Despite fraud remaining flat for the last five quarters nationwide, CoreLogic has made projections that increases will occur over the next two quarters.
The main reason cited for the growth is short sale fraud, which CoreLogic estimates 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.
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 estimates that one out of every 52 short sales is suspicious of this type of fraud. The most common states for this fraud are California, Arizona, Florida and Nevada.
“Fraud occurs more when there are opportunities. So as the number of short sales increases, I’m not surprised that is where the fraud is attacking right now,” Grace said.
To prevent short sale fraud from occurring, CoreLogic recommended at its June mortgage fraud consortium meeting that lenders review all the necessary documentation to complete a short sale carefully, including all the disclosures to resell the property at a higher price. Grace said a borrower should also confirm that they are not aware of any other parties or contracts who may be associated with the property to ensure there is not another transaction arranged to take place.
William Rudow, an attorney from the Rudow Law Group that provides mortgage loan fraud recovery services for banking and lending clients, said any false written statement made by the purchaser that does not allow them to make a profit helps the banks obtain any loss mitigation funds related to short sale fraud.
“We are looking for language where there is a specific representation that the property is intended to be held for a minimum amount of time and/or occupied by the purchaser without any intention for the home to be flipped in a short time frame,” Rudow said. “If the banks can document this information, then they have proof to make recovery efforts against the purchaser.”
CoreLogic also has a tool called the short sale monitoring solution that helps lenders detect short sale fraudsters before the short sale transaction is approved.
The tool provides alerts to lenders if there appears to be a second prospective sale brewing on a property during the short sale process. If it appears there is another sale in the works, this is an indication to a lender that there might be an arranged flip. Lenders can then inquire about the other transaction to see if there is an explanation for this occurrence.
In addition to alerts delivered before the closing of a short sale, participating lenders can receive a notification if the property was flipped after they short sold the property. If the flip was contrary to any agreements signed during the short sale, the lender may have recourse.
The primary focus of the consortium meeting is for lenders of the fraud prevention group to come together and share new fraud practices they are seeing and ways to prevent them from happening. The group includes 75% of the nations mortgage originations leaders.
“Lenders are collaborating and are putting best practices in place and are definitely focused on stopping the fraud and protecting the mortgage industry’s good name,” Grace said.
