What about a short sale to yourself?

The FHFA will not allow short sales to friends and relatives of the seller. But Sen. Elizabeth Warren argues that such arrangements should be allowed as a way to keep the owners in their home.

By Teresa at MSN Real Estate Jun 12, 2013 12:22PM

© fotag/Getty ImagesOne of the ironies of short sales is that many owners could afford to keep their dwellings if they could buy them at the short-sale price.


But that’s not allowed, nor can they sell their home to friends or family members with an arrangement to rent the house or buy it back later.


That’s wrong, says Sen. Elizabeth Warren, D-Mass., who was instrumental in setting up the Consumer Financial Protection Bureau. She has caused a stir with a piece she wrote arguing that the Federal Housing Finance Authority, which oversees Fannie Mae and Freddie Mac, should not only allow such inside deals but should encourage them rather than classifying them as fraud.


In a short sale, a homeowner sells a house or condo for less than the loan amount, and in many cases the lender agrees to write off the forgiven debt. To be approved for a short sale, a homeowner has to demonstrate financial hardship and provide substantial financial documentation, usually multiple times.

Among the documents the seller must sign is an arms-length affidavit, attesting that there is no relationship between the seller and the buyer, the real-estate agent and the seller, etc. The real-estate agent often has to sign an affidavit, too.

It is certainly possible to game the system – to sign the affidavit but to sell the house to a friend or to a relative with a different last name. But should such sales be considered fraud, as they are now?

Warren argues that the bank gets the same amount of money either way, whether the home goes to a friend or to a stranger or to a nonprofit that will sell or rent it back to the seller. She writes in the Dorchester Reporter and on her website:

The FHFA claims that its policy prevents sweetheart insider deals that benefit the homeowners at the expense of Fannie and Freddie. But that makes no sense when the house is sold at market value or when people affiliated with the homeowner put in the highest bid to save the home. In those cases, the identity of the bidder makes no meaningful difference, because Fannie and Freddie's bottom line stays the same. And every time a family stays in a home, rather than being pushed into foreclosure, the neighborhood does better and the overall housing market does better – both of which help the value of all the other mortgages that FHFA holds.

But Bill McBride, at the Calculated Risk blog, argues that Warren’s proposal would lead to fraud and that the lender would not necessarily get the same price. He writes:

Warren doesn't understand that short sales don't go to the highest bidder. The first chance to negotiate with the bank goes to someone the homeowner (or agent) picks. Since the homeowner has no financial interest in the property, this creates an agency problem and opens the door to fraud (I've suggested having the lender hire the agent). The "arms-length" protection is an important tool to prevent fraud.

The current system is also open to fraud, as my colleague Melinda Fulmer wrote, including sales to friends of the seller or to the real-estate agent or "floppers" who persuade lenders to take less than the home is worth and then immediately resell it at a higher price. She details how some of the fraudulent deals are done. In some cases, real-estate agents have refused to submit higher offers, telling the lender that the offer from their preferred buyer was the highest received.  


Certainly there have been cases where the home was sold to a relative or friend of the homeowner with plans for the homeowner to buy it back, with all parties lying on the arms-length affidavit.


You might wonder why a homeowner who could afford to keep the house if the payments were lower would not just apply for a mortgage modification with a principal reduction. But Fannie Mae and Freddie Mac will not agree to principal reductions on any mortgages they back.


What do you think of Warren’s proposals? Should short sales be allowed to someone who plans to rent or sell the home back to the original seller?




Aug 6, 2014 9:31AM
The real estate scumbags are getting around the law by setting up LLC's to buy the house for themselves and then selling it on for a profit.  
Dec 5, 2013 12:57AM

Now  what if the house is paid for  would or could any of this apply


Aug 26, 2013 6:32PM
dear grumpy in LV I was just trying to find a way to circumvent all of these crooks from making even more money for nothing but to lend you.  I stated and do again, if the government really wanted to help us like they say in their merry-go-rounds they could stop all of this but no, because they are the core of this problem.  Still think any person with money should think about investing in refinancing people's homes they would get more interest than they are getting from the banks or lenders.  In fact, if they were smart enough they would see that refinancing people who are qualified by them they would get more interest than the lenders are giving them, of course, this is just my thought.  Las Vegas will be stagnant for a long time and it seems like no one cares, so I will stay put until the time comes, and I will refinance my 2 mortgages.  Good luck to everyone, read between the lines and sometimes you just have to say no.
Aug 25, 2013 4:15AM

In Michigan, one of the Supreme Court judges did a short sale and wound up in jail.  Too bad the manager of the bank that did the sale didn't wind up in jail also.


It takes 2 to tango, unless you are a tea bagger, then you can tango with yourself.

Aug 24, 2013 10:22PM
Personally, they all had me going for 5 years, and guess what, I am still where I was 5 years ago except the value is so much lower than what I owe.  I have pleaded, begged and everything else short of walking out, to deaf ears.  Everyone keeps saying the government will do this and the government will do that, well let me tell you, the government doesn't know it's **** from a hole in the ground.  They are all too busy double checking to make sure that get their cut.  They don't give a damn about you or me.  They caused this whole thing with the banks and the lenders, and now are still continuing to play games.  How many more programs is Obama going to initiate that don't help people at all.  Think about this, you have a county assessor's office that knows the values of homes because they tax them, so why in the hell would you need an appraisal in order to get financed or refinanced in my situation.  It is because like what Wells Fargo is great at doing, they call in what is supposed to be an independent appraiser and then they come in far below your needed value and take your appraisal money in advance so when the appraisal comes back in too low, you are out another $475.  They are all conning you, stay put where you are because in the end something good will happen for you.  If you can hold out, don't move one inch because something else is coming down the pike and please know, they know what they are doing to make money off of you, you don't know the game plan because when you do they change the rules.  We should all unite and disband this crooked government that we have, I gave them the name Giver-Mint meaning the give to everyone around the world as if they were the mint, we pay taxes to allow them to do this, stop paying your taxes and see what they can do, absolutely nothing.
Aug 24, 2013 10:20PM
my sons realtor was offered two different times by two different people to purchase his home while in a short sale. This amount would have paid off the mortgage in full plus gave the realtor and him some extra monies and they turned it down would not let the realtor sale the house foreclosed for a 10,000.00. loss. I'm sure after all the paper work and lawyers it was more like 15,000.00.GREED NO ONE TO SUCCEED .My SON was in the wrong but trying to make a bad situation turn out the best he could but the USB wanted all or non and they would have had every penny they lent out just not as much interest as they wanted. Sad  
Aug 24, 2013 9:19PM

I agree with Sen. Warren's arguments, and she is looking at the BIG picture....avoiding blighted neighborhoods which usually happens in many areas.


She should also advocate ease in loan modifications so that mortgagors would allow reduction of principal, if such is the fact in the neighborhood.

Aug 24, 2013 8:20PM
I bought a house in late 2007 and lost my job 3 months later.  But guess what.... I still have it and have never missed a payment and am no longer under water.  I sacrificed, refinanced twice, and recast twice.  My payment is now about 35% less than the original loan.  
Aug 24, 2013 8:15PM

What's wrong with Elizabeth Warren?  Has she lost her mind encouraging criminal actions.  There is so much corruption in my neighborhood by attorneys, builders, developers and realtors who are also inter related and corrupt.  After reading this article, I am troubled enough to switch my party affiliation.  I am totally disgusted watching over half of my neighbors using their houses as automatic teller machines.

Some have 3 mortgages as high as $3,000,000 on an appraised home of 800,000.00. Then they offshore the 3 mil and allow the home to go into foreclosure while renting the house for the years that it takes to foreclose on the home.  These same home owners provided the banks with incorrect names spelled out on the mortgage paperwork; i.e. First Name as middle name and then Middle name as initials etc., and then file their mortgage documents with the clerk of the court in the adjacent county from which they bought their home.  Foreclosures are finally getting cleared up after many years yet those who bought their homes with the intent of providing the banks with incorrect data on these asset backed securities are taking much longer to remedy the bankruptcy proceedings. Of course these same people brag about how cleaver they are.  If you do the crime you should  be indicted and prosecuted to the full extent of the law!l

Aug 24, 2013 8:13PM
Sounds good to me!  I'll take out a mortgage on my existing home, stop making payments, and then short sale it to myself for less than I owe.  Is that what we talking about?  Who would loan me the money to buy the short sale?  If I got money to buy it from myself, how come I'm not making payments on the mortgage to begin with?
Aug 24, 2013 8:11PM
No, it opens the door to fraud.  Last time I checked, bank loan officers don't force stupid borrowers at gun point to sign for a mortgage. 
Aug 24, 2013 7:55PM
Anything that would prevent foreclosure is a good thing.  Just add: a reasonable time period for a re-transfer, Say 5 to 8 years and you practically eliminate fraud.  It can be structured to work.
Aug 24, 2013 7:05PM
The banks and Freddie Mac and Fannie Mae do this all the time. It's called a "credit bid" The bank forces the home into default via a home modification program such as HAMP. Then the bank "loses" the paperwork and payments made, then forecloses. It "auctions" the property to Freddie or Fannie via a credit bid. A credit bid means they flip it in the books but never pay up a dime. Only the creditor of record  is legally allowed to place a credit bid at auction, but all others must pay cash. The problem is that many times Freddie or Fannie are not the creditor of record. I say if the banks make these sweet deals among themselves then the home owner should have the same. Oh, and the bank collects on insurance too.
How do I know this? It happened to me...
Aug 24, 2013 6:13PM
There is also another thing to think about in the sad tales of people losing their homes to repo. How long did the people get "free" rent while not paying their mortgage? There are several  examples of it taking 2 or more years to actually get the owners out. That's tens of thousands of dollars of "income" for them for doing nothing. I would like to see it taxed. If I tried to do that in my apartment, I would not get past 90 days before I was out on my ****...Just saying.
Aug 24, 2013 4:42PM
Im sure everyone will agree that houses were way over valued before the crash. There are a lot of people on here who think it would be a good idea to roll back the loan amount to the to the current values in the market to help keep some people in their homes. It is true that some people would be able to stay and there would be fewer foreclosures. The question is who should lose the money. The real reason home prices were so over valued was because everybody and their brother started flipping houses and taking loans out on them. Easy credit allowed this to happen. It was a way for people to start their own business with almost no cash and try to make six figures. Show after show on tv documented example after example of this during the height of the market. So really whos fault is it people took out huge loans on things they could not really afford to try and make money? If you think about it the buyers, sellers, and banks were all at fault and should all take the hit. The sellers of the over valued homes should have to give back a third of the profit of the sale. The banks can lose a third and the buyer can also. That would be fair. But that's not what the people who want the banks to rewrite the mortgages really want. They only want to make the banks pay. They want to punish them and give no blame to any other party.
Aug 24, 2013 4:40PM
If the seller can prove hard ship with beyond a shadow of a doubt,   and a short sale is inedible, then they should be able to do a short sale and keep the property or the lender should do a loan modification... No matter what the home is going to sell or financer is going to get less monies then the home is worth.
Aug 24, 2013 4:08PM
I agree with the philosophy that a short sale will bring what the market will bear,  doesn't matter who the buyer is even if it is the current owner.  I think legislation should be put in place to obligate the short sale buyer to retain the property for a certain amount of time to avoid "floppers",  something like 3 to 5 years with the penalty for early sale to be the difference between profit of the sale in relation to the short sale purchase.  This would deter people from trying to make the fast buck and secure genuine homeowners their opportunity to keep their home in a market that skewed their home ownership.
Aug 24, 2013 3:34PM

US Bank told us in 2012, we will not talk to you until you are three months in arrears. Way to reward deadbeats. I called them a year in advance for help on our mortgage. Of course, we are seriously underwater. We also ended up in a prettily flipped house with no wall insulation.


As soon as I heard this stipulation from the bank (our income did not keep up to the mortgage plus all of our other self generated bills, even after paying down debt, paring bills, and, eliminating bad habits such as groceries. My spouse FINALLY gave up nicotine and alcohol in our desperate bid to keep the house, and, we both gave up visits to the dr); I made sure we had somewhere else to live, but, tried to pay down the principal enough to get us to the magic 20% equity. I failed, and, sure enough, exactly one year after I called US Bank for help, and, some unexpected medical bills (child & cat), along with the depleted savings, we did not have enough money to make the mortgage.


Still no help from the bank, and, it is strange how the heartless customer service agents are so willing to help one into a Deed in Lieu or Short Sale...I told them they seriously have to consider a career with the US Ari Force as Fighter Drone Pilots. I will not talk to them, again, if I can help it. And, have told them we will foreclose in order to cost the bank time and money.


We have another complication to the then affordable mortgage we purchased in 2007. It was sold to us by the Wisconsin Department of Veterans Affairs...and the note did not fully explain some very interesting details of the mortgage which would have led us NOT to buy it in the first place. I am currently pursuing this angle...Mortgage Fraud by the mortgage note seller. We are still foreclosing, however. My pleas fall on deaf ears to politicians and consumer protection agencies (state & federal), and, everyone thinks it is all our fault for signing the bottom line, anyway.


Once the kid begins school, I am searching for a lawyer. I will help us, even though no one else cares to.


In addition, the banks have lost us as customers, permanently. PERMANENTLY. Try to manipulate our credit score so they can take advantage and charge us 2-3X the going interest rates for up to seven years, tell us to become deadbeats before they will help us...screw the banks.

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