Experts say one area of the short sale process particularly vulnerable to fraud is property valuation. Bank-owned fraud attributed directly to schemes involving short sales and REO inventories has increased by 40 percent over the past year and has more than doubled from two years ago, according to market data from the California-based risk mitigation firm Interthinx.  According to a member of Freddie Mac's Fraud Investigation Unit, any misrepresentation related to the buyer, a subsequent transaction at higher prices, or the seller's hardship reason to qualify for a short sale constitutes fraud.

 
      The GSE outlined several red flags that might suggest short sale 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.

      Treasury officials say they have already incorporated safeguards against fraud into HAFA. To participate in the program, borrowers and the licensed real estate agent who lists the property are required to sign a Short Sale Agreement (SSA) and sales contract attesting that the transaction is being conducted at arm's length, meaning the property is not being sold to a relative.  In addition, buyers must agree not to resell the home within 90 days of the closing date, and the lender/servicer must have an independent property valuation in hand that meets their pre-set net return requirement before agreeing to the short sale.

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