distressed Florida homes have instead been pocketed as profits by a new breed of property flipper. These flippers target houses on the verge of foreclosure and persuade banks and mortgage companies to accept lowball buyouts, sometimes by using questionable appraisals and not disclosing that a quick sale at a higher price has already been arranged, experts say. No one knows how widespread the scheme has become. But a national glut of short sales -- pre-foreclosure sales in which the lender agrees to let the house sell for less than the mortgage owed -- has spawned a small industry of short-sale flippers, some of whom use these questionable tactics, experts say.(1)

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  • Bankers and some organizations that regulate the real estate industry have taken steps to curb the latest form of flipping.(2) But the measures, including restrictions on writing mortgages for flipped properties, have not halted questionable transactions. Experts warn the number of short sale flips is likely to continue growing nationwide.

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  • [F]raud experts warn that some of the real estate flipping they see today involves the same kind of insider deals and manipulated sale prices that plagued the housing bubble. The FBI recently added short sale flipping, dubbed "flopping" by some mortgage fraud experts, to its list of recognized real estate fraud. In a June 2009 report on mortgage fraud, FBI officials described various forms of short sale flipping fraud.(3) Each type involves misrepresenting the value of a house to a lender.

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  • "These people are doing exactly what they did during the run-up," said Tim Mattingly, who owns an Orlando mortgage brokerage and title agency. "They are getting inflated appraisals. They are selling to straw buyers and they are hiding terms of their deals from lenders. It's amazing that after all we've been through, these people are still at it."

For more, see The new flipping: short sales.

See also, Toronto Sun: Florida's flopping circus (The Florida town made famous by Ringling Brothers' "greatest show on earth" has become a three-ring real estate circus of flippers, floppers and amazing deals).

(1) A Herald-Tribune examination of nearly 18,000 property sales that occurred in Sarasota and Manatee counties in 2009 showed that at least 250 properties have been sold multiple times at escalating prices so far this year, the story states. Reportedly, nearly 50 of those properties were bought then resold within 24 hours, suggesting that banks were underpaid for properties that already had a buyer willing to pay more. Just the most suspicious sales, where properties flipped within a day, have cost banks $1.7 million in Sarasota and Manatee counties so far this year. On houses bought and resold within a month, the bank short sales were $3.2 million less than the houses fetched just a few days or weeks later.

(2) In a June, 2009 story (see Title insurance group's move could stymie short sale flips), The Tampa Tribune reported that the Attorneys' Title Insurance Fund ("The Fund"), an Orlando-based outfit that is a major underwriter for attorneys who write title insurance in Florida, notified its 6,000 member attorneys that it will not insure deals made with a popular – but controversial – method for closing flips of short sales being advertised on the Internet that promises to make investors lots of money with little or no work.

In Sepember, 2009, The Fund announced that it will go ahead and insure short sale flipping deals that meet certain guidelines (see The Fund Underwriting Bulletin: Short Sale Transactions - Guidelines Revised). With all the heat now being applied to these deals by federal investigators, The Fund may want to rethink its most recent announcement. For examples of federal indictments involving alleged fraud in connection with short sales, see the following U.S. Attorney press releases:

(3) See also, What Else Are They Selling? Loan Mods That Turn Into Questionable Short Sales? (begins at page 17 of the recent National Consumer Law Center report, DESPERATE HOMEOWNERS: Loan Mod Scammers Step In When Loan Servicers Refuse To Provide Help):

  • 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. 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.
  • 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. 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.

For a story on a questionable arrangement that combines short sales with sale leaseback deals that give short sellers an option to repurchase their homes in the future (presumably without the knowledge of the lender and/or loan servicer approving the short sale), see Short Sales Coupled With Lease-Buyback Option A Way To Help Those Facing Foreclosure Stay In Their Homes?

posted by Home Equity Theft Reporter at 4:03 AM