In an August study, property data provider CoreLogic estimates that short sale fraud could cost mortgage lenders $310 million this year alone and recommends some changes in lender practices that could reduce those losses. Unfortunately, additional fraud prevention steps could further slow the pace of short sale approvals for homeowners desperate to get out of underwater mortgages.

According to the study, the number short sales has more than tripled since 2009 as the housing crisis has dragged on. More than half of the approximately 400,000 short sales in the past year have occurred in Florida, Arizona, California and Texas.

CoreLogic estimates that fraud costs lenders an average of $41,000 per short sale -- with one in 53 of the transactions involving fraudulent activity such as property flipping or misrepresentation of offers.

Tactics Used in One Common Short Sale Fraud

Here is how the study describes one common type of short sale fraud involving offer misrepresentation by a real estate agent:

  • A real estate agent is hired to sell a home in a situation where the bank has agreed to a short sale. The homeowner owes $150,000 on the mortgage.
  • The real estate agent receives a legitimate offer of $120,000 for the property.
  • The real estate agent then has a partner in the scam submit an offer of $100,000 for the property.
  • The real estate agent withholds the legitimate offer from the bank, forwarding only the lower offer. The bank accepts and the home is sold to the scam artist for $100,000.
  • The real estate agent and the other scam artist resell the home for $120,000 to the buyer who had made the legitimate offer, and the two split the $20,000 in profit.
  • The bank writes off a total of $50,000 on the short sale -- $20,000 more than necessary.

To reduce the risk of losses to short sale fraud, CoreLogic recommends that banks add these requirements to the short sale process:

  • Careful review of all documentation, particularly resale disclosure details
  • Confirm the accuracy of arm's-length disclosures for all parties involved
  • Require the borrower to confirm that he or she is not aware of any other parties or contracts associated with the property
  • Ensure the borrower's reported income is accurate
  • Apply due diligence to verify the property's current market value
  • Verify that any significant renovations claimed were actually completed
  • Ensure that the seller is the current owner of record

Sadly, fraud of this magnitude has the potential to increase the time banks take to approve short sales and could derail the process for many homeowners who are facing foreclosure and have a legitimate but time-limited offer on the table.

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