As short sales absorb a larger role in foreclosure prevention, concerns about possible increased occurrences of fraud persist. From valuation fraud to post-transaction flipping, there are several stages in the short-sale process during which a servicer must be especially vigilant.
‘My staff puts a lot of focus on making sure it's an arm's-length transaction,’ says Jon Meade, vice president of loss mitigation at Fifth Third Bank. ‘We're not looking to take a short sale so your brother can buy it and ultimately give it back to you.’
The federal government's short-sale program, Home Affordable Foreclosure Alternatives, explicitly forbids flipping within 90 days of the short sale's closing. Prevention boils down to knowing the participants – brokers, buyers and sellers – involved.
‘What you'll really ultimately see is an additional layer of inquisition,’ says Jim Satterwhite, executive vice president of Infusion Technologies, parent company of National Quick Sale.
Bank of America has implemented fraud controls based upon some of the common items its negotiators know to look for, according to Matt Vernon, the company's executive in charge of real estate owned (REO) and short sales. Verification that a sale is a bona-fide transaction is built into negotiators' internal workflow, he explains.
Bundled-service providers have begun to offer ‘flip watching’ as part of their cradle-to-grave short-sale services. Fifth Third's staff already pulls down title for a sample of its short sales six months after closing, Meade says. Although he's seen few flipping cases to date, Meade says the process is a preventative measure that can help identify fraudulent behavior going forward.
To police flipping activity, servicers need a mechanism for searching deeds on a regular basis, adds Scott Gillen, senior vice president at Stewart Lender Services. But not every quick re-sale of a property is indicative of fraud or a questionable relationship between the buyer and the seller; there are prudent investors who buy properties at a discount and make the requisite repairs before reselling in a shortened time frame.
‘That's all part of the solution,’ Gillen explains.
When it comes to broker selection, there are two schools of thought, he adds. One mentality advocates that servicers select asset-management-type brokers with whom they're familiar. The other way of thinking precludes servicers from coaching borrowers on which broker to list the property.
‘You've got to be careful not to become party to the transaction,’ says Meade. ‘We try not to get involved with helping them set the price; we think it puts us out there for exposure.’
Fifth Third, however, does educate borrowers on the need to find an agent who can list the home at a price that's reflective of true market value. Bank of America uses a similar tactic.
‘Our guidance to a homeowner is to find a business partner – i.e., Realtor – who has a track record of facilitating short-sale transactions,’ Vernon says. ‘They are not the average transaction because of the complexity based upon the negotiation process, so clearly, we would recommend that they find a Realtor who has a certification or capability in the short-sale process.’
But for property flipping to hold value for fraudsters, there must be an opportunity to acquire the property at less than market value.
‘The highest opportunity for fraud is to have a manipulated sale where a $200,000 house sells for $180,000,’ says Chad Neel, president and chief operating officer of LPS Asset Management and Field Services. ‘The most important thing is that you get market value.’
(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at email@example.com.)