As short sale and REO fraud continues to be a prominent problem for servicers, lenders, Realtors and homebuyers to deal with on a daily basis, one industry executive recently discussed ways to determine if a transaction is legitimate and how to prevent fraudulent deals from taking place.
During a presentation at the Mortgage Bankers Association’s National Short Sale and REO Summit, Ed Gerding, senior fraud and risk strategist at CoreLogic, told conference attendees that the main reasons why short sale fraud is so prevalent today is due to the unprecedented levels of shadow inventory, high volume of overall
According to CoreLogic’s 2012 fraud trends report, 35% to 40% of all transactions last year were a distressed sale. In 2Q 2012, suspicious short sale fraud recorded its highest volume and research from the Irvine, Calif.-based risk mitigation firm indicates that the mortgage industry is likely to originate at least $325 million resulting from short sale fraud in 2012.
A suspicious short sale is defined by CoreLogic as anybody who tries to make a rapid profit from a buyer. For example, a single-family residential transaction that has been resold is deemed suspicious in three ways: more than 10% or more than $10,000 profit on resale within one month, at least 20% or greater than $20,000 profit on resale within three months, and a 40% or $40,000 profit on resale within six months.
Currently, Florida and Nevada account for 50% of all short sale transactions. Gerding said the suspicious rate has been on the rise since the last quarter of 2010 and 2.5% of all short sale transactions fit this definition of being suspicious.
Gerding noted that the way an
“The challenge lenders and servicers have when setting up their distressed assets shops is that they’ve had to bring in people such as short sale negotiators and underwriting specialists who do not have a lot of experience and don’t have a good understanding of what fraud red flags are,” Gerding stated at the summit. “So all of these things have blown up the situation and make it riskier.”
However, the viewpoint is different from an origination and servicing standpoint. Gerding said the process on the servicing side utilizes a volume of tools like automated valuation models, broker price opinions, full residential appraisals with interior inspections and collateral risk assessment tools in order to generate an assessment and fair market value for their assets.
“They don’t care what the unpaid principal balance is, don’t look at the prior dates of sale, and don’t care what the original appraisal was on the property because things have changed so much in the market over the last several years,” Gerding added. “From the servicing management perspective, they look at this as not a risky transaction, but a reward. The reason is because there is less reputation risk because foreclosures are timely and they just want to enhance the position of a nonperforming asset.”
But on the origination side, Gerding noted that lenders are more aware of the risk and advocate the use of monitoring tools to prevent fraudulent transactions. He said any short sale deal is suspicious when the sale price deviation is 30% or more below the AVM.
In his presentation, Gerding highlighted several ways to determine whether or not a property that is available for purchase on one of the 800 multiple listing services across the country is accurate. First, he said suspicious short sales have a higher percentage of shorter and/or negative remarks in their listings compared to a regular sale. In particular, any listing with less than 100 characteristics providing details of the asset is suspicious.
Secondly, it is important to notice how many and what the photos look like on a listing, such as whether they were taken from a bad angle, have poor resolution, or include foreground objects blocking full visibility of the properties exterior. Short sales typically have at least eight photos on their listings, while suspicious short sale transactions usually have less than two photos. Also, Gerding noted that any listing that fails to include interior photos of a home should be considered suspicious compared to a regular sale.
Investors and prospective buyers should also be leery of flash listings. CoreLogic revealed that 11.5% of short sales are less than five days active on MLS, while 7% are listed for sale less than three days. Meanwhile, a short sale active for purchase for a fraction of one day is occurring 36% more than a regular sale transaction.
Lastly, noticing whether property attributes are consistent with MLS and public records can help determine if a sale is really genuine. Gerding noted that 15% of short sales have different MLS and public records for bedrooms, while 0.6% of short sales have different MLS and public records for ZIP code.
To combat fraudulent practices from happening, Gerding recommended that Realtors and servicers implement a short sale monitoring tool and conduct training sessions for their employees and REO negotiators to pinpoint an inaccurate transaction or listing. He added that individuals should also monitor transactions up to 180 days after close of the short sale to verify the legitimacy of the deal and scrutinize cash transactions, especially when an LLC or trust is involved.
“You need to know about fraud, and the less you tolerate it, the better we are all going to be able to prevent it as an industry,” Gerding said. “So obviously red-flag training is an important part in your normal day-to-day activities.”
