No More Flipping Short Sales!!!! Freddie Mac Claims Fraud!!!!

No More Flipping Short Sales!!!! Freddie Mac Claims Fraud!!!!

This article is on the Freddie Mac website. It looks like flipping Short Sales is going to be a no go in the coming days! I am curious to see what investors do to get around this issue.

Press on...

Fraud Trends: Short Payoff Fraud
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Given increased defaults and declining property values in certain locations, the mortgage industry is experiencing an increase in short payoffs, sometimes called short sales. In fact, over the last two years, short payoff volume at Freddie Mac has grown more than 1,000 percent (2007-2009). This upward trend in volume leaves the market ripe for incidences of short payoff fraud.

What is a short payoff?
A short payoff occurs when a borrower cannot pay the mortgage on his or her property and is permitted to sell the property for less than the total amount due, at a loss to the lender, investor and/or insurer. All parties consent to the mortgage being paid "short," primarily because the property does not need to go through foreclosure. Please note that many legitimate short payoffs take place in the real estate market.

What is short payoff fraud?
According to a member of Freddie Mac's Fraud Investigation Unit, a slight variation of our general definition of mortgage fraud also defines short payoff fraud – "Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known." Misrepresentations in these schemes may include the buyer of the short payoff property, a subsequent transaction at a higher price, and/or the selling borrower’s hardship reason used to qualify for the short payoff. In many instances, the short payoff fraud will involve a "facilitator," engaged by either the listing agent or the selling borrower, to assist with negotiating the transaction.

How is short payoff fraud committed?
There are many variations of short payoff fraud. The example below is just one way this type of mortgage fraud can occur.

A seller (delinquent borrower) owes $100,000 on a property that is worth $80,000.
The short payoff facilitator negotiates with the bank to accept a $70,000 offer to purchase the property. In several instances, Freddie Mac has seen that this offer will be made directly by the facilitator or through an entity under his/her control.
The lender/investor accepts the offer for $70,000.
The facilitator neglects to disclose to the lender/investor that there is an outstanding offer between the facilitator and a second end-buyer for $95,000.
Both transactions close on the same day with the net difference being pocketed by the facilitator and increasing the lender/investor’s net losses.
At first glance, this may look like a legitimate short payoff. However, in this example, the fraud is the failure to disclose the second, higher offer. The facilitator is willfully withholding important information the same way a scam artist would, and the lender does not realize they are walking into a premeditated short payoff fraud scheme. Because the facilitator is deliberately withholding the higher offer, Freddie Mac also experiences a larger than necessary loss on this sale.

Short Payoff Fraud Prevention Red Flags
Remain alert to the following flags, which may suggest short payoff fraud:

Sudden borrower default, with no prior delinquency history, and the borrower cannot adequately explain the sudden default.
The borrower is current on all other obligations.
The borrower’s financial information indicates conflicting spending, saving, and credit patterns that do not fit a delinquency profile.
The buyer of the property is an entity.
The purchase contract has an option clause to resell the property.
Short Payoff Fraud Prevention
The following protective measures are recommended in order to detect and mitigate the severity of short payoff fraud:
Review all short payoff documentation carefully, including the sale contract. This helps determine if there is an option clause to resell the property at a higher price without notifying the lender.
Draft a short payoff arm’s-length affidavit/disclosure notice for all parties involved in the short payoff to help avoid any hidden contracts, or side agreements. The parties involved should be, but are not limited to: the buyer, seller, listing agent, selling agent, short payoff negotiator(s)/facilitator(s), and closing agent.
Solicit information from your borrower.
Inquire if the borrower is aware of any other parties involved with the short payoff other than real estate professionals.
Is there a short payoff negotiator/facilitator involved?
Is the borrower aware of any other purchase contracts on the property?
Require an executed and signed IRS Form 4506-T, Request for Transcript of Tax Return,from each borrower and process the form to determine if the borrower’s qualifying income is accurate.
Order an interior Broker Price Opinion (BPO) and review all other BPOs that have been ordered on the property (drive-bys and full interiors) to establish a high/low value variance. The BPOs should include a past and present Multiple Listing Service (MLS) listing history, as this will determine if the property was relisted in MLS while the short payoff is being processed.
Review the Freddie Mac Exclusionary List to see if the parties to the short payoff are on the list. Seller/Servicers can access the Exclusionary List via the selling system, MIDANET®, MultiSuite®, and Loan Prospector®.
Immediately notify Freddie Mac if you are aware of a second purchase contract for a higher price.
Important Freddie Mac fraud prevention resources
Leverage the following resources for more information on dealing with fraud:

Freddie Mac Fraud Hotline: 800 4 FRAUD 8
Mortgage Fraud Prevention Web Page
Quality Control Resources and Fraud Prevention Web Page



I think just because people make a win-win for everyone in a situation other people think that it is fraud, and they don't get a piece of the "pie" they miraculously change the rules of the game and say that its been like that for years. From the way I see it people who are behind stuff like this don't wanna see others succeed where maybe they have failed. It is just like when people "sue" other people they claim something that is completely false and find ways to make it look real and sue just so that they can have money to gloat about.

There I'm done venting but I might come back to vent some more later.


Anxious to start in North Dakota My theme song Travis McCoy (ft[1]. Bruno Mars) - Billionaire -

Agreed Mason......

You said it man for sure !!

Flipping homes is a great way for the poor (like me ) and have nots to get started in real estate investing. Naturally , the big shots will cry fowl.

God Bless America !!

Randy S.
Elkton, MD

wait a minute!!!!..

so let me get this straight... Is it a matter of "disclosure" in the contract?? letting the lender now what ur intent is is not sufficient?? Now because im a newbie I need to know what the heck im getting into??? I currently have a significant amount of funds available to me right now and want to purchase properties at a discounted price and lock up other cash buyers on contract to do "transactional" funding...Can I do that?? Is it legal???

I have another question

Does this mean that targeting those in foreclosure whose loans are more than their mortgage is now not going to be an option? Here in CA, most loans are flip flopped, and my strategy was to target pre foreclosures and help them by buying them or either lease option or assigning them. Is that completely out now? I've put a lot of work into setting up my website for this very purpose. Did I waste all my time?


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After talking with my mentor, we're basically going to have to disclose that we are an investor and intend to sell for a profit. Unfortunately, we're probably going to get a lot of rejections because of this. I think once Fannie figures out that the majority of people who are buying short sales are investors and not regular home buyers, they're going to change their position. I don't think Fannie realizes that as an investor, we can provide creative financing to home buyers who would not otherwise qualify traditionally. The really bad thing about this is that banks are most likely to follow Fannie's lead. This means that they will have the same policy and we will have to disclose to them that we intend to sell for a profit. Short sales are already a long process. Now that Fannie will not accept transactional funded offers, the process is going to be even longer for the homeowner. The good news is that the housing inventory is going to continue to grow. Eventually Fannie and the banks are going to have to say "move it" regardless of what the buyer intends to do with the property.

Press on...


I believe that these fraud rules/laws have existed for a long time. Because there are more incidences of fraud, Freddie Mac is going to look deeper into these deals. When a seller misrepresents their abilty to pay their mortgage, a buyer presents their offer as the best and highest offer available, while holding an offer, to themselves, for more money, a facilitator negotiates a deal while holding a better deal, for their profit, a seller sells to a friend or family member, then buys the property back at a considerably lower price then their original mortgage, this IS fraud. In a legal flip deal, the middle man needs to make significant improvements to the property (add value) to make their mark-up legal. Short sales are not going to go away. Lenders, such as Freddie Mac, are going to investigate these deals closer, to reduce fraud. This is my opinion of what is happening, but I believe it is accurate.




Watch your thoughts; They become words,
Watch your words; They become actions,
Watch your actions; They become habits,
Watch your habits; They become character,
Watch your character, it becomes your destiny.

Frank Outlaw

Yet another exsample of

Yet another exsample of banks being greedy and making bad decisions. They made bad deals to people who shouldn't have qualified. Their greed got to them then and its getting to them now. If they accept an offer, from whoever the buyer is, then they have no right to complain about money an investor makes by doing a double closing and/or reselling it. FHA threw out the 90 day seasoning rule because they reconized most people buying short sales are investors and are only doing it to make a profit. Theres always going to be someone who is out to get us investors and this time its the banks! They need to stop complaining and get smart. Without us, their inventory will skyrocket, and then they'll realize how important we are to them. Unfortunatley this takes time and their nortoriously slow. Aren't we suppose to be coming out of the recession and not putting ourselves back in with a surplus of houses sitting on the market? Like we need more hoops to jump through. Oh well, they'll learn sooner or later, and they won't get in my way to becoming a millionaire!

I was thinking outside the box

and what if we offer to give the bank our buyer for a fee from them directly? Is there a way to make a legally binding document that the bank would be required to pay us X amount of $s for giving them the buyer that would pay the higher price if they did indeed end up purchasing it?


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Freddie Mac Article No Reason to Panic

Saturday, April 17th, 2010 at 3:52pm
Freddie Mac Article No Reason to Panic
Posted by Ron Ballard
I wasn’t going to write about the April 12 Freddie Mac online article about “Short Payoff Fraud” for several days because it is so fraught with misstatements and misunderstandings that it’s my humble opinion that it will be modified and clarified soon. However, I have received too many inquiries from nervous real estate investors and licensees to ignore it.

The article can be found at

As my good friend and legal colleague, Jeff Watson, says today on his Facebook page ( ), “Please stay calm.”

First, it’s valuable to note that the author is not named nor is any specific contact information provided for follow up (just generic contact points). This brings the level of authority of the article into immediate question.

Second, the article is entirely inconsistent with Attachment A to Freddie Mac Bulletin 2009-24 of October 2009 which states: “Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Legitimate property flips are acceptable transactions in connection with loans purchased by Freddie Mac.” It goes on to specify, “Some indications of property flip transactions that may be legitimate include: . . . Sales of properties that the seller acquired at below market value after purchasing as a result of a distress sale (i.e. . . ., short sale, . . . ) where any increase in the sale price over the property seller’s acquisition cost can be clearly shown to be result of the difference (if any) in the market’s reaction to distress sales and typical arms-length sales.” Bulletin 2009-24 came from the division in Freddie Mac which determines the standards for loans it will purchase. The April 12 online article is attributed to “a member of Freddie Mac’s Fraud Investigation Unit” with respect to the discount Freddie Mac will allow on loans for which it agrees to a short payoff. Apparently these two units are not aware of each other’s opinions. Freddie Mac’s general counsel’s office needs to reconcile these discrepancies.

For reasons explained below, I am confident that the ultimate direction of Freddie Mac will be more consistent with Bulletin 2009-24.

On January 15, 2010, FHA announced standards for a one year Waiver of 90 Day “No Flip” Rule for investment property resales of short sale and foreclosure properties. In its comments, FHA acknowledged the important role of investors in stabilizing the housing market and reducing the number of REO properties which negatively affect communities. FHA establishes a 20% profit spread as acceptable without additional valuation review. This implies that the a typical difference between an acceptable short sale distress discount and a typical market value is about 20% without additional factors. Naturally, short sale investors see spreads larger and smaller than this. For example, a property that an investor puts under contract in January will be selling in a different market if it is going up for resale in June. Seasonal factors alone can account for several percentage point differences alone.

The unnamed “member of Freddie Mac’s Fraud Investigation Unit,” does not display an awareness of the FHA position.

The example in the article under “How is short payoff fraud committed?” doesn’t make sense. It fails to distinguish between distress property value and fair market value, as Bulletin 2009-24 effectively does. First, it states that the property “is worth $80,000” and that the facilitator negotiates a purchase price of $70,000, which represents a 12.5% discount from the $80,000 value. If the $80,000 value is the distress sale value, then the 12.5% discount is a fairly typical discount for a bank to accept in a short sale to avoid the costs of a foreclosure and of holding and reselling a REO property.

Next, the example states there is a second end-buyer for $95,000. However, there is no clarification whether the $95,000 price is the fair market value or somehow a fraudulent sale in which the “facilitator” convinces a buyer to over-pay for the $80,000 property. As active real estate investors, brokers and agents know, it’s virtually impossible in this market to find a buyer who will overpay for a property. Moreover, it is virtually impossible with the controls over appraisers imposed under the HVCC standards to obtain an over-market valued (manipulated) appraisal. The “facilitator” cannot influence the selection of the appraiser and certainly is not in the ordinary chain of communications to make any communications that could attempt to influence the appraiser.

Moreover, the bank agreeing to the short payoff has a bevy of resources at its disposal to determine a reasonable market and distress value of the property and to determine the level of acceptable loss. The “facilitator” cannot “trick” the bank into an unreasonably low value for the property. Let’s be real: the bank is in a far superior negotiating position and resource level than an individual investor.

The example proceeds to a series of convoluted and inflammatory statements equating an investor whose business model has been legitimized by Freddie Mac Bulletin 2009-24 and the FHA waiver of January 15, 2010 to a “scam artist” by “deliberately withholding the higher offer.” Real estate attorneys, such as this author, who strive to advise investors in full compliance with legal and ethical practices require investors who are engaging in short sale flip transactions to give notice to the discounting bank on the face of the purchase contract and in a publicly recorded notice or memorandum that they are an investor who is purchasing the property with the intent of rapidly reselling the property with the purpose of making a profit. Moreover, the contract states on its face that the seller grants the buyer the authority to remarket the property on the buyer’s behalf with all future offers going to the buyer. These are the material disclosures that advise the existing lender to negotiate the short payoff with the knowledge that the buyer is seeking a high discount in order to resell for a profit. The article implies the creation of a new duty of an investor to disclose its future business transactions to the discounting lender. This author is not aware of any statutory or common law duty of such wide sweeping disclosure.

[The article also seems to confuse the obvious duties of the seller’s real estate broker with that of an investor. It would be clearly fraudulent for the seller’s real estate broker to receive the $95,000 offer, not present it to the borrower or the bank, put the property under contract with the broker as the purchaser for $70,000, and then secretly enter into a contract with the end-buyer for the broker to sell the property for $95,000. This is an entirely different set of duties that must not be confused with a common, routine market-oriented transaction that is disclosed as such to the seller and the seller’s lien holders at it’s initiation by an investor who is taking the risk that it can sell the property after the investor puts it under contract.]

The article then states, “Freddie Mac also experiences a larger than necessary loss on this sale.” This assumes that the seller could have obtained the $95,000 offer without the involvement of the investor. This assumption is contrary to the typical short sale transaction. For example, the investor may put the property under contract two weeks before a scheduled foreclosure sale date when there are no pending offers and then obtains a series of postponements to negotiate and close the sale over a period of five months. In the fourth month the investor receives a verbal short payoff offer from the lender and begins marketing the property as an “approved short sale.” Now the investor receives the $95,000 offer. Neither the bank nor Freddie Mac were on track to receive the $95,000 before the foreclosure date. The only reason the $95,000 offer even appears is because the investor took the risk to put the property under contract, negotiate the final payoff, and re-market the property. Freddie Mac never could have enjoyed the benefit of the higher offer because the sale process was not on track to attract it. Hence, the “larger than necessary loss” is a mere phantom that would not materialize in real life. This concept is magnified dramatically when there is more than one lien against a property.

I don’t want to sound disrespectful to the article’s unnamed author, but the article does not reflect the realities of actual real estate transactions. Accordingly, it’s conclusions are flawed.

There are MANY other points in the article with which I take issue, but this unplanned article is too long already.

As conceded above, there are ways in which predators or “scam artists” can take advantage of sellers and their lenders in short sale transactions. However, the article improperly implies that a properly disclosed investor purchase for resale is always fraudulent if the investor puts the property under contract for resale before closing the purchase. This is a conclusion without legal merit which is likely to wreak havoc on thousands of pending deals and potentially create a short term increase in foreclosures while scared investors, seller and real estate licensees back out of legitimate, properly disclosed investor resale transactions.

If the investor has properly disclosed the transaction, as I’m confident my form system provides, then none of the parties need to have cause for concern. If Freddie Mac were to litigate a legitimate investor transaction as fraud, it is inconceivable that it can produce legal authority for the phantom duty of an investor to disclose the offers it is receiving when re-marketing a short sale property upon which this entire article is based.

It's none of their business

It appears to me that this is 2 separate deals, 2 separate closings, the 2nd being of no concern to Freddie Mac. The lender has already entered into a bad deal when they issued the bloated loan to the homeowner, not to mention the escalated price brought on by greedy RE agents and under-educated appraisers to make the deal work. Now because of their poor negotiation skills, they try to push the blame on investors and try to recoop some of the lost funds.
Lets wait till the properties go into 4closure or auction where the bank can sit on the property even longer until that day, as the property depreciates even more, gets vandalized, brings the value of the surrounding houses down, and the lender has to pay another round of property tax and insurance. As the greedy homeowner was approved for a loan for a house they knew they couldn't afford, so is the tradition of greed carried on by the lender.

Ecclesiastes 5:9-15

My thoughts on this as a Newbie

If we do two things, we're not committing fraud:

1) disclose that you are an investor and intend to resell as quickly as you can find a qualified buyer for a profit.

2) DO NOT make any contact with buyers regarding the property until your current transaction is final. By waiting until afterwards, you have "No Knowledge" of any other "existing" offers for a higher value.

I really think its that simple.


Wishing you Happiness and Prosperity,
Rick & Peggy
Eagles Crest Properties


That was a very detail breakdown of the article. I was thinking some of the same points you mentioned after I read the article as well. I am glad to know that I was on the right track.
I also think that FMack will either change or revise that article pretty soon. If they don't then they can or the banks can expect more REO's in their inventory.



"Be the change you wish to see in the world" Ghandi

Think outside the box

Just like most situation do not fret over the problem. Make sure you understand the true reality of the situation then spend the bulk of your energy finding a solution.

Doing a lease option would not be considered a flip. Give your buyer a two year lease option (or longer) to let the market come back and justify the price. If the option is executed in 30 to 60 days so much the better for you. If not, sell your interest for a smaller profit. This way you are selling the future profit of the home and not the home itself.

I would start getting worried if they come up with something outrageous, like the purchaser of a short sale has to live in the home as their primary residence.

I was also just watching a news program on the real estate market and short sales. It looks like the government is goinng to make short sales easier and quicker. HAFA is the program that will allow homes to be pre-qualified for short sales. I did not catch if the amuont would be established at that time or not. That would be nice (a lower starting point for negotiations). The program has been approved but we may not see its affects for a couple of months.

Fear Not

As long as you are disclosing to the lender and the end buyer there is noting to fear. Also if you can find a cash buyer to work with you, they can purchase the place out right and then you can re-sell after the transaction closes. This will require taking title to the property which is no big deal.
I have completed several of these transactions. I don't make as much money but I also don't have to worry that I'm going to get in trouble down the line.
There are so many ways to do these transactions ethically and legally.
There are so many cash buyers out there that are begging to buy. Just go to your county foreclosure auction and ask anyone that is bidding if they are interested in buying approved short sales that are 70 cents on the dollar and watch them come running..

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