Short Sales May Lead To Mortgage Fraud
Posted Feb 27, 2008 @ 12:14 am, Viewed by 1069 Visitors, Read 1151 Times.We have all heard so much about "mortgage fraud" contributing to the bubble but what about fraud on the way down? In other words, mortgage fraud that forces the market down. For the uninitiated here is how one scheme works. Imagine you own a house with a 1st mortgage of $600,000 but the market is depressed and it is really only worth $400,000. What do you do? Here is what people are doing, and hopefully banks can find a way to stop this craziness. First, stop paying the mortgage. Sixty days later, the bank starts calling desperate to work out a payment plan. Second, have a trusted relative with good credit and a strong finances handy because she is going to help you pull this off. Third, find an agent willing to list a "short sale" on your home. Fourth, bring in that relative to make the first offer at a market rate of $400,000 the first day it hits the MLS. The understanding is that you will continue to live in the home and pay for the mortgage in full. In return, the relative deeds you back 80% of the property in a co-tenancy so when the home is sold, this relative pockets 20% of the upside in return for helping you lower your mortgage from $600,000 to $400,000. WAIT. It gets better - if you have TWO relatives willing to help, then guess what? A few months later, stop paying the mortgage again. Let it fall into a short sale, and bring in relative number two to buy at the short sale for $300,000. Now the three of you will share a deed on this property. However, in return for letting your two relatives in on a percentage of the deed, you've just lowered your monthly payments by half.
So how does the bank stop these ort of shenanigans? It can not unless it takes possession of the property as an REO (real estate owned). Unfortunately, allowing a short sale only perpetuates these sort of fraudulent transactions. Not everybody will be participating in this scheme because ultimately when you let your mortgage fall into a short sale, your credit is marked - but that is a small obstacle for many looking to recoup their losses in this bubble collapse. The recommendation for banks at this time is avoid short sales and go straight to REO, unless the bank has the manpower to 1) follow up after the closing 2) have a bank of attorneys to file suit 3) bring the Feds in for prosecution.
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Social Bookmarking6 Responses to “Short Sales May Lead To Mortgage Fraud”
Keith, sadly it is near impossible to prove this scheme because there is no paper trail showing that the homeowner intended to defraud the bank. "Coincidentally" the agent is related to the homeowner and the buyer happens to be a cousin, but on paper everything appears to be legitimate. Now, if the original owner continues to live in this home 3 months after the sale goes through, that's one way to show that there may be some shenanigans going on - but who has the time to check up on these people 3 months from now? Certainly not the bank, and the neighbors don't really care.
Phyllis Harb
This is an excellent post and this is happening.
lei
is it still illegal for a relative to buy a short sell if he really lives there and the former owner just moves out after a few months and doesn't buy the house back?
It is not "illegal" technically but up to the bank to "sniff" out the scam. If the bank doesn't realize what's going on, who's going to report this to anybody?
Davis
I indeed saw it happening now. I wonder if the FED or CNN can invest into this new type of real estate fraud.
To prevent this happening I think the bank after decide the short sale price, it should release the price to the public for 1-2 weeks and allows everone equally competes for the morguage.
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You bring up a great point. My wife and I are first time home buyer, and think that we have uncovered a scheme like this. We found the home of our dream, and the real estate agent for this short sale listing is the current owner's sister. I wish there was someone I can report this to. It's frustrating when fiscally irresponsible people try to pull this stunt just to bail themselves out of a mess.