Are Your Short-Sale Clients Colluding?

By Robert Freedman, Senior Editor, REALTOR® Magazine

A few months ago we heard from real estate practitioners about a short-sale contract addendum that lenders were requiring of borrowers to curb fraud, so we talked with David Sunlin, Bank of America senior vice president and operations executive for short sales, to learn more about his company’s version of that form. He said it had been incorporated into the process in part because of a Freddie Mac policy requiring borrowers to vouch that their deal is an arm’s-length one. “They came to us and said, ‘We, as an investor, require you to do this,’ said Sunlin. “And then we looked at it and thought it was a good practice, so we extended it to our entire portfolio that we service.”

As a follow-up to that conversation, we spoke with Kathleen Cooke, fraud investigation manager at Freddie Mac, in mid-June, and she said her company’s requirement was simply putting into formal practice what the industry had informally required all along: that parties to a short-sale transaction show there’s no collusion between them.

Cooke said fraud continues to be an issue with short sales, mainly flipping arrangements, but other types of fraud are cropping up, too. The impact of her company’s anti-collusion affidavit is preventative: some parties that are thinking of colluding aren’t, because the affidavit takes away the legal gray area: Once you vouch for the fact that the deal’s at arm’s length, you have nothing to hide behind if you’re shown to be colluding. Cooke thinks the affidavit is succeeding in combating fraud.

Here are the highlights of our conversation with her:

REALTOR® Magazine: What kinds of short-sale fraud are you seeing?

Kathleen Cooke: We’re seeing flipping going on, the same day or shortly thereafter, that the property is bought. These deals are for tens of thousands of dollars more [than the purchase price], in some instances $80,000 more. And the lender and Freddie Mac were unaware of the higher offer. Typically what we see there is a straw buyer, usually a family member or a friend, who purchases the property and then sells it back to the borrower. We have several cases open throughout the country, so it’s not concentrated in any one area. There are real estate companies out there that market these services and secure straw buyers for the sellers.

RM: Let’s say I’m a friend of the owner, who’s selling his house as a short sale. I buy it, and sell it back to the owner. Is that illegal?

KC: From our perspective, a seller cannot profit from a short sale. And that includes profiting by shrinking the principal through a pre-arranged deal.

Click here to learn more about the short sale process in Long Island and Queen.