Freddie, Realtors Look to Stop Short-Sale Fraud

Freddie Mac's fraud investigation unit is reaching out to Realtor associations and real estate agents to educate them about how to prevent fraudulent short-sale activities from taking place.

In 2010, short sales accounted for 14% of completed workouts, a stark increase from the 4% accomplished in 2000 for the government-sponsored enterprise. Through June 2011, Freddie Mac said the volume of short sales they have processed is up 31% over the same time period last year, increasing the probability for fraud to occur.

Shelley Poland, vice president of single-family mortgage credit risk management at Freddie Mac, and Robert Hagberg, associate director of fraud investigations at Freddie Mac, wrote a blog where they said that short-sale fraud is on the rise because Realtors fail to disclose all of the parties who are involved in a transaction. The executives said the Realtors “rig sales at a low price” and keep higher offers off the table from the GSE and the distressed seller and then flip the house after it is sold to a fraudster for a better price than what it was originally given away for, thereby earning a profit.

“By concealing the higher offer, short-sale fraud worsens losses to home sellers, Freddie Mac and taxpayers,” the Freddie Mac employees said. “It also throws another wrench into the housing recovery by undermining the trust and transparency at the core of any real estate transaction.”

Tim Grace, senior vice president at CoreLogic, said it is common for a limited liability company to negotiate a short sale with the bank and have a buyer ready to purchase the same property simultaneously to this closing for approximately 30% more than the rate agreed upon by both the seller and the bank.

CoreLogic, Santa Ana, Calif., estimates short-sale fraud will rise by 25% this year. According to CoreLogic's 2011 short-sale research study, unnecessary losses related to risky short sales are approximately $375 million annually.

Freddie Mac's fraud investigation unit has made stopping short-sale fraud its top priority. The GSE said it has identified and stopped several fraudulent deals from closing by working with real estate professionals and law enforcement agencies. There are several trends and red flags that the GSE is telling Realtors to be aware of to stop short-sale fraud from occurring.

The first involves Realtors falsely indicating on a short-sale listing that there is an offer on a property in order to discourage legitimate offers and protect an accomplice's planned low bid.

Another common trend fraudsters are using is reverse staging—manipulating the short-sale listing price by making the house look more distressed than it really is. This also includes inflating repair estimates for the property and using similar tactics to obtain a low home value on a broker price opinion.

A third trend Realtors should be aware of is the “flipping” scheme where a fraudster buys a house at a short sale without using their own money. This individual then sells the house either the same day or a few days later to a second buyer for a higher price. During this scheme, the fraudster uses false loan documents in order for a lender to approve the buyer's mortgage.

Lastly, some fraudsters are manipulating the HUD-1 settlement statement where they itemize all fees and charges from the home sale so they can make proceeds for themselves without the seller's knowledge.

Firms and individuals who have been caught by the fraud investigation unit are placed on the GSEs exclusionary list barring them from conducting business with Freddie Mac. Because of the recent uptick in short sales taking place nationwide, Freddie Mac now requires all parties involved in a transaction to sign an affidavit confirming their agreement in case there are any legal problems.

“We strongly believe responsible Realtors are America's natural first line of defense against such scams,” the executives said. “There are many conscientious real estate professionals who want to do the right thing. We often receive calls in our servicing, quality control, fraud investigation, outreach and HomeSteps divisions from real estate agents who know they've seen something inappropriate and won't look the other way. They understand that real estate fraud turns a shortsighted profit at the cost of the public's long-term confidence in homeownership and the housing industry.”