Short Sale Fraud

May 20, 2013

With so many homes in foreclosure and homeowners eager to end their mortgage obligation, fraudsters have become ingenious at finding ways to pocket cash from short sales.

Short sale fraud is on the rise for several reasons, says Tim McCallum, director of short sales in Fannie Mae’s Real Estate Asset Management division. “The short sale process is a lengthy one compared to a normal real estate transaction, taking anywhere from 2 to 6 months—the long timeline and multiple parties involved have made short sales an attractive target to fraudsters.”

Sellers and buyers involved in short sales can protect themselves by choosing their representation carefully and watching for questionable activities, such as those described below.

Going Off the Books

For a real estate transaction to be completed, all lien holders must sign off. In this fraud, one party (real estate agents involved, first mortgage lenders, second lien holders) might make certain demands outside of the escrow transaction before signing off, such as asking that real estate agents to reduce their commissions or other parties (short sale negotiators, attorneys, etc.) get reduced pay or no pay.

While these arrangements sound innocent enough, they are actually “off the books” transactions, meaning they are not being recorded on the HUD-1 Settlement Statement. Someone will profit from that hidden cash.

Reverse Staging

In reverse staging, the home is stripped down, making it appear “distressed.” The home then appraises at a lower value than it would have. After the appraisal, it’s offered on the market at a low price and is purchased at a low price by an accomplice. Once the fixtures and appliances are restored, the home is put back on the market at a higher price.


As a purchaser, be on the lookout for reverse staging, which can happen in conjunction with flopping. This is when the fraudster (such as a real estate broker) might have a second escrow in the works that is opened and closed simultaneously with the purchase described above, or soon afterward.

The perpetrator of the fraud buys low, sells high, and keeps the difference between the two sale prices.

Hired Help (You Don’t Need)

Another common scenario involves short sale “negotiators” (also called processors, coordinators, expeditors or foreclosure rescue negotiators) who offer to sell your home for a flat fee or percentage of the sale price. Often, the negotiator collects a fee but does nothing or little in return.

It’s advisable to contact your mortgage servicer or a HUD-certified counselor with any questions you might have. Be sure to read documents carefully and ask questions before hiring anyone to help you—California, Washington, and Oregon license short sale negotiators. If you live in one of these states, contact the state agency responsible for licensing and regulating real estate agents and find out if the negotiator is licensed and, if so, check that they are in good standing.

Stay Alert

According to Fannie Mae’s McCallum, the one constant with mortgage fraud is that perpetrators adapt quickly to change in economic conditions and in lending practices. “Be wary of mortgage fraud throughout the short sale transaction and if you have questions reach out to a HUD-certified housing counselor for help,” he suggests.

If you suspect fraud, call your lawyer or one of the organizations below:

  • Your state Attorney General's office
  • The FBI
  • Fannie Mae at 800-2-FANNIE (if the loan is owned by Fannie Mae).
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