A new study indicates that banks and distressed homeowners will lose $375 million this year to white collar criminals.
These criminals, disguised as real estate agents and property investors, earn their ill-gotten gains by making “short sales even shorter.” Here’s how it works:
An agent lists a home that is “underwater.” That is, the mortgage balance on the home is higher than the home’s value in today’s real estate market.
They offer the home for sale and find a solid buyer at today’s fair market value. Then the investor steps in, making a much lower offer on the house, which is then presented to the bank for approval. In order to convince the bank to approve the sale, the agent prepares a broker price opinion (BPO) to substantiate the low price.
Because the investor buyer is able to close with cash, the short sale makes its way through the system quickly. Then the agent contacts the legitimate buyer and sells the home – with neither the distressed homeowner nor the bank realizing that they existed.
According to an article in the Wall Street Journal, this kind of white color crime is rising at the rate of 25% per year, and while a few cases are going to trial, the crime is going largely undetected. Investigators are looking more closely at homes that re-sell within 6 months at a price increase of 40% or more, but many of these criminals are posting gains of “only” 20-30%.
This kind of fraud does require cooperation from all parties, and in some cases, bank asset managers are suspected of complicity.
Are some homeowners also going along with the fraud? It’s possible, especially in states where banks are not allowed to come back on the homeowners for the deficiency. (A deficiency is the difference between the mortgage loan balance owed and the dollars the bank realizes after all costs of the sale are deducted.)
Banks are the target in this fraud. However, in states where deficiency judgments are allowed, distressed homeowners are the true victims. After the short sale closes, the bank can sue for a deficiency judgment, and the homeowner can be saddled with a crippling debt that can prevent them from ever owning another home.
These criminals are taking a huge risk in the name of fast profits. Federal bank fraud carries a penalty of up to 30 years in prison on top of fines and restitution.
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