Short Sale Fraud a Major Problem in the Housing Market

July 14th, 2011 Brock Hailes Leave a comment Go to comments

Mortgage lenders are being ripped off in droves by investors committing short sale fraud, according to a new CNN Money article. However, as noted in the article, lenders arent the only ones suffering. Homeowners and the market as a whole are taking a big hit from the new scam.

What is Short Sale Fraud?

Short sale fraud has become a major issue in the U.S. housing market. It occurs when scam artists, usually real estate agents, secure a legitimate bid on a home that is considered a short saleone where the borrower owes more on the mortgage loan than the home is currently worth.

The agent arranges the bid on the home on behalf of an investor at a low price. Because the bid is coming from an agent, the lender assumes this is the highest bid theyll receive. The lender doesnt know that the investor bidding (which is sometimes owned by a separate real estate company) plans to resell.

After purchasing the home at the lower price and asking the lender to forgive the remaining balance, the first agent makes his commission. Now the investor turns around and sells the home for up to $50,000 moresometimes within hoursto a true home buyer who may have already been lined up before the short sale deal.

Short Sale Fraud Hurts Homeowners Most

According to CNN Money, short sale fraud has become commonplace, largely due to the ailing housing market. With more homeowners than ever looking for a short sale to get out of their underwater mortgages, scammers have been looking to make a quick buck.

Figures from the National Association of Realtors found that while 13 percent of all existing home sales are short sales, fraud associated with short sales comprise half of all fraud investigations for mortgage companies. They have become so common, in fact, that its difficult for legitimate short sale transactions to go through.

This has a tremendously negative impact on homeowners looking to sell because, in many cases, it forces them into foreclosure.

Law enforcement is pushing to crack down on agents who commit short sale fraud. In Bridgeport, Conn., two agents were arrested for netting more than $180,000 in fraud. But many are still concerned that, despite the fact that some scammers are being caught, there are always more willing to take their place.

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