Short Sales May Lead To Mortgage Fraud

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.

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.

This is an excellent post and this is happening.

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?

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.

I think stopping short sales is a terrible idea and I don't see how that would limit banks losses.  If the property goes back to the bank and someone buys it for whatever its true market value is the bank still takes the loss.  People doing this type of thing could very easily just have their friend, relative buy another house that they don't live in too right?  What would limit a banks loss is this.  Lets say homeowner owes $600k, current value is $400k.  If bank reduced principal to $475-$500k I bet that homeowner would stay.  Problem here is moral hazard, if banks did that everybody would want to reduce their balance and even though things seem bad it is still less than 10% of all U.S. homeowners that are behind on their mortgage payments.  Its a tough situation out there with no easy answer but saying that short sales lead to mortgage fraud is ridiculous.  For Keith up above, I feel your pain but you need to understand that there are all sorts of games being played by REO listing agents too and I can assure you that not all offers always go to the banks when they foreclose.  What about the assignment of REO's in the first place?  While I've seen diligent former colleagues forced out of the business, forced to go sell gym memberships or some other deadend job, a select few are getting phat and have hundreds and hundreds of listings.  Many of these REO listing agents are impossible to get in touch with and don't even allow you to call them for status (they actually put this in the private remarks section of the listing).  I spoke with an internal asset manager from countrywide about this once at an REOMAC conference in Irvine and he got huffy with me as if I was accusing him or his company of not being fair with their distribution of REO's (he obviously had been asked about this before).  Sorry the REO process has just as much corruption (if not more) than the short sale process.