California Real Estate Fraud Report

Analytics firm CoreLogic has completed a study of short sale fraud and is warning consumers of its findings:

• 1.9% of all U.S. short sales over the past two years — roughly 15,000 nationwide — are fraudulent. That’s one out of every 53 deals.
• That banks and other lenders incur about $310 million in “unnecessary losses” each year because of short sale fraud.

Short sale fraud can take many forms. One type, explained in the CoreLogic study, occurs when a dishontest listing agent colludes with a buyer to purchase a home below the market value. Usually this means failing to present higher offers to the lender for its approval. After the short sale is approved, the agent and buyer resell the property to a buyer who had made a higher offer.

Note: if lenders are doing their due diligence, a property evaluation by a licensed appraiser should raise a red flag about the low offer.

Read the full article in the Orange County Register / OC Register.

If home buyers thought the near-collapse of the real estate market would make purchasing a home any easier, many by now have had second thoughts. The steep drop in prices in most of the communities in Los Angeles County has not made purchasing a home as easy as one would think. Why not? Because fraud is still prevalent in real estate transactions; the schemes are just different than before the bubble began its burst in 2007.

Read the full article by Monique Bryher in the KPCC Freeway.

San Diego District Attorney Bonnie Dumanis told her audience during a recent public safety meeting that her office has almost doubled its caseload real estate fraud related cases. Her office filed 39 real estate fraud cases in 2009, compared to 20 cases in 2008.

The number of defendants, however, has practically tripled due to the focus on foreclosure fraud and loan modification fraud cases, which tend to have both more victims and more defendants.

Read estate fraud includes not only fraud in the purchase/sale of a home, such as intentionally failing to disclose material facts, but mortgage and loan fraud, appraisal fraud, foreclosure fraud, title fraud, escrow fraud, and now short sale fraud and REO fraud. The latter two crimes typically happen when the listing agent does not submit all offers to the bank or servicing company so that the offer of the agent’s own buyer becomes the highest or best offer. Expect to see many of these cases in the news in the near future.

Read the full article in the Voice of San Diego.

California Attorney General Edmund G. Brown Jr. today issued a press release that warns of a rise in short sale fraud.

Just as the federal government’s program to encourage banks to extend distressed homeowners loan modifications spawned an entire, mostly sordid, industry of loan modification consultants and foreclosure consultants, the new HAFA initiative (Home Affordable Foreclosure Alternatives Program) is proving to be a magnet for individuals claiming to be “short sale negotiators”.

Says Brown: “While short sales can provide homeowners with a last-ditch alternative to foreclosure, this market is rife with scam artists. Homeowners and buyers, agents, and lenders should beware of short sale negotiators who operate without licenses, use straw buyers or charge illegal fees.”

As a note, I believe a lot of the short sale fraud being perpetuated involves crooked real estate agents. One such agent who worked for Coldwell Banker is Sergio Natera, who was prosecuted and pleaded guilty in Connecticut to defrauding Regions Bank in a short sale fraud scheme in which Natera flipped a property he had purchased through a short sale to the higher bidder on the property. Read the press release by the U.S. Department of Justice in which Sergio Natera’s plea is described.

Brown’s press release states the the California Department of Real Estate (DRE) is currently investigating more than 40 complaints of short sale fraud, whereas there were none just three months ago.

Consumers: use common sense when hiring people to assist you. Like any real estate transaction, your “negotiator” should be licensed. Ask for the license number, look it up, and make sure that the license and the person are one and the same. Also, never, never pay upfront fees to parties unless they have an advance fee agreement registered with the DRE.

Read the press release from AG Brown’s office.

It was bound to happen.

As the real estate market has changed, so have the schemes being concocted by criminals, some of them real estate professionals.

Short sale fraud can occur in a number of forms. The primary form occurs when the listing agent (Realtor) for a property being marketed as a short sale receives multiple offers and does not submit the highest or best offer to the bank or loan servicer. That is because either the offer submitted is by the agent’s own buyer, in which case the agent is motivated to receive both the seller’s and buyer’s sides of the commission, or the agent has been bribed by either the buyer or the buyer’s agent to submit that buyer’s (lower) offer and to “forget” to submit the other offers.

If there are any agents reading this posting, most of you have probably experienced being told your own offer was not accepted and yet seeing the property close at a lower sale price, again, often with the listing agent representing the buyer. There is nothing that can be done unless the buyer’s agent can somehow find the employee inside the bank that negotiated the short sale. But banks intentionally make it difficult to find these employees.

I also know from personal experience that even the banks’ own fraud departments have little to no interest in investigating possible short sale fraud. In my transaction, the lender was Countrywide and the servicer was Bank of America. I spoke with and emailed one of the managers at Bank of America’s fraud department. She never followed up and acted irritated when I followed up with her to ask why she was not initiating an investigation.

Read an article about this type of short sale fraud, called “flopping”, in Bloomberg Businessweek.

A major dog fight is underway, as licensed appraisers and real estate agents battle for business under the Obama Administration’s new Home Affordable Foreclosure Alternatives program (HAFA), part of the Making Home Affordable program (MHA). HAFA is scheduled to begin April 5, 2010.

Maggiano, director of policy at the Treasury’s Homeownership Preservation Office, the purchaser of a home that is being sold as a short sale must sign a Short Sale Agreement (SSA) as well as a sales contract attesting that transaction is an arm’s length one, meaning that they buyer and seller are unrelated by family, marriage or commercial enterprise.

[Note: it is not uncommon that homeowners in distress find a "buyer" for their homes who fits into one of the mentioned categories, who then either rents or sells the property back to the original party, who gets a new, often highly-discounted mortgage courtesy the lender and taxpayers. And yes, real estate agents who facilitate these transactions know exactly what is being done.]

Under HAFA, the Treasury Department requires that the new homeowner may not sell, aka “flip”, the property for 90 days and the lender must obtain an independent property valuation before agreeing to the sale.

The Real Estate Valuation Advocacy Association (REVAA) asserts that real estate agents can capably provide home valuations in the form of Broker Price Opinions, aka BPOs. The Appraisal Institute counters that not only are Realtors not trained to the level needed to perform an accurate property valuation, that sometimes the agent has a conflict of interest in that they are hoping to either get the listing for the property or bring their own buyer to make the purchase.

The National Association of Realtors also has an explanation of HAFA and HAMP and the guidelines for both on its website.

Read the original articles here and here on HousingWire.

The Federal Financial Institutions Examination Council, aka FFIEC, is a federal interagency organization which is “empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) and to make recommendations to promote uniformity in the supervision of financial institutions.”

The FFIEC has just updated its white paper on mortgage fraud and deterrence. Important topics for consumers and financial professions are its chapters on reverse mortgage fraud (a new addition), as well as property flipping fraud, short sale fraud, loan modification fraud and other schemes.

Read the FFIEC white paper on The Detection and Deterrence of Mortgage Fraud against Financial Institutions. There is also a link to the white paper on the blogroll to the right of this column.

To learn more about the FFIEC, click here.

That’s strong language. Unfortunately, many real estate agents and their buyers, after being shut out of numerous purchases of homes, are concluding just that.

In a conventional sale of a residential property (but this applies to commercial and industrial too), the buyer’s agent, also known as the “selling agent”, presents a written offer to purchase to the listing agent. The listing agent then presents that offer to the seller(s), who can accept the offer, make a counter-offer, or reject the offer outright.

Conventional sales are a rare beast these days, replaced in disproprtionate quantities by short sales and REOs, both of which present opportunities for less-than-ethical behavior by some listing agents, along with their sellers. In some neighborhoods in the San Fernando Valley, I’ve calculated that 93% of the properties currently listed, are foreclosure properties, either short sales, or REOs.

In contrast to the above description of a conventional sale, both the short sale and REO (Real Estate Owned, bank-owned properties) involve negotiation with a bank, lender or servicing firm that represents an investment bank, e.g., Deutsche Bank. Under such circumstances, neither the buyer nor his/her agent has the ability to meet the seller/bank. They therefore have no assurance that their offer was actually transmitted to the lending institution for consideration.

Why, do you ask, wouldn’t the listing agent transmit all offers - especially when there is multiple bidding for a property - to the seller/bank? There is only one reason: the listing agent has his/her own buyer and wants to “double pop”, or collect both commissions. If the listing agent’s own buyer does not have the highest offer, s/he moves their buyer to the top of the pile by not transmitting all the offers. The bank doesn’t know, and the other buyers and their agents don’t know either. They’re just told their own offer was rejectd. Only after escrow closes, when they see that the selling (buyer’s) agent was also the listing agent, and the sale price was lower, do they realize what happened.

What next? What can buyers who have been defrauded out of a purchase do? Very little, for the most part. Most banks hide their asset management (REO) and short sale departments because they don’t want contact with the public. Even their fraud departments show little interest in following up on complaints by jilted buyers or their agents. And the listing agent, who was the doorkeeper to the entire transaction, certainly won’t confess to his/her tactic.

For another story on buyer frustration with short sales, see this in the San Bernardino County Sun. There is a brief paragraph with me at the end of the article. The newspapers’ editors apparently didn’t want to touch the topic of real estate fraud.