Lenders are building buffers to protect themselves from an anticipated rise in borrower fraud when the Home Affordable Foreclosure Alternatives (HAFA) program launches on April 5, 2010 and prompts a surge in demand for short sales. HousingWire broke the story on HAFA in October when the US Treasury Department announced the program. The Treasury will provide incentives to servicers that provide short sales and deeds-in-lieu of foreclosures to borrowers who do not qualify for a loan modification through the Home Affordable Modification Program (HAMP). Through January 2010, participating servicers in HAMP provided 116,000 permanent modifications. Mary Alice Short, a real estate agent in Minnesota, told HousingWire of a common type of fraud in the short sale arena. Borrowers sometimes have a relative or partner purchase the property in a short sale and rent it back to the defaulted borrower. As short sales are increasing in demand with the onset of HAFA, lenders are now having all parties of a short sale transaction – borrowers, buyers and real estate agents – sign affidavits assuring that there are no under-the-table agreements and the transaction is taking place at arms length, Short said. Short also described a situation where an investor makes a lowball offer to the lender to buy the property at a short sale. If the lender approves the offer, the investor then sells the property to an end buyer at a “simultaneous closing.” “The investor collects the ‘spread’ between the amount of money the lender was willing to accept and the purchase price that could be obtained on the open market. In order to crack down on this, many lenders now require that the offer come from a licensed real estate agent,” Short said. “In fact, the agent has to send in their licensure information along with the short sale application.” Ari Afshar, of Housing Assist America, a company that helps broker short sales in California, said HAFA will “definitely expedite short sales” and he is already seeing “a huge influx of deals.” He warned however of the same fraudulent behavior Short mentioned. “Many homeowners are attempting to purchase their own properties at the market value. They will request a family member purchase their property with a different last name,” Afshar said. Even borrowers who pursue a legitimate short sale could cost the lender. Many borrowers mistakenly think that a short sale frees them from the mortgage, but lenders still have the right to pursue the losses, according to Christopher Hanson, founder of the Hanson Law Firm, which represents real estate brokerages and other housing-related companies. The problem is that banks will have to go through lengthy and expensive litigation. The process could take up to 18 months and cost more than $100,000. Even then, Hanson explained, the borrower has the right to repay the judgment amount for one year after the ruling and get the home back – otherwise known as the redemption right. In an effort to combat fraud and other risks associated with short sales, Fannie Mae (FNM) requires borrowers to wait two years after a short sale before they can purchase another home with a Fannie-backed mortgage. Write to Jon Prior.