The estimated financial impact of short sale fraud is $310 million annually with the risk of 'unnecessary losses' occurring in one in every 53 short sale transactions, according to a new study by CoreLogic.
In "The Cost of Short Sales," the Santa Ana, Calif.-based company says the average amount of unnecessary loss is $41,500 per short sale transaction.
"A jobless economic recovery and weak home prices are fueling short sales volume," said Craig Focardi, senior research director, consumer lending at The TowerGroup.
"In many instances, government-sponsored or private short sale programs are a preferable alternative to foreclosure. However, important aspects of the short sale transaction are disclosure of all potential buyers to the seller and accurate home price comparables."
By definition, short sales constitute a financial loss to lenders but will continue to be a necessary part of the mortgage industry as it seeks stabilization, added Tim Grace, senior vice president of Fraud Analytics, CoreLogic.
"The primary objective for lenders is to eliminate unnecessary loss," said Grace.
"The best way to mitigate fraud risk and unnecessary loss is through a collaborative effort where lenders collectively share pre-closing and post-closing information."
Study highlights show the number of short sales in the market has more than tripled since 2008 with the estimated annual volume at 400,000. Over half (55.8%) of all short sales occur in just four states (California, Florida, Texas, and Arizona).
Approximately four percent of short sales have a subsequent resale within 18 months. Investor-driven short sales are not inherently bad, the report noted. "Investors provide the industry with necessary liquidity," it said.
Short sale transactions may be deemed risky to the lender when either the second sale amount is vastly higher than the short sale amount, and/or the two sale transactions are executed within a very short window of time.
While the exact definition of what constitutes fraud continues to evolve, CoreLogic analysis indicates lenders are consistently incurring more loss than necessary.
Approximately one in every 53 (1.9%) short sale transactions was part of an egregious flip and therefore deemed risky.
The results are derived from CoreLogic examining a representative data sample of single-family residence short sale transactions from the past two years. The CoreLogic transaction data used for the study represents 98% of real estate transactions and 85% of mortgage financing details.
