Fear Of 'Flopping' Fraud Leads Loan Servicers Away From Short Sales, Opting To Foreclose Instead

The Boston Globe reports:

• [A]s more homeowners attempt to stave off foreclosure by striking [short sale] deals, lenders are denying or delaying many of these transactions even when it appears the sales would be in their best interest, according to real estate agents and housing advocates.(1)

• Eventually, some of the properties are sold at auction for less than the lender would have recouped through a short sale, they say. That not only costs banks, but it further damages homeowners’ credit and depresses overall property values.

***

• Indeed, lenders are growing more cautious about short sales as evidence of fraud in the process escalates along with volume, said Frank McKenna, vice president of fraud strategy for CoreLogic, a California research company. Lenders are losing about $310 million annually in short-sale fraud, with about one in every 53 sales plagued by problems, according to CoreLogic.

• Those problems include a fraudulent process known as flopping, through which an outside investor or buyer hires a real estate agent to assess a home for less than its true market value and then convinces a lender to sell at that price. The buyer then quickly resells the home at a higher price. “There is a fear of not getting the right valuation because you have some shady investors,’’ McKenna said.

***

• [S]tories of botched short sales are becoming more common in Massachusetts. Tony Nakhle, a real estate agent in Stoughton, said he had two deals fall through last year after lenders foreclosed upon homes even after sales were approved. In one case, the lender foreclosed on a house after approving a $136,000 deal, he said. Instead, the home was sold at auction for just $109,000. The buyer then sold the property back to the former owner for $136,000, he said.(2)

For more, see Wary lenders denying short sales (Citing price concerns, many opt to foreclose).

For an opposite viewpoint, see Housing Wire: Higher loss severities on foreclosures will push servicers to short sales in 2011: Fitch:

• Loss severities are expected to increase between 5% and 10% on residential mortgage-backed securities in 2011 as loss mitigation costs and foreclosure expenses go up, according to Fitch Ratings. This, analysts said, will push servicers to short sales.

(1) In actuality, it is the loan servicer, not the lender/mortgage investor, that is denying or delaying many of these transactions. While it may appear that these short sales would be in the lender/mortgage investor's best interest, the loan servicer is the one calling the shots. Since the servicer isn't the one taking the financial hit, it apparently doesn't care one way or the other if the lender/mortgage investor loses money.

(2) See also NPR: Housing Nightmare Upends Family, Enriches Investor, for a story on loan servicer Wells Fargo who reportedly, unwilling to work out a deal with a homeowner, auctioned off a house at a foreclosure sale to a private investor for $115,000 — a fraction of the original $584,000 borrowed. The investor who bought the home at the auction then flipped the property to another investor two weeks later for $270,000, making a profit of $155,000. Michael DeVito, an executive vice president for Wells Fargo Home Mortgage, would not comment about this particular case, the story states.