A short sale is one of the few good options for homeowners who are struggling with an underwater mortgage. It's also one of the few processes where the homeowner and the mortgage lender share the financial burden of a failed mortgage. It's often the least expensive way for banks to resolve a mortgage default since a foreclosure can cost a bank upwards of $50,000 to process.

While no one would call this a "win-win" for mortgage lenders and struggling homeowners, a successful short sale can make the best of a bad situation for both parties. The rise of short sale transactions has been one of the few pieces of good news during the foreclosure crisis.

As we've reported before, however, short sale fraud is also on the rise, and it's threatening what can be the last decent option for desperate homeowners.

Florida Has One of the Highest Levels of Short Sales in U.S., and Probably of Short Sale Fraud

According to the financial consulting firm CoreLogic, 55.8 percent of all short sales that took place in 2009 and 2010 occurred in four states: Florida, California, Texas and Arizona.

CoreLogic doesn't directly measure short sale fraud, but estimates its incidence by examining how soon homes are resold after a short sale transaction. This is because the most common type of short sale fraud involves a real estate agent arranging the initial sale to a straw buyer, then quickly arranging to resell the house to another party at a higher price.

This is fraud if the agent knew all along about the higher offer and didn't present it to the original homeowner and bank. Instead, the agent convinces the homeowner and bank to agree to a lower offer from the straw buyer. The straw buyer makes a profit reselling the house and the agent profits from both sales.

CoreLogic's vice president for fraud strategy Frank McKenna estimates that about 2 percent of the short sales completed in the last two years were fraudulent. However, a recent report by CoreLogic analysts indicates that fraud is becoming more frequent.

"It's happening a lot more in this market because there are so many more short sales," he told the New York Times. "There's more opportunity to go after the quick buck."

McKenna says the growing number of suspicious short sales might undermine the use of these transactions as an alternative to foreclosure, which would be unfortunate, since troubled homeowners and mortgage lenders have only recently reported some momentum in their successful completion. Getting bank approval for short sales had until recently been one of the more difficult challenges in resolving the foreclosure crisis.

However, John P. Bonora, a Ridgefield, Connecticut bank vice president, notes that CoreLogic does sell fraud prevention services to mortgage lenders. He's taking CoreLogic's warning with a grain of salt.

"I'd forward the report to my folks and say you should have some of these things in the back of your mind," he said. "But I don't think this report would deter us from doing a short sale."

Nevertheless, Bonora admits that the report will serve to make him more suspicious of real estate agents marketing themselves as foreclosure specialists.

"They're probably speaking with borrowers on a daily basis about foreclosures," he said. "And people are opportunists."

Sources:

  • "A Downside of Short Sales" (The New  York Times, September 10, 2010)
  • "CoreLogic Releases 2010 Short Sales Research Study" (CoreLogic press release, August 10, 2010)