Freddy Mac and Short sales

Freddy Mac and Short sales

Emerging 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.


Hi Richie

Thank you so much for sending us the article. The information is fantastic.

Have a great weekend!



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It’s about learning to dance in the rain.

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Your more than welcome

Your more than welcome Cindy. from what I read into it, they are mad that investors are making money on the SS flips. most SS investors that are on the up and up do disclose that they will be reselling the property for a profit. I dont see where the fraud comes in if you disclose to them that you are selling the property for a profit. once they close with you I dont see why they would care about what you do with the property. the banks are just greedy and want it all and the politicians cater to the banks. I dont see them being able to claim fraud on this. Legally you own the property for a few hrs on a double close, and if you put the addidum in that you can assign it and they agree to sell it to you, I dont see the beef on it. I have to read more on it later.
good luck

An Article Worth Reading

This is a great article, Richie. Other than short sale fraud, I believe there is also foreclosure fraud. This is when instead of the banks lowering the payments and extending the loan, they chose to foreclosure to inherit the insurance money they had on the initial mortgage loan. The banks never lose, since they acquire most of their interest upfront, where for the majority of the loan period the borrower is paying mainly the interest on the loan, hence the thirty year payment period. A perfect example of why the country is in the state it is today. A case of high class robbery. Thanks for sharing. God Bless


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