Lenders Out $310M from ‘Preventable’ Short Sale Losses: CoreLogic

Wed, Aug 11, 2010


By: Carrie Bay

The number of short sales has more than tripled since 2008, with the estimated annual volume now at 400,000, according to the real estate data and analytics firm CoreLogic.

The hard-hit housing markets of California, Florida, and Arizona, along with Texas, are seeing the most activity, CoreLogic said in its 2010 Short Sale Research Study released Tuesday. These four states account for more than half – 55.8 percent – of short sale volume.

CoreLogic says multiple variables indicate short sales will continue to be a frequent and important part of the mortgage industry. But as with any modus operandi that rapidly picks up steam, this proliferation can open the gate for fraudulent activity.

Lenders’ financial losses resulting from preventable and unnecessary short sale fraud are estimated to be as high as $310 million by the end of this year, CoreLogic says. According to the company’s study, the risk of ‘unnecessary losses’ occurs in one in every 53 short sales and averages about $41,500.

“By definition, short sales constitute a financial loss to lenders but will continue to be a necessary part of the mortgage industry as it seeks stabilization. The primary objective for lenders is to eliminate unnecessary loss,” said Tim Grace, SVP of fraud analytics at CoreLogic.

The company found that approximately four percent of short sales have a subsequent resale within 18 months, but CoreLogic says “investor-driven short sales are not inherently bad” because investors provide the industry with necessary liquidity.

The company says, though, that such short sale transactions may pose a fraud risk if the second sale amount is considerably higher than the short sale amount, or the two sale transactions are executed within a very short window of time.

Grace says 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.

Craig Focardi, senior research director for consumer lending at the TowerGroup, added that it is important in all short sale transactions to disclose all potential buyers to the seller and accurate home price comparables. Focardi also noted that the long duration of mortgage defaults and the potential loss that may accompany a short sale mandate automation and outsourcing of technology to reduce risk for lenders.

The Santa Ana, California-based CoreLogic examined a representative data sample of single family residence (SFR) short sale transactions from the past two years. The data used for the study represents 98 percent of real estate transactions and 85 percent of mortgage financing details.


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