California Regulator To Step Up Education, Enforcement Efforts In Response To Alarming Escalation Of Short Sale Fraud

The Bakersfield Californian reports:

• 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.

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• "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."

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• 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.

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• 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."

For more, see Real Estate Department warns of rise in short sale fraud.