Freddie Mac’s Surprising Definition Of Short Payoff Fraud
Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors
Short Sale Flip Fraud – While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. The latest opinion released from Freddie Mac on short sales presents legal and practical issues for short sale investors.
On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” Essentially, the article stated that a short payoff or a short sale can be considered fraudulent if the lender agrees to a short sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. This could mean problems for investors who have been short sale flipping, or negotiating short sales with banks and then selling the properties at a profit.
The Freddie Mac poster went on to describe scenarios and red flags for short payoff fraud. The scenario was set up around a short sale negotiator or facilitator that engineered a short sale of an 80,000 dollar home with outstanding debt of 100,000 for 70,000 dollars. In the scenario, the facilitator fails to notify the bank he has a higher offer, 95,000, on the house. The second the facilitator puts his profits in his pocket, Freddie Mac considers him guilty of fraud because his negotiations caused Freddie Mac to ultimately take a “larger than necessary” loss on the sale of the property.
The article urges buyers, sellers and lenders to be on the lookout for short payoff fraud red flags. Freddie Mac considers entities buying property, borrowers who are suddenly in default and borrowers who have not reneged on all of their loans to be red flags for short payoff fraud. The article also says that resale options in contracts can be a red flag.
Buyers, sellers and lenders all are encouraged to report short sale fraud the second they become aware of or suspect a second purchase contract for a higher price. It may not be considered breaking the law, but it certainly looks like Freddie Mac wants to make short sales as difficult as possible for real estate investors.
