If you are a real estate investor, then you need to stay up to date on the details of REO and short sale fraud – as much because you could be inadvertently of it as because you might fall victim. Thanks to the constant revision of what defines “fraud” in the housing market, the definition of mortgage fraud is constantly changing. Nowhere is that truer than in short sales and the REO space, said Rob Hagberg, associate director of fraud investigations at Freddie Mac [2]. He warned recently that “this area is ripe with fraud” and said that although servicers have “adapted” to some fraud schemes and are getting better at detecting them, “schemes continue to evolve as fraudsters find new ways to manipulate sales.”

Sometimes, this adaptation means that practices that used to be fairly commonplace are now questionable behaviors. For example, short sale “gurus” used to encourage investors to fail to repair cosmetic problems on potential short sale properties in order to obtain a lower valuation on the property. This might mean not replacing cabinet doors on cabinets or failing to broom-clean before bringing in a broker to get a price opinion. Now, however, those types of behaviors are considered fraudulent, says Hagberg, who calls them “reverse staging” and says that they amount to “manipulate[ing] MLS data.” He also mentions a new trend called “short sale and stay” in which someone known to the current owner of a short sale property purchases the home via short sale and then allows the original owner to remain in the home. Sometimes wives will even use their maiden names to accomplish this if the homeowners are unable to refinance in a traditional manner.

The desire for speedy transactions is one reason that REO and short sales are so susceptible to fraud and why the definition of fraud changes so rapidly in these spaces. For example, property management firm LRC Asset Management recently rolled out a program designed to expedite the default servicing side of this business to 180 days, but the company also had to roll out a complementary program designed to determine occupancy for REO properties in order to combat reverse staging and deliberate code violations[1]. LRC also hopes that the program will help prevent investors from flipping short sales for too much profit; many lenders consider a profit greater than 20 percent on a short sale – or garnered in fewer than 90 days – to be evidence of fraud.

With all these evolving definitions for fraud and changing policies on what is and is not acceptable in the REO and short sale space, are you still involved in this aspect of real estate? Do you think that the new definitions of fraud are reasonable?


[1] http://www.housingwire.com/fastnews/2013/05/07/lrc-asset-management-launches-program-improve-reo-timelines-reduce-fraud

[2] http://www.dsnews.com/articles/reo-short-sale-fraud-continue-to-evolve-2013-05-10

by Carole VanSickle