An article in today’s Press Enterprise discusses the rising popularity of short sales and the possibility that some lenders may be losing out in the process. According to “real estate experts”, the short sale process presents an increased risk of fraud and abuse. The article on goes on to say that this is particularly true where a buyer purchases a short sale and then flips the property soon thereafter for substantial gain.

While I do not doubt the potential for fraud in the short sale process, the added cost and hassle of dealing with banks in a short sale negotiation will always create a discount on the value of a home. This is particularly true where a buyer must negotiate a release of a property encumbered with both a first and second mortgage on the property. Also, the lender has the added benefit of avoiding foreclosure fees which can be estimated in the thousands of dollars. Additionally, there may be additional fees to care for the property, maintenance of the property while it is being sold, and the cost of ultimately finding and selling the property. As a final benefit, the lender does not have to deal with potential damage to the property or vandalism to the property that may occur as a result of foreclosure. Once the savings have been added up, the potential discount on a home is significant and may create opportunities for investors to make quick money. This is not fraud.

For lenders to intimate they are losing money because of short sales is to completely ignore the realities of the current mortgage situation and their role in the short sale process. At the most basic level, the potential loss to lenders is directly attributable to their failure to perform due diligence on the actual value of properties being short sold. The lender ultimately approves the sale of the property and determines its value. On a deeper level, the popularity of short sales and higher cost of foreclosures may be attributed to the failure of banks to work with homeowner’s for loan modifications or other workout solutions. While I doubt widespread mortgage fraud through short sales, the analysis must first start with lenders before blaming brokers or investors.

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