California Commissioner Warns Against Short-Sale Fraud
California Real Estate Commissioner Jeff Davi warned the state's financial institutions in a fraud alert that his department has noticed a sharp increase in short-sale fraud. Lenders have suffered losses at the hands of both real estate licensees and unlicensed companies.
The California Department of Financial Institutions distributed the alert to the state's financial institutions. DFI spokesman Patrick Carroll said Davi asked the DFI for the assistance.
"In a majority of the short-sale fraud cases, it is the lender that has been the victim and suffered the financial losses," Davi said.
One of the major and recurring schemes is short-sale flipping, he said. Real estate agents and brokers defraud the short-sale lender using false appraisals to undervalue the property, sometimes even withholding better offers in favor of a personally secured straw buyer who has offered an artificially low price.
Without the knowledge of the lender, the listing broker will then resell the property for a profit, sometimes immediately after the close of the first transaction because he or she already has a buyer lined up at a higher price.
In another growing scheme, listing agents and short-sale negotiators require buyers to pay the negotiator's fee. The homebuyer's agent is told that if buyers don't agree to pay the negotiator's fee, the offer will not be presented. They are asked to sign an addendum agreeing to the terms.
If the requirement is being driven by the listing agent or the negotiator and is not a requirement of the seller, there is potentially an ethics violation and breach of the listing agent's fiduciary duty to the seller by stifling and limiting the presentation of legitimate offers, the fraud alert said.
Based upon anecdotal reports from lawyers and real estate practitioners, it appears that unscrupulous negotiators are purposely not sending the proper documents to lenders as part of the package of information requesting short-sale approval from the seller's lender. This practice of intentional concealment may lead to a finding of lender fraud, the alert stated.
Another variation on the theme is seen in agreements in which sellers are crediting buyers with so-called "nonrecurring closing costs," which are used to pay the short-sale negotiator's fee. Whereas the closing cost credit to the buyer is or may be eventually disclosed and approved by the short-sale lender, the ultimate payment of that credit to a third party is not. The payments often are not divulged on the HUD-1 statement until after the short-sale lender has approved all of the terms and the transaction has funded and closed.
"All of these incidences of fraud in short-sale transactions share the same theme-they revolve around and arise from the knowing failure to disclose material information to the short-sale lender. As a result, lenders are approving of sales based on false or omitted information," the alert said.