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Flopping: Short Sale Scheme Swindles Mortgage Lenders

Written By:
October 25, 2012 at 12:08 AM

Flopping: Laters Short Sale Scam

The real estate analytics firm CoreLogic estimates that over 11 million homeowners have underwater mortgages – borrowers owe more on their home loans than what their properties are worth. In late 2011, many of these homeowners made a move to get from under the burdens of an underwater mortgage by using the strategy of a short sale.

A short sale occurs when the homeowner list the property for sale but receives an offer that is lower than the balance on the home loan. The homeowner accepts the buyer’s offer and wants to get out with no foreclosure and $0 debt.

However, to consummate a legally binding sales contract, the mortgage lender must agree to accept less than what the borrower owes on the mortgage and sign the offer to purchase. By signing off on the offer to purchase, the bank forgives the remaining balance on the home mortgage.

The seller benefits by getting relief from a burdensome home debt and avoiding the negative ramifications of a foreclosure on their credit report.

Requests for bank approvals of short sales started trending up in late 2011. In January 2012, short sales comprised 23.9 percent of existing-home purchase. The percentage of short sales has decreased with the improvement in the housing market. According to the National Association Realtors (NAR), short sales made up 11 percent of existing -home sales in September.

Short Sale Fraud

Scammers are prevalent in the mortgage industry. These individuals, who make a living defrauding homeowners and banks, have developed a scheme to take advantage of the millions of homes with underwater mortgages and the short sale process.

The latest sting is called “flopping.”

Under normal short sale circumstances, the borrower tries to obtain as high a price as possible for the home, which increases the probability of the bank accepting the buyer’s offer. Flopping occurs when the home seller works with a buyer (co-conspirator) and accepts an unusually low price for the property.

If the mortgage lender agrees to the offer price, the accomplice closes the deal, flips the home, and turns a hefty profit.

Tactics Used By Floppers

The number of short-sale transactions has increased more than three-fold in the past 36 months. Earlier this year, the NAR projected 546,500 short sales by the end of the year. The onslaught of short sale requests has made the banks an easy target for this type of fraud.

The perpetrators use methods like ripping out appliances, taking cabinets doors off the hinges, or creating water damage to walls and ceilings. Some partners in crime have gone as far as to spray possum urine around a home, close the windows, and fire up the heating system.

In addition, many schemers work with dishonest home contractors who provide inflated repair estimates in exchange for a piece of the action.

Fraudsters Receive Significant Gains

In a recent Florida case, the court convicted three people of conspiracy to commit wire fraud and making false statements to financial institutions. The three individuals targeted low income homeowners and convinced them to sell their homes to a straw buyer. The buyer would pay the mortgage payments for a few months.

At some point, the straw buyer stops paying the mortgage and eventually requests a short sale of the property to another collaborator.

This person would sell to another conspirator for a substantial profit. In total, banks lost about 80 percent of the outstanding mortgage amount on the original home loans. The fraud involved $1.5 million in mortgages.

CoreLogic estimates that nearly two percent of the short-sale activities in 2011 consisted of flopping. These transactions were labeled as suspect because the buyers flipped the homes the same day and received an average profit of 34% or $55,000.





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