We’ve been discussing each step of the short sale process. A new study called The Cost of Short Sales, by CoreLogic, illustrates how much risk a lender takes on when they grant a short sale. This study will help you see the other side of the equation.
Estimates show that short sales are really hurting the lending industry in an already tough economy and housing market. Short sale fraud costs the industry $310 million annually and the risk of “unnecessary losses” in the process is high — one in every 53 short sale transactions.
The average amount of unnecessary loss is $41,500 per short sale at a time when short sales are rising. Key findings of the study:
• The number of short sales in the market has more than tripled to an estimated 400,000. Short sales will likely continue to be a frequent and important part of the mortgage industry.
• More than half (55.8 percent) of all short sales occur in just four states (California, Florida, Texas and Arizona).
• Approximately 4 percent of short sales have a subsequent resale within 18 months.
• Investor-driven short sales “are not inherently bad. Investors provide the industry with necessary liquidity,” the study said.
Here are two signs that make a lender view a short sale as risky: 1) the second sale amount is vastly higher than the short sale amount, and/or 2) the two sale transactions are executed within a very short window. In other words, flipping of properties.
According to CoreLogic. “The primary objective for lenders is to eliminate unnecessary loss. The best way to mitigate fraud risk and unnecessary loss is through a collaborative effort where lenders collectively share pre-closing and post-closing information.”
How can short sale fraud be prevented? The study said lenders should take fundamental steps to alert themselves to the possibility of improper short sale-to-resale transactions.
This includes reviewing all documentation:
- resale disclosure details
- confirming arm’s-length disclosures for all parties involved in the short sale
- requiring borrowers to confirm that he or she is not aware of any other parties or contracts associated with the property and/or its short sale
- applying due diligence to ensure that both the borrower’s income is accurate, as well as that of the current market value of the property
- validating that claims of “significant renovation” were actually completed
- ensuring that the seller is the current owner of record.
Data is taken from a representative sample of single-family residence short sale transactions from the past two years. See http://www.corelogic.com/shortsalestudy
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