5. Short sale fraud
Fraud occurs in a short sale when a borrower purposely withholds mortgage payments, forcing the loan into default, so an accomplice can submit a “straw” short-sale offer at a purchase price less than the borrower’s loan balance.
Sometimes the borrower is truly having financial difficulty and is approached by a fraudster to commit the scheme. In all cases, fraud is committed if the financial institution is misled into approving the short-sale offer when the price isn’t reasonable and/or when conflicts of interest are not properly disclosed.
Best practices for prevention:
- Establish a short-sale policy and review/approval process;
- Obtain an appraisal or evaluation to determine the property’s market value;
- Determine if the sales transaction is arms length, and identify common surnames, telephone numbers, addresses, etc.;
- Obtain sworn statements from all parties, including the real estate agent, that the transaction is a true sale and the parties don’t know each other;
- Require the seller to vacate the property and certify that the seller will not occupy the home again for five years;
- Inform the seller that occupancy checks will be performed periodically;
- Verify the borrower’s reason for financial hardship (unemployment insurance, medical payments, divorce, etc.); and
- Include the FBI Mortgage Fraud Notice in loan documents.