Short Sale Report 2010: Fraud, Forecasts, and More!

Came across this press release by CoreLogic which puts out a short sale research study with some very interesting statistics, the first of which has to do with short sale fraud, which we have talked about here before.

You can download the full PDF file, for free, by clicking this link HERE. It’s a very interesting and detailed read about the state of the short sale market.

On Fraud

The estimated industry financial impact of short sale fraud is $310 million annually with the risk of ‘unnecessary losses’ occurring in one in every 53 short sale transactions. The average amount of unnecessary loss is $41,000 per short sale transaction.

It’s an interesting statistic, and we wanted to know more about how CoreLogic arrived at this number.

The definition CoreLogic uses to define Short Sale Fraud is:

“where parties involved in the process manipulate the short sale transaction and/or subsequent
transaction for a profit.”

They have interesting logic in the article that essentially correlates duration after a close with a resale to likelihood of fraud. In other words, even with disclosure of intent to resell, selling a day later for $30,000 profit is much different than selling 30 days later for the same profit, because in those 30 days things could have changed, like improvements on the home or even a shift in property values.

We are still in the same boat we have always been on – advocating for disclosure, disclosure, and more disclosure – you want to keep your head above water legally and protecting yourself means keeping everyone informed as much as possible as to what is going on with your transaction.

They then make a comment that I fully agree with: Lenders need to do their own due diligence as well to make sure that the deal is a fair one for them. In other words, the lender should know if the market would have held a sales price of 30,000 more than the agreed short sale price.

Rather than arguing over what is fraud and what isn’t, lenders should focus on their primary objective—eliminating unnecessary loss.

And:

“By definition, short sales constitute a financial loss to lenders but will continue to be a necessary part of the mortgage industry as it seeks stabilization. The primary objective for lenders is to eliminate unnecessary loss,” stated Tim Grace, senior vice president of Fraud Analytics, CoreLogic. “The best way to mitigate fraud risk and unnecessary loss is through a collaborative effort where lenders collectively share pre-closing and post-closing information. Lenders in the CoreLogic Mortgage Fraud Consortium will benefit greatly from sharing knowledge of concurrent transactions pending on short sale properties in real time.”

They have a great graphic that shows time and resale value after a short sale transaction as well:

Other Findings:

CoreLogic 2010 Short Sale Research Study Highlights

• The number of short sales in the market has more than tripled since 2008 with the estimated annual volume at 400,000. Multiple variables indicate short sales will continue to be a frequent and important part of the mortgage industry.
• Over half (55.8 percent) of all short sales occur in just four states (California, Florida, Texas, and Arizona).
• Approximately four percent of short sales have a subsequent resale within 18 months.
• Investor driven short sales are not inherently bad. Investors provide the industry with necessary liquidity.
• Short sale transactions may be deemed risky to the lender when either: 1) the second sale amount is vastly higher than the short sale amount, and/or 2) the two sale transactions are executed within a very short window of time.
• Short sale fraud exists. While the exact definition of what constitutes fraud continues to evolve, CoreLogic analysis indicates lenders are consistently incurring more loss than necessary. Approximately one in every 53 (1.9 percent) short sale transactions was part of an egregious flip and therefore deemed risky.
• It is estimated that lenders are incurring unnecessary losses of $300 million in short sale transactions annually.
• Group, consortium analysis and reporting are necessary to fully leverage multiple-lender data and mitigate risk.

All in all, a very good (and short!) read that talks about what is happening and reminds us of many things:

1. Disclose your transactions
2. Investors are necessary in today’s market
3. Short sales are still in a peak and are expected to remain for some time into the future

What are your thoughts? Share them in the comments!

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