Wendy Jimenez

By JEFF COLLINS / THE ORANGE COUNTY REGISTER

As short sales become increasingly dominant in today’s market, so has short sale fraud, said short sale expert Kathy Mehringer.

“Fraud is heating up like a wildfire right now,” said Mehringer, risk management director and short sale advisor for Coldwell Banker Residential Brokerage in Sherman Oaks. “We’ve got to be aware that this fraud is changing directions, is jumping containment lines.”

Mehringer spoke Wednesday during a session at the California Association of Realtors conference in Anaheim.

Short sales involve the selling of a home for less than is owed on its mortgage.

In the looking-glass world of short sale fraud, real estate agents do their best to get the lowest price they can for a home, Mehringer said.

Instead of staging the home to look its best, they make it look worse. They run pictures and videos highlighting the home’s flaws.

Instead of marketing it to potential buyers, they advertise it in a multiple listing service that’s miles away from the property.

And once they the lender agrees to sell at their artificially low price – often as part of a sweetheart sale to a friend, a relative or an LLC – they quickly flip the house, selling it at its true value and pocketing thousands of dollars in ill-gotten gains.

Mehringer’s message to agents and brokers: Since a lot of Realtors are losing their licenses because of inadvertently representing the wrong guys, agents and brokers have to be on their toes.

“The consequences of fraud are enormous,” she said. “You can’t bury your head in the sand and pretend it’s not happening.”

Among the most common schemes are:

• Flopping: Scammers arrange to buy a home at an artificially deflated price intending to flip it immediately at its actual value.
• Non-arm’s length transactions: The buyer in a short sale is related to the seller by blood, marriage or some type of business or personal affiliation. This is typically arranged by an underwater borrower to regain ownership of the property free from the mortgage debt.
• Side agreements: In addition to payments included in a lender’s “approval letter,” the buyer and seller have side agreements to pay off junior liens, short sale negotiators’ fees or other third-party fees.
• False information: The transaction includes phony details in the closing settlement statement, or HUD-1, to hide buried costs and fees.

Mehringer said one problem is agents are targeted by trainers offering seminars on how to make short sales easy. Many of those techniques are sketchy at best, she said.

“You can’t put ‘easy’ and ‘short sale’ in the same sentence. It’s an oxymoron,” she said.

Johanna L. Hladunk, the FBI’s supervisory special agent in San Diego, said the so-called “sovereign citizens movement” has spawned a whole new type of mortgage fraud.

The anti-government adherents believe that they are separate or “sovereign” from the United States even though they live here. Adherents have tried a variety of techniques to shuck their mortgage without paying it off.

One agent told Mehringer her office is losing clients because they refuse to play along with short sale schemes.

“We’re the minority,” the agent said. “The agents who are doing things correctly are having a lot of problems.”

The solution is for agents and brokers to report problems they see and can document, Mehringer said. Complaints about fraud sometimes do fall on deaf ears, but that shouldn’t deter Realtors from doing the right thing.

“Sometimes you have to report it when it’s righteously wrong,” Mehringer said. “Don’t be afraid to report it.”