Short Sales Cost Lenders $310m More Than Necessary, CoreLogic Study Finds

Property data provider CoreLogic (CLGX), today released the 2010 “The Cost of Short Sales” study in an effort to estimate the financial impact of this year’s surge in short sales. The study projects that more than half of short sales happen in Arizona, California, Florida and Texas and will cost lenders an estimated $310m in unnecessary losses during all of 2010. These losses average $41,500 per short sale. Potential fraud, such as flipping or offer misrepresentation, likely happens in one in every 53 short sale transactions. CoreLogic examined a representative data sample of single family residence (SFR) short sale transactions from the past two years, representing 98% of real estate transactions and 85% of mortgage financing details, the firm said. CoreLogic also found the number of short sales in the market has more than tripled since 2008 with the estimated annual volume at 400,000. Lender risk increases with short sales transactions when the second sale amount is vastly higher than the short sale amount, and/or the two sale transactions are executed within a very short window of time. Below is an example of fraud, as provided in the short sale study, where the highest bid is withheld by the lender: CoreLogic suggests several ways to try to identify fraud in short sales. Lenders should require the borrowers to confirm that they are not aware of any other parties or contracts associated with the property, as known associates are necessary to perpetrate fraud. Also, lenders should verify borrowers’ income, get an accurate valuation, confirm any renovations and be sure the seller is the actual owner of the property. Write to Jacob Gaffney. The author holds no relevant investments.

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