A short way to short-sale fraud

New York /
Jun.June 03, 2011 12:00 PM

Are banks and distressed home sellers getting rooked on a massive scale in the booming short-sale
arena — leaving hundreds of millions of dollars on the table for white-collar criminals?

A comprehensive new study estimates they will lose more than $375 million this year alone when they
sell undervalued houses to tag teams consisting of real estate agents and investors. Worse yet, the trend
appears to be growing at the rate of 25 percent a year.

CoreLogic, a large real estate and mortgage data research firm headquartered in Santa Ana, Calif.,
studied 450,000 short-sale transactions across the country during the past two years, and offered these
real-life examples of how lenders are losing big bucks:

— A house in Kings Beach, Calif., was purchased near the height of the boom in 2005 for $530,000. On
Oct. 28, 2009, it was sold in a short sale — an arrangement in which the lender allows the delinquent
owner to avoid foreclosure by selling to a third party — for $247,500 to an investment group. Later that
same day, the investors resold the house to a non-investor purchaser for $375,000. This produced a
quick $127,500 profit — a 52 percent gain for the investment group in a matter of hours.

— A house in Gilbert, Ariz., sold for $400,000 in 2006. On March 2, 2010, it was bought in a short sale by
investors for $220,000 and resold the same day for $267,500 — a gain of $47,500.

How do investors manage to turn such quick profits? Are they just super-sharp shoppers or is there
something else going on? Law enforcement and banking industry experts say it’s frequently fraud,
and it works like this: Local real estate agents partner with investor groups. The agent’s job is to spot
borrowers in financial distress — usually people underwater on their mortgages. They persuade the
homeowners to sell to investors in a short sale at a low price. Then they contact the bank with the
investors’ short-sale offer.

Meanwhile, the agent finds legitimate buyers who are willing to pay more for the property, but the
agent never presents their offers to the bank. To back up the investors’ lowball offer, the real estate
agent produces an appraisal or a “BPO” — a broker price opinion of the distressed home value that
confirms the low valuation. The bank then sells to the investment group. After the closing, the investors
sell the house to the legitimate purchasers at the higher price, and the real estate agent and the
investors split the profits.

According to the CoreLogic study, 65 percent of short sales that are resold within six months for profits
of 40 percent or higher are “suspicious” — with a significant possibility the lender accepted a low payoff.
Most of these transactions go undetected by the banks being defrauded, but some lead to prosecutions
and convictions.

For example, Connecticut real estate agents Anna McElaney and Sergio Natera currently are awaiting
sentencing hearings in July and October in connection with guilty pleas in federal court to short-sale
bank fraud. According to the U.S. attorney’s office in Connecticut, McElaney and Natera participated in a
scheme in which Regions Bank, headquartered in Alabama, agreed to a $102,375 short sale on a house
it financed in Bridgeport, Conn. The buyer was BOS Asset Management LLC, an investment company
controlled by Natera. Unknown to Regions Bank, however, listing agent McElaney had earlier received a
signed purchase contract from a private buyer for $132,500. After closing at the lower price, BOS resold
the property to the private buyer, yielding Natera and McElaney a fast $30,125 profit.

The original federal charges against the two agents alleged short sale frauds on three other houses,
including properties financed by Wells Fargo Bank and a mortgage unit of the global financial services
firm, Credit Suisse. The guilty pleas, however, solely involved the Regions Bank house in Bridgeport.

Though banks are the primary victims in short-sale scams, homeowners can be hurt as well. When
distressed owners are pressured to sell to investor groups for less than the highest offer available, they
end up deeper in debt to the lender. In the majority of states where banks can pursue borrowers for
mortgage balance deficiencies following a foreclosure or short sale, homeowners may be subject to debt
collection actions by banks at the very time they can least afford it.

But the bottom line here, as seen in the Connecticut guilty pleas, is that short-sale thievery is federal
bank fraud. Real estate agents and investors who participate in these schemes risk prison terms up to 30
years, big fines plus restitution of the funds they stole.

Ken Harney is a syndicated real estate columnist.

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