Price manipulation
To realize a big profit from this type of fraud, an investor, agent or middleman must first push down a home's price. That means driving down the broker price opinion (BPO), the estimate of value that servicers get agents to provide for short sales.
While the vast majority of these estimates are probably free of influence, many aren't. Short-sale facilitators or other middlemen often contact these agents with lowball comparable sales that they would like to see used in the valuation, such as mobile homes or major fixer-uppers. In one case, Hagberg says, he was told of a negotiator leaving two envelopes for the agent coming up with the BPO: One contained the comparables to be used in the valuation; a second contained two $100 bills.
Another way to drive down the price of a short sale and pack more profit into the flip is by making the house look as though it is in worse shape than it is. Borrowers or negotiators brought in by the borrower will submit false repair bills for shoddy pipes, wiring or lead paint.
"A lot of times these repairs are for things Realtors are not qualified to assess," Hagberg says.
Hagberg has even seen cases of "anti-staging" or "reverse staging" in which a house is sabotaged to look weather-beaten, vandalized or smelly.
How can someone gain access to do this? Many times, an underwater borrower will give his negotiating rights – and access to his home – to a short-sale negotiator who will conduct all communications with the lender and allow other investors to manipulate the sale for a kickback.
"Many times, borrowers don't know about the flip" that's coming, Hagberg says. "And frankly I don't know if there's a whole lot of concern on their part. They are seeing the same loss anyway."
There haven't been very many indictments for this type of short-sale fraud. But such fraud can be punishable by up to 30 years in prison.
To catch a thief
Servicers are slowly trying to improve their systems and give paperwork more scrutiny to prevent short-sale fraud, Fulmer says. Prevention is more practical than prosecution, given the limited resources of law enforcement.
And, in the past, it has been hard for investigators to get servicers to cooperate in efforts to crack down on this fraud.
Glenn Gulley, a real-estate fraud investigator with the district attorney's office in California's Stanislaus County – one of the nation's hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.
"In 4½ years, I've never had a bank call me and say we've been defrauded," he says, though he adds that they're slowly starting to respond as they put more staff in charge of mitigating these losses.
Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.
"I'm getting people calling and saying, 'I offered $300,000 for a house that sold for $200,000.'"
And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as "sale pending" at 9:01.
"Then you know the same agent double-ended it" and is bringing in his own buyer, Gulley says.
Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.
Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.
The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren't sure that BPOs should take the place of full-fledged appraisals.
"There are no real standards for how to pick the comps to establish the value that you receive," Fulmer says. "You can pick the lowest of the low balls and skew the results."
Whom does it hurt?
After the recent mortgage meltdown, few are shedding tears for lenders over these short-sale losses. Fulmer says that when she talks about this type of fraud, a common reaction is, "So what?"
But people should care, she says, because we're all ultimately paying the tab for it.
"A lot of these loans are insured by the Federal Housing Administration or bought by Fannie (Mae) and Freddie," Fulmer says. "These excess losses are translating into losses that taxpayers are going to have to make up for."
Moreover, this type of fraud pushes down neighborhood values, potentially putting more people underwater on their loans. In other cases, the fraud is part of a larger network of schemes that leaves the house sitting empty and open to theft and vandalism.
"Once a neighborhood gets caught up in fraud, it can get recycled in fraud indefinitely," Fulmer says. "I saw one house that was flipped and foreclosed, flipped and foreclosed for 10 years."
