Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors

Short Sale Fraud – It’s not a law; nor is it an official policy, but it’s definitely going to be a problem regardless. Freddie Mac’s new short sale opinion – for lack of a better word – could create serious legal and practical issues for real estate investors.

The organization posted a new educational article on April 16, 2010 titled “Emerging Fraud Trends: Short Payoff Fraud.” Essentially, the article stated that a short payoff or a short sale can be considered fraudulent if the lender agrees to a short sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. This could mean problems for investors who have been short sale flipping, or negotiating short sales with banks and then selling the properties at a profit.

The rest of the article detailed scenarios and red flags for “short payoff” fraud. The scenario revolved around a short sale facilitator who set up a deal with a lender to purchase a home worth 80K for 70K while the lender took a 30K loss. The facilitator does not let the bank know that he already has a buyer ready to pay 95,000 for the property. When both transactions close and the facilitator pockets his profit, Freddie Mac considers him to have committed fraud since Freddie Mac has now taken a “larger than necessary” loss on the sale.

The article urges buyers, sellers and lenders to be on the lookout for short payoff fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the property being an entity rather than a person. The article also tells readers to keep an eye out for resale options in their purchase agreement.

Everyone involved in a short payoff is encouraged by Freddie Mac to report potential short payoff fraud the second they become aware of a second purchase contract for a higher price. This may not yet be a law, but the signs are not good when Freddie Mac has posted such a direct attack on short sale investors.

This was a May 12, 2010 Press Release by Freddie Mac!

This policy change is effective immediately!



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This is the Freddie Mac text from April 16, 2010.

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.
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


Ok, after posting all this are they trying to tell us we buy for cash, close escrow and then market and sell our own property?

You would think they could just come out and say it?


I’d be very interested to know what the percentages are between short sales purchased by owner-occupiers and investors. Because I suspect that most of the short sales are being purchased by investors.

Perhaps Freddie Mac is planning on biting the hand that feeds it.

Just another example of how we have to change with the times… Not an issue…

I’m curious to know exactly when/where/how this disclosure was supposed to occur? When is it required to notify a seller or bank that you have an offer to purchase the property you are buying?

If there is no required disclosure, there can be no fraud.

You are right as it is very important for us to know what we have to do when it comes to disclosure. As you will find many frauds happening now a days.

It is required to know it in more better ways.


I’m sorry to say, I personally may feel happy about this fact! I’ve been trying to buy a house for a year and 2 months with no luck! This might just make it okay for us to be able to start being able to purchase again! Phewwww

I recently bought 2 units in condo… is this good or advisable the unit only has 30sqm each.

I thought this was only if you don’t disclose the fact that you are and Investor that plans to resell the property for profit…