Suspect Short Sales Could Cost Lenders $375M This Year: Report

With millions of homeowners falling behind on their mortgage payments and declining property values eating away at home equity, both lenders and borrowers have increasingly turned to the short sale as an alternative to foreclosure.
[IMAGE] ""CoreLogic"":http://www.corelogic.com reports that the number of short sales has tripled in the last two years, and the company estimates they will increase by another 25 percent in 2011 to about 270,000.

But as with any modus operandi that experiences such rapid growth, this proliferation can open the gate for fraudulent activity.

CoreLogic estimates that lenders, servicers, and investors may incur potential losses in excess of $375 million in 2011 due to ""suspicious"" short sale transactions. This is up more than 20 percent from $310 million in estimated losses for 2010.

""Identifying risk and monitoring distressed asset sale trends is absolutely essential for lenders to preempt potential losses,"" commented Craig Focardi, senior research director in the consumer lending division of the ""TowerGroup"":http://www.towergroup.com, an advisory services firm for the financial services sector.

CoreLogic describes a “suspicious” short sale as one where the short sale transaction was quickly followed by a resale

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transaction for a substantially higher price in a situation where that higher price is not supported by an underlying increase in property value.

The focus of the company’s study, which involved the analysis of over 450,000 single-family residential short sales occurring in the past three years, was to quantify the potential losses associated with suspicious transactions.

CoreLogic found that short sales which show another sale transaction closing on the very same day account for 16 percent of all suspicious short sales in the industry. These same-day resales on average go for $50,000 more than the short sale price.

Overall, CoreLogic says one in every 52 short sales conducted during the first half of 2010 appeared to be suspect, and the company estimates that this ratio has continued to rise since then.

Tim Grace, SVP of product management and analytics at CoreLogic, says the study also validates an industry perception related to Limited Liability Company (LLC) buyers in short-sale transactions.

“[W]hile they comprise only two percent of all buyers, they comprise more than 25 percent of buyers in suspicious short-sale transactions,” Grace said.

CoreLogic calls the industry’s losses from suspicious short sales “unnecessary.” The company notes that its Mortgage Fraud Consortium provides a forum for lenders to share real-time data about pending and closed short sale transactions, offering a national, industry-wide perspective that Grace says is essential in identifying suspicious short sales transactions before they occur.

According to CoreLogic’s report, some of the states with the largest short sale volume, including California, Arizona, Colorado, and Florida, are now the same states with the highest rates of suspicious short sale transactions.

“This convergence results in maximum negative impact on the industry,” according to CoreLogic.