Short Sale Fraud Schemes

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 What Is "Short Sale Fraud"?

Short sale fraud involves the use of false or misleading information to induce the homeowner to have a short sale or to defraud the lender of money that is owed under the mortgage. It also involves intentionally withholding information for the same purposes.

A homeowner who is considering a short sale should be aware of the dangers that are associated with short-safe fraud and short-sale mortgage fraud. The homeowner may commit this type of fraud, the lending institution or an outside third party.

What Is a Short Sale?

A short sale is a type of property transfer that occurs when a property is sold at a lower amount than what the homeowner owes on their mortgage. The short sale process is typically a sale that is used as a foreclosure alternative.

Because of this, in many short-sale cases, the seller is in default with their mortgage loan. Short sales may be favorable for borrowers because it can help them avoid various fees that are associated with foreclosure.

It is important to note, however, that it may have a negative effect on an individual’s credit report. The unpaid balance that is owed to a lender is called a deficiency.

There are some states that allow a lender to recover this unpaid amount through a deficiency judgment. Other states have anti-deficiency laws in place to prevent lenders from collecting more than what was offered as security for the home.

Because a lender holds an interest in the sale of a home, they are typically healthy and involved in the sales process. A lender will typically be involved in the pricing for the home that is for sale.

What Are Some Examples of Short Sale Fraud Schemes?

Examples of the common short sale fraud schemes include, but are not limited to:

  • Undisclosed payments: Short sales cannot occur without all of the creditors first agreeing to the short sale if there are multiple loans attached to one piece of property. In addition, the proceeds of the short sale are paid to these creditors according to priority;
    • Because of this, the later or junior creditors will likely receive little or nothing from the short sale. In order to obtain the consent of the junior creditors, the primary lender may arrange for extra compensation for those junior creditors;
    • However, any extra disbursement must be disclosed to all creditors, not simply the two creditors involved in making the arrangement;
      • This means that the primary lender will not be able to use undisclosed or off-the-record payments in order to induce a junior creditor into agreeing to the short sale;
        • The primary lender would be guilty of criminal fraud if they did so;
  • Flopping: A short sale flop occurs when a short sale is induced by an intentional misrepresentation of the value of the mortgaged property;
    • With a flop, a homeowner and lender are convinced by a third party that the property is worth much less than fair market value;
    • The third party then purchases the property for a lower value. They then immediately resell the property at its actual market value so they can make a profit;
  • Predatory short sale fraud: Predatory short sale fraud schemes typically involve an individual offering their services as a short sale negotiator. That negotiator will offer to sell the property for the owner and request a flat fee percentage of the sale price;
    • The negotiator will collect that fee upfront and then disappear without rendering any services to any of the parties involved in the short sale; and
  • Non-arm’s length transactions: Homeowners may attempt to short sell their property to a friend or relative in order to then buy the house back for far less than the mortgage;
    • This is typically done when the homeowner is convinced that their property value will recover;
    • However, this type of conduct would still constitute fraud unless all of the facts of the transaction were disclosed to the lender and all of the other parties that were involved.

The majority of short sale fraud schemes are challenging because the party that is committing the fraud will disappear once the fraud is completed. Because of this, it is important that an individual checks their licenses and credentials as well as verify the individual’s contact information.

An individual should be wary of anyone from out of state or who does not have working contact information.

What Are the Legal Consequences of Short Sale Fraud?

A short-sale fraud scheme is generally treated similarly to criminal fraud. Criminal fraud is a crime that involves a scheme to deceive or cheat another individual or entity in order to obtain financial or similar types of gains.

Under criminal fraud laws, any action that is intended to deceive another individual through false representation of fact, which results in legal detriment for the individual who relied on the information, may be considered an act of criminal fraud. This means that if an individual knowingly lies about a key or important fact in a relationship or transaction, and another individual relies on that misrepresentation of fact and suffers harm, fraud has occurred.

In contrast, fraud does not occur if an individual provides a fact that they believe is true, even if they are wrong. For a defendant to be convicted of committing criminal fraud, the prosecution is required to show the following:

  • An intentional misrepresentation of a material fact occurred;
  • By an individual who was aware that the material fact represented was false;
  • And who intended to defraud;
  • An individual or entity who justifiably relied on the misrepresentation of fact when making their decision; and
  • The individual suffered actual injuries or quantifiable damages as a result of relying on that falsely represented fact.

If a defendant is convicted of criminal fraud, they may face:

  • Jail or prison time;
  • Probation or parole;
  • Fines;
  • Restitution.

There are numerous factors that courts will consider when determining a defendant’s sentencing for a criminal fraud conviction, including, but not limited to:

  • The severity of the fraud committed;
  • Whether the defendant had prior convictions or is on probation or parole;
  • The amount of money or property that was stolen from the victim;
  • The party that was the targeted victim of the fraud scheme.

If the victim of the fraud is the Federal Government, charges may be brought under federal laws instead of state laws, which may result in harsher penalties. Short sale fraud, specifically, can be punishable by:

  • Fines;
  • Suspension of professional licenses;
  • Jail time;
  • Civil short sale lawsuits intended to recover the defrauded funds.

It is important to note that the victim of a short sale fraud scheme may also be found guilty of fraud if they cooperated with or participated in the fraud scheme.

Should I Contact an Attorney?

You may be considering selling your home using a short sale or suspect you may have encountered a short sale fraud scheme. If this is the case, it is important to consult with an experienced mortgage lawyer. The state laws that govern short sales and frauds vary.

Your lawyer is best equipped to help you understand the laws in your state regarding short sales. Your attorney will also be able to help you avoid short-sale fraud schemes by giving you legal advice throughout the process.

If any disputes arise related to your short sale, your lawyer will represent you in court, as needed.

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