Thursday, May 19, 2011

The Next Fraud Trend

From the Appraiser Buzz:
Interview with Ann Fulmer, Vice President Business Relations - Interthinx


FULMER: Fraud schemes are always mutating to take advantage of opportunities presented by the economy and lenders' operational processes. Now that lenders require fully documented applications there’s been a big increase in forged and fabricated documents relating to the borrower’s income and assets. There’s also been an increase in misrepresentations relating to occupancy as investors begin to move back into the market or try to obtain refinancing. The predominant for-profit schemes are default related and center on underwater borrowers and distressed properties. That’s why the biggest pain point for lenders today is short sale "flopping."

Flopping occurs when participants in a short sale withhold material information and/or manipulate the property’s exposure to the market in order to induce the note holder to accept a below-market price. In a for-profit flop, the motive is to increase the profit margin when the property is quickly resold at actual market value with minimal or no improvements. Here’s an example: Let’s say that the amount due on a note is $100,000, that the actual market value of the property is $80,000, and that the note holder is fraudulently induced to believe that the value is only $60,000. If the short sale goes through at the manipulated price, the seller’s deficiency and the holder’s loss are both increased by $20,000. The crook walks away with that amount as his profit.

BUZZ: What is the anatomy of a short sale fraud and what do appraisers need to look for?

FULMER: Flopping occurs in two phases. The first phase (A to B) is the acquisition of the property. Appraisers are not likely to be involved at this point because collateral value is usually established with a broker price opinion. Appraisers get involved at the B to C stage when they're asked to value the property for the end buyer (C). Red flags to look for include:

• Seller is not the owner of record
• Owner of record (distressed borrower) is the seller but he/she is not actively involved with the sale or no longer occupies the property (may indicate an unrecorded sale)
• Previous owner of record (the distressed borrower) remains in the property after the short sale
• Subject transaction is set to close less than 90 days after short sale with no apparent improvements or repairs to justify the higher resale price
• Liens or judgments were filed shortly before or after the short sale but there’s no evidence of repair
• Second mortgage (satisfied during the short sale) was back-dated and filed after notice of default
• Seller is a land trust (especially where transfer into trust occurred shortly before the short sale)
• Seller is an LLC
• The transaction is non-arms length (seller is a corporate entity/LLC owned by the real estate agent or broker or another participant in the transaction; seller and real estate agent or settlement agent have an on-going undisclosed business relationship; end buyer is a friend or relative of the seller, etc.)
• The same real estate and settlement agents are involved in the short and end buyer transactions
• The purchase contract:
- predates the short sale
- shows an excessive real estate commission, or a commission that is based on an amount that is significantly less than the purchase price (may indicate that the real estate agent is uncomfortable with the stated contract price)
- shows substantial fees are to be paid to a “negotiator” or “facilitator,” or for referral or management of the property
• The short sale was never listed in MLS
• The short sale was listed but the history (pre-short sale) shows only token exposure to the market:
- No photo, or only one photo that makes property appear very unattractive
- Minimal property description
- Listing was immediately marked “pending” or “under contract”
- Listing was “office exclusive” (only agents from listing office can bring offers)
- Property was coded for a different (usually inferior) neighborhood
- Property was listed in the wrong city
- List price was significantly lower than sale and list prices for comparable properties
• Comparable sales show signs of flopping/flipping and/or involve the same parties as in the subject transaction.

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Related article in LA Times

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