Freddie Mac warns of the top four short sale fraud schemes

Portrait of a fraud, image by Don Hankins.

Freddie Mac sends out warnings

With short sale fraud on the rise, Freddie Mac has been getting a high volume of calls, so they are setting out to communicate with Realtor associations as well as individual agents about these fraudulent activities.

With 6.5 million Americans more than 30 days delinquent on their mortgage payments and recent reports that delinquencies rose in the second quarter of 2011, and Freddie Mac saying the volume of short sales they have processed in the first half of 2011 is up 31 percent over the first half of 2010, it is highly likely that fraudulent activity will increase as short sales and foreclosures remain a target.

Rigging sales and illegal flipping

Freddie Mac officials have noted that the rising fraud sometimes involves a failure on the Realtor’s part to disclose other parties involved in a transaction and that these Realtors “rig sales” at a low price and hide better offers from the distressed homeowner and even from Freddie Mac.

“Then, after the house is sold, the fraudster can flip it a few hours later for the better price and walk away with the profitable difference,” said Freddie Mac VP, Shelley Poland and Fraud Investigations Associate Director Robert Hagberg on Freddie Mac’s blog.

“By concealing the higher offer, short sale fraud worsens losses to home sellers, Freddie Mac, and taxpayers. It also throws another wrench into the housing recovery by undermining the trust and transparency at the core of any real estate transaction,” they continued.

Investigating the fraudulent acts

Freddie Mac has a unit dedicated to short sales fraud which is now the top priority of Director Hagberg’s unit. Poland and Hagberg said that the unit has “also added the perpetrators to our Exclusionary List – firms and individuals barred from conducting business with Freddie Mac – and worked with law enforcement agencies to prosecute them.”

The top four fraudulent trends

Manipulation is the name of the game as Freddie Mac notes Realtors involved in fraud manipulate bids, manipulate broker price opinions, manipulate flipping schemes and manipulate settlement statements.

As the unit investigated the fraud, specific trends emerged such as agents discouraging legitimate bids by putting in false offers on a property and making sure their accomplices get the property for a predetermined low bid. Other agents manipulate the listing price to make overstating repair costs to obtain an artificially low broker price opinion in order to manipulate the listing price.

Also on the rise is dirty flipping schemes wherein an agent buys a short sale from Freddie (or the banks) by using falsified loan documents and title documents, then selling the property to a legitimate buyer at a higher price, often within hours of closing.

Freddie Mac warns that some are altering the HUD-1 settlement statement to “skim away net proceeds” from the sale into their own pocket.

Dealing with short sale fraud

In addition to their Exclusionary List, Freddie Mac now requires all parties in any short sale to sign an affidavit, “attesting that it is a true arms-length transaction,” thus strengthening Freddie’s “legal path.”

“There are many conscientious real estate professionals who want to do the right thing. We often receive calls in our servicing, quality control, fraud investigation, outreach, and HomeSteps divisions from real estate agents who know they’ve seen something inappropriate and won’t look the other way,” the executives said. “They understand that real estate fraud turns a shortsighted profit at the cost of the public’s long-term confidence in homeownership and the housing industry.”