Freddie Mac Takes On The Short Sale Transaction

Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors

Short Sale Fraud – While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. The news from Freddie Mac on short sales could cause serious legal and practical issues for real estate investors.

The organization posted a new educational article on April 16, 2010 titled “Emerging Fraud Trends: Short Payoff Fraud.” The article described a new trend in short sale fraud that happens when a short sale buyer flips a newly acquired property to another buyer and “pockets the difference.” This is a serious yellow flag for short sale investors who make their living negotiating good short sale deals with banks, then selling their new properties to other buyers for 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. When the transactions close – in this case on the same day – and the facilitator pockets the difference, according to Freddie Mac he has just committed fraud because he withheld information about a higher offer and causes Freddie Mac to take a “larger than necessary” loss on the sale.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the property being an entity rather than a person. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.

Finally, sellers, buyers and lenders are all encouraged to report this short payoff fraud if they are aware of a second purchase contract for a higher price. This may not yet be a law, but the signs are not good when Freddie Mac has posted such a direct attack on short sale investors.