I received a few emails today with regard to what seems to be an update to the Freddie Mac website. More specifically, Freddie Mac has updated one page of their website which discusses what they call Short Payoff Fraud.
I reviewed the site, and am not surprised by either their definitions or their solutions. In a nutshell, here is what Freddie Mac has to say about Short Payoff (or Short Sale) Fraud:
Freddie Mac’s Investigation Unit describes Short Payoff Fraud as “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” The website goes on to explain that “Misrepresentations in these schemes may include the buyer of the short payoff property, a subsequent transaction at a higher price, and/or the selling borrower’s hardship reason used to qualify for the short payoff. In many instances, the short payoff fraud will involve a facilitator, engaged by either the listing agent or the selling borrower, to assist with negotiating the transaction.”
The site goes on to explain that an “A to B, B to C” transaction with a same-day closing would be one possible example of a way that Short Payoff Fraud is committed.
In order to prevent incidents of Short Payoff Fraud, the website describes many techniques that can be employed: carefully reviewing borrower information, ordering a BPO for the property, use of IRS Form 4605-T, etc.
Quite frankly, I am not surprised by anything that I read on the Freddie Mac site. I am also not surprised that short sale investor buyers are reacting to this information,
As Realtors®, we have always been taught about the extreme importance of full disclosure. Even though many will argue that the FHA has now waived the 90-day flip rule which would acknowledge their awareness of this business practice, it seems that full disclosure to (and by) all parties including the lender is of supreme importance when working a short sale transaction. What say you?
P.S. Please remember that I am not an accountant or an attorney (nor do I play one on tv) and the information presented on this page is provided for informational purposes only.