Archive for the ‘Borrower Default’ Category

Identifying Short Payoff Fraud

Friday, April 30th, 2010

– While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. The latest opinion released from Freddie Mac on short sales presents legal and practical issues for short sale investors.

On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” The article stated, in short, that short sales could be fraudulent if the lender does not have information about a pre-arranged flip of the property after the short sale to another buyer. This is a serious yellow flag for short sale investors who make their living negotiating good short sale deals with banks, then selling their new properties to other buyers for a profit.

The rest of the article detailed scenarios and red flags for “short payoff” fraud. The scenario revolved around a short sale facilitator who set up a deal with a lender to purchase a home worth 80K for 70K while the lender took a 30K loss. In the scenario, the facilitator fails to notify the bank he has a higher offer, 95,000, on the house. When the transactions close – in this case on the same day – and the facilitator pockets the difference, according to Freddie Mac he has just committed fraud because he withheld information about a higher offer and causes Freddie Mac to take a “larger than necessary” loss on the sale.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the property being an entity rather than a person. The article also tells readers to keep an eye out for resale options in their purchase agreement.

Everyone involved in a short payoff is encouraged by Freddie Mac to report potential short payoff fraud the second they become aware of a second purchase contract for a higher price. Short sales may not be breaking the law, but Freddie Mac’s PR team certainly wants the process to be as difficult as possible for all real estate investors.

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