Detecting And Derailing REO Fraud

Withholding higher offers from a lender that may be in favor of an arm’s length investor is an example of a deceptive practice that appears often in a short sales scheme. Mispriced broker price opinions and undervalued appraisals are part of this process as well.

In one instance, a perpetrator submits a short sale offer for preforeclosure property at a price less than the current listing, according to Brad Froelich, chief appraiser at US Real Estate Services Inc., where he is responsible for overseeing all valuations-related discrepancies.

“The perp locates a second buyer who may not be at arm’s length to purchase the home for a higher price simultaneous with the short sale or in rapid success, concealing the second transaction from the lender approving the short sale. The second transaction may involve a new loan based on the completed appraisal.” Generally, this scheme involves the listing agent who presents his or her short sale offer as the best offer even though the agent has received other higher, arm’s length offers, said Mr. Froelich. “The agents on the streets talk about the difficulties in getting through the short sale process to the lender and getting an offer accepted. There are agents out there who are collecting higher offers and they are already in cahoots with an investor who is obviously trying to purchase the property at a discount. How much sales activity is being presented on this property?”

Mr. Froelich is quick to point out that not all investors are “bad people.” He often meets investors who say that just because they purchase the property with the intent to flip it and immediately sell the home for profit does not mean they are “the bad guy” and have the intention to create fraud.

“I’m careful to use the ‘f’ word. Not all transactions sold to investors that purchase homes with the intentions of flipping them are necessarily illegal. They can be and many times they are. The investor who walks into a market, looks at a different sales price and says, ‘Listen, I’m like any other buyer in the neighborhood. I’m offering so much to purchase this home with the intent of selling at a later date.’”

Overstated deferred maintenance items that are not supported by contractor estimates are one of the first red flags of fraud his company gets. Some cost-to-cure estimates are not substantiated. “We see it all the time. Anyone who has spent time at a Lowes or Home Depot knows that a 900-square-foot home should not have $34,000 worth of carpet, but you would be surprised how frequently we see it.” Most of these flips potentially can be identified and boarded either by the preforeclosure lender or the lender financing the second inflated transaction.

Best step practices include confirming the ownership status of the property. Is the title held in trust? Was it an allowable transfer? Review the marketing efforts, such as the MLS listing. “This is an important step. Has the property been canceled? Was it expired? What are the extensive, aggregate days on the market for the property? How many price reductions were there?"

Chrissi Rhea, president and CEO of Mortgage Investors Group, says short-sale consultants and Realtor fraud teams that are prolific across the country are what will stop the industry from recovery.

“As Realtors, you need to be aware of the property. Was it overlisted? For instance, there was one example of a property that was listed at $550,000. That was probably way too much. The real value was probably $425,000. This consultant talked the servicer to reducing the mortgage amount to $200,000,” said Ms. Rhea.

“If you are asked to do a BPO, I truly believe the responsibility is on your shoulders to save the nation. You need to clearly give a true opinion of value, whether you are working through an independent company or for a third party that you are approved to do a BPO for.”

Accurate values in this day and time are absolutely essential, she added. Before a servicer accepts a short sale or reduces their unpaid principal balance, they should do research on how long that property has been listed and for how much.

“One you start negotiations, did the multiple listing change? If they are looking for $200,000 or $300,000 and that property has been listed for $550,000, there’s probably another contract out there. Before you do your BPO, determine what is going on in the neighborhood. Know the property values, not just on the street but the entire market. As a lender, it is my responsibility to help the servicer determine if that is a true short sale.”