Short-sale ‘flopping’ may be next big housing scam

Reporting from Washington —  Lenders lose an estimated $310 million annually in undervalued short-sale transactions, according to a study released in August.

But homeowners lose millions too, especially when unscrupulous loan brokers, real estate agents and lawyers are involved.

Of the more than 5,000 complaints in the PreventLoanScams.org database, between 1,400 and 1,500 indicate that a lawyer was involved, according to Yolanda McGill, who manages the Loan Modification Scam Prevention Network for the Lawyers’ Committee for Civil Rights Under Law.

“As much as it pains me to say this, a lot of attorneys are involved” in loan modification rip-offs, said McGill, who also is the liaison between the Lawyers’ Committee and federal, state and local law enforcement authorities with respect to mortgage scams.

Often, the unethical professionals are the same mortgage brokers, realty agents, appraisers, lawyers and title agents who helped their now desperate clients buy their currently undervalued homes in the first place. And she believes that they now have their eyes on short sales.

Short sales, she said, “are the next big scam coming.”

A short sale is a straightforward transaction in which the lender gives its blessing to a borrower to sell the property for less than what he owes on the mortgage.

Let’s say that, because of declining property values, the house is worth $150,000 but the borrower still owes $170,000. Rather than engage in a long, drawn-out foreclosure process in which a disgruntled owner might trash the place, the lender would agree to take a $150,000 payoff and be done with it.

Yes, the lender is out $20,000. But the company probably would have spent far more money pursuing a foreclosure, which could take several months, a period during which the lender receives no payments. So a $20,000 loss might be the cheapest way out, for the lender and the borrower.

Lenders lose more — an average of $41,500 in one of every 53 short-sale transactions, according to the study by CoreLogic — when fraud is involved.

Short-sale swindles already have a name. It’s called “flopping,” and it’s just the opposite of “flipping,” the sometimes-fraudulent process that was popular when housing values were rising on almost a daily basis.

In an illegal flip, the scam artists inflate the value of the property so the mortgage company will lend more than it’s worth. Then they work a deal with the seller to pocket the difference.

A flop works the other way. Rather than inflate the value of the house, they deflate it so the lender will permit the borrower to sell the place for far less than what it’s worth. Then the buyer or realty broker, who is often part of the fraud, sells it to someone else at its true value and splits the profit with others in on the deal.

Here are some tips for consumers involved in loan modifications or short sales:

• Be alert to who is counseling you. Don’t respond to unsolicited e-mails, and don’t call the numbers on roadside signs. Trust only your closest advisors. Or contact a counseling agency approved by the Department of Housing and Urban Development. If a counselor is not HUD-sanctioned, look elsewhere.

• Just because you see the letters LLC after the name of a firm or individual doesn’t make it or him legit. Check them out with the state authorities to make sure that they are registered or licensed, and with your state consumer-affairs agency to see if any complaints have been lodged against them. Ditto for your real estate agent.

• Beware of claims such as “We win 99% of our cases” or “We don’t take no for an answer.” It just doesn’t happen.

• If someone suggests that the lender will agree to an offer that is far below what your house is really worth, even in the current poor market, you should be wary. The agent, in conjunction with someone else in the transaction, may have a buyer waiting in the wings at a higher price.

lsichelman@aol.com

Distributed by United Feature Syndicate.