Distressed homeowners with underwater mortgages desperately need alternatives to foreclosure, and short sales have been one of the options that has worked for many. Since the housing and foreclosure crisis began, however, short sales have been a challenge to arrange. Bank delays and securitized mortgage investors' refusal to cooperate during the approval process regularly slow the down short sales so much that the transactions fall through. Short sale fraud adds to the cost of the transactions, making them less appealing to banks.

Lawmakers and advocates for homeowners have been urging banks to step up their game in offering short sales, often pointing out that it's in the banks' own best interest. Taking a loss on a short sale is often less expensive for a bank than going through the foreclosure process -- as long as delays and fraud don't force down the selling price. Recently, the big mortgage lenders have started to come around, with Wells Fargo publicly calling for a faster short sale process.

The biggest problem has been how to speed up the process without opening it up to even more fraud. To solve it, a company called Woodward Asset Capital is launching a new service in April called VerifiedShortSale.

Short sale "flopping" scams drive down home prices, hamper foreclosure prevention efforts

A type of short sale fraud called "flopping," which we described in a post on August 18 of last year, is estimated to have cost lenders around $310 million in 2010, with an average loss of $41,500 per occurrence.

In a short sale flop, a real estate agent for the homeowner arranges for a straw buyer to make an offer for a short sale and presents it to the bank. What the seller and the bank don't know is that the agent already has a higher offer from another buyer. Once the short sale goes through, the straw buyer and the agent sell the house to the second buyer for a profit, and the bank takes a bigger loss than it would have if the seller's agent had been honest.

"The biggest problem in this market is that agents aren't working for the banks, and they realize that," Woodward Asset Capital's president Ron Jasgur explained to HousingWire.

To remove the incentive for flopping from the process, VerifiedShortSale is set up so banks receive short sale offers directly from buyers' agents, not seller's agents.

"With our software, flopping virtually disappears, and every sale approval can be defended without question," Jasgur said. "No longer is the listing agent able to hold anything back from the bank."

Having a third party vet the offers should also shorten the approval timeline, because lenders and loan servicers often can't move forward with short sales unless they get the approval of investors who partially own the mortgages.

"This technology finally brings the time line for resolving an approved short sale in line with that of a private sale," said Jasgur. "The quicker the sale, the smaller the loss."

Source: HousingWire, "Woodward Asset Capital moves to block short sale flopping," Christine Ricciardi, March 22, 2011