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Mortgage lenders could lose $375 million to short sale fraud in 2011, report says

[May 26, 2011.]


During the first six months of 2010, banks lost $150 million to short sale fraud, and could lose $375 million to the schemes in 2011, according a report by the mortgage banking news service Housing Wire. The reason? As more homeowners face foreclosure, short sale deals have soared, raising the potential for scams to proliferate.

Short sales: how they work

Short sales occur when mortgage lenders agree to let homeowners sell their properties for less than what is owed on home loans. The advantage to the homeowner is that he or she can get out from under a mortgage loan on a property that has declined in value. For mortgage lenders, the upside is that they recover at least part of what is owed on mortgages and can resell the properties.

Suspicious activities

Three threseholds are used by analysts to identify possible short-sale fraud:

  1. When the buyer flips the property for a profit of 10 percent or more less than one month after the short sale.

  2. When the buyer flips the property for a profit of 20 percent or more less than three months after the short sale.

  3. When the buyer flips the property for a profit of 40 percent or more within six months of the original sale.

Flipping properties the same day

Over 450,000 short sales of single family residences over the last three years were analyzed by business intelligence company CoreLogic to come up with estimated bank losses. CoreLogic found that nearly one in six properties were resold the same day a short sale occurred. California (34 percent), Florida (17 percent) and Arizona (10 percent) dominated the number of suspicious short sales in the first half of 2010. All three states have seen housing values plummet during the housing crisis.

Homeowners attempting a short sale should be cautious. Much of the short sale fraud involved investment companies, according to CoreLogic. Sellers should always be wary of people who make unrealistic promises when attempting to do a deal. They should also avoid taking part in flipping schemes set to occur right after they short sell their property.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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