1. Presented by: Kathy Mehringer CRB, SFR® SFR® Instructor California Association of REALTORS® Director for Life 1

2. What is Short Sale Fraud? The misrepresentation or omission of material facts designed to induce a Servicer / Lender to agree to agree to the sale of a property At a price, terms and/or conditions which would not have been agreed to had the true facts been known What does fraud look like: Property Flopping / Flipping Non-Arm’s Length Transactions Non-disclosure of dual agency representation by broker Misleading lender / servicer as to distribution of commission and/or other payouts 2

3. What is Short Sale Fraud? Falsification, manipulation AND/OR multiplication of HUD1 Settlement Statement(s) Abuse of the Multiple Listing System (“MLS”) What / When / Where Fair Market Value maneuvering BPO Abuse of MLS data Reverse staging 3

4. Prevent Mortgage Fraud Recognize Red Flags Another Definition of Fraud:  Deceit  Trickery  With intent to profit Recognize the Red Flag: “If it sounds too good to be true………..” “Trust me it’s perfectly legal…………….” “I can give you the secret to multiple commissions…” DON’T JUST SAY “NO” SAY “HECK NO!” 4

5. Scams and Schemes We are all part of the solution!  Honest Realtors®  Broker defense lawyers  Risk management advisors  Brokers and managers  Real estate trade organizations  Law enforcement agencies  Buyers and sellers  Lien holders and servicers  Settlement Service Providers 5

6. Recognize: Its easy Be alert and pay attention Reject: Not hard when you understand the consequence Just say “NO” Report: Take the time to do the right thing Walk the walk – don’t just talk the talk 6 Scams and Schemes

7. Investors “Flip ‘em and Flop ‘em” I can show you how Cash for homeowners: “Only to you will my secrets revealed!” Real Estate Licensees: “Earn three commissions on every short sale” 7 Scams and Schemes

8. Arm’s Length Affidavits Require borrower(s) and buyer(s) signatures AND Listing agent and buyer’s agent signatures AND Are signed under penalty of perjury AND Ought to be read carefully before signing 8

9. 9

10. 10

11. 11

12. 12

13. Distressed Homeowner : In Default OR Danger of Imminent Default 13

14. Mortgage or Loan(s) – More $$$ 14 Some Scams & Schemes  Seller persuaded to: Transfer into a trust w/ beneficial interest to interested party; Stop making payments OR Pay to Con Man Power of Attorney  Short Sale Negotiator is Buyer or works for Buyer Deed transfer, quit claim, multiple bankruptcy filings  Quick Sale below FMV “for the flip” Falsify MLS info, bogus offers, fake photos, listing agent freezes out offers in order to self sell mulitiple HUD-1’s LLC Buyer, reverse staging, bogus liens, bogus repairs Settlement service provider “in pocket” manipulates HUD-1 outside escrow payouts  Pre-determined buyer - double escrow to retail buyer A-B-C  Close Escrow – Jail time

15. Current Fair Market Value – Less $$$ Legitimate Real Estate Representation  Open to market and Public Brokers  Present all offers to seller Secure highest price with best terms from a legitimate qualified buyer Best offer to short sale lender  Disclose all material facts, addenda, agreements HUD settlement & lender approval letter match No money changes hands without consent of short sale lender  Adhere to Arm’s Length Affidavit No money transfers outside of escrow Close Escrow and complete short sale 15

16. Just When You Think You Have Seen it All 16

17. Red Flags Listing agent (individual) also represents buyer  Dual Agency IS NOT necessarily problematic as long as offer is legitimate No counter offers negotiated with purchase contract MLS data entered the same day as the sale Listing agent unable / unwilling to provide market activity verification Specific escrow company as a condition of sale  “Off Brand” Offers from LLC  Multiple Offers in queue from other LLCs  “Teasing the Lender” 17

18. 6+6=12 Preventative Measures 1. Property Inspections 2. Independent Licensed Certified Appraisals 3. Preliminary Title Reports 4. Review contracts for added language: a. I’m robbing you but I’m telling you b. “Buyer intends to resell at a profit” 5. Controls on LLC transactions 6. Cash purchases / verify funds upfront 18

19. 12 Preventative Measures 1. Pre-Approval letters / legitimate source 2. Third Party Short Sale Negotiators 3. Implement Exclusionary List 4. Minimum MLS marketing time a. In the relevant MLS 5. Require Market Activity Report 6. Require both Buyer and Seller side of HUD-1 Settlement Statement a. Why would a Buyer agree to pay off liens, debts, short sale negotiator or any additional fees? b. Because the house is being sold at a price well below fair market value, right? 19

20. Enforcement Efforts are Underway 20

21. Fraudulent Short Sale Approval Letters http://www.fbi.gov/losangeles/press-releases/2012/three-arrested-in-los- angeles-and-orange-county-for-fraud-involving-short-sale-real-estate- transactions?utm_campaign=email- Immediate&utm_medium=email&utm_source=fbi-in-the- news&utm_content=106751 http://www.fbi.gov/losangeles/press-releases/2012/three-arrested-in-los- angeles-and-orange-county-for-fraud-involving-short-sale-real-estate- transactions?utm_campaign=email- Immediate&utm_medium=email&utm_source=fbi-in-the- news&utm_content=106751 U.S. Attorney’s Office June 15, 2012 three arrested in Los Angeles and Orange County for Fraud Involving Short Sale Real Estate Transactions Alleging they defrauded homeowners, financial institutions, and real estate investors in schemes that targeted the distressed homeowner market and allegedly caused more than $10 million in losses, According to court documents, the defendants used a variety of schemes, at least two of which centered on fraudulent short sale approval letters purportedly issued by a bank. Many of the properties utilized in the schemes were distressed homes. In some cases, the defendants claimed to have insiders working at the bank who, in exchange for cash, would authorize short sales for far less than the fair market value. This allowed the defendants to “flip” the house for a significant profit. 21

22. Federal Bureau of Investigation http://www.fbi.gov/losangeles/press-releases/2014/real-estate- professional-pleads-guilty-to-federal-bank-fraud-charges-for-illegally- flipping-central-coast-residential-properties http://www.fbi.gov/losangeles/press-releases/2014/real-estate- professional-pleads-guilty-to-federal-bank-fraud-charges-for-illegally- flipping-central-coast-residential-properties San Luis Obispo real estate broker pleads guilty to a short sale “flipping” scheme He purchased homes at artificially low prices and resold them at a profit Between January of 2010 and September of 2012 the broker admitted that he made false representations about the fair market value of the short sales he was purchasing While negotiating the short sale at a lower price he simultaneously was negotiating the flip at a much higher price Profiting in excess of $500,000.00 The Judge will impose the sentence in June of 2014 22

23. Question and Answer Time 23