Flopping Houses: A whole new meaning to mortgage fraud

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The good news is traditional forms of mortgage fraud has reportedly dropped.  The bad news is those instances of mortgage fraud that are occurring have a whole new “attitude.” “Flopping” is a whole new type of mortgage fraud that steals from those desperate to sell their homes and from lenders, in a market that makes doing so difficult, and in some cases almost impossible.

You may have heard of “short-sales,” where a property is sold for less than the amount needed to cover the mortgage.  This is done so that the homeowner can get out from underneath the mortgage debt and the lender can still recover some of the money involved in the mortgage.  However, short sale scams provide the perfect opportunity for “flopping” a method of mortgage fraud that cheats both lenders and sometimes homeowners out of the full value of the property.

How does flopping work?  According to Neil Barofsky, special inspector general for the Troubled Asset Relief Program flopping scams occur when investors or home buyers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit.  The broker profits the profits, after all those that were involved in the scheme are paid off first of course.  Honor among thieves and all that.

“This is a misrepresentation of value,” said Denise James, coauthor of an annual report on the topic by the LexisNexis Mortgage Asset Research Institute during a teleconference Monday.

She said such schemes could add to problems faced by regions with an abundance of distressed housing, since “lenders will grow concerned with false depreciation of values,” thus making the buying and selling of homes even more difficult in depressed housing markets.

“Flopping increases as desperation to get rid of rising inventory grows,” she said.

While reports of fraud by 600 lenders and other real estate businesses to the LexisNexis mortgage institute declined year over year, “the decrease does not necessarily correlate to actual occurrences of [fraud], which are rising according to several industry sources,” James said. (Source Philly.com)

Florida and New Jersey rank among the top five states with the highest levels of fraud and in 2010 it is estimated that lenders lost $310 million in undervalued short sale transactions.  Unfortunately homeowners lost millions too.  In some cases they were left “holding the bag” as lenders used civil judgments or collection agencies to collect on the deficiencies left by “flopping” their properties.  Unfortunately in some instances the homeowners were just as “shorted” as the lenders.

Methods have been put into place to stop short sale fraud and flopping. According to Laurie Maggiano, policy director of the department’s Homeownership Preservation Office in Washington, says, “The Treasury has put reasonable protections in place to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days.”

However some brokers say that buying a  short sell property and selling it again quickly isn’t necessarily fraud, in some cases it is just good business. Dean Edelson, owner of Elysium Investment Group Inc. in Sedona, Arizona said in an interview with Business Week “Edelson said efforts to influence broker price opinions, or BPOs, are needed to counterbalance lender pressure to inflate values. Brokers often form an opinion based on a street view of a home, unaware of hidden flaws, he said. Attempting to influence their opinion is legal as long as there is no pressure or payment to get a desired outcome, according to Edelson, who says he has completed “a few hundred” short sales since 2003.

“How is influencing a BPO fraud?” Edelson, 53, a former producer of promotional trailers for television shows including “Seinfeld” and “Frasier,” said in a telephone interview. “What’s fair market value? It’s determined by what a buyer is willing to pay for the property.”

Investors can help the real estate market by paying cash to lenders, preserving property prices by reducing vacancies and helping homeowners avoid foreclosure, Edelson said.

“Investors move inventory and help prevent market values from declining,” he said.