Fraudulent aspects of short sale transactions in Florida

Many real estate experts and commentators are of the view that the type of transaction discussed in this article does amount to civil and/or criminal fraud. Lenders are attempting to stop these type of transactions from occurring via the use of the arms length transaction affidavits. See “Why Does the Bank Require an Arms-Length Affidavit on a Short Sale?” By Elizabeth Weintraub, www.About.com; Blog by Alan Nyugen, Realtor in Jacksonville, Florida, www.brokeralan.com; “Homeowner Fraud Exacerbates Mortgage Crisis,” by Leslie Berkman, The Press Enterprise, August 30, 2008, www.pe.com; “Bank Take Losses on Short Sales as Foreclosures Soar,” By John Gittelsohn and Margaret Collins, Bloomberg.com, December 4, 2009. Additionally, one title company actually has a power point presentation used to train its brokers to spot potential straw borrower fraud (i.e. use of a strawman to “act” as the borrower to gain loan approval when the actual borrower would not be able to qualify), which is similar to the use of a strawman to “act” as the purchase in a short sale to hide the identity of the actual purchaser. See TRGC Internet Conference Training Program. Similarly, where a second mortgage holder tells an owner to pay money to the second mortgage holder outside of the short sale closing (thus depriving the first mortgage holder of all of the short sale proceeds) that this is also considered to be fraud on the first mortgage holder. See “Big Banks Accused of Short Sale Fraud,” By Diana Olick, CNBC Real Estate Reporter, January 15, 2010, www.CNBC.com.

In the above stated example, if the owner and strawman are required to sign an arms length transaction affidavit as part of the short sale closing, then there is no question that they will be making a false statement and subject to liability since: (1) the owner and strawman have a business arrangement together (the strawman will sell the home to the relative); (2) there is a side arrangement between the strawman and owner (agreement that the strawman will sell the home to relative and receive compensation for it); (3) there is an agreement between the parties and funds are being paid to a person outside of the closing.

Furthermore, the owner and strawman are making these false statements, as well as engaging in the entire transaction for the purpose of effectuating a short sale that the lender would never have agreed to, and the ultimate purpose of the transaction is to benefit the relative.

The owner and strawman will clearly be engaging in fraud based on the elements set out by the Florida Supreme Court in Johnson v. Davis inasmuch as the owner and strawman will be making a false statement, knowing the statement is false, with the intent that the lender rely on the statement. Additionally, the relative who purchases the residence from the strawman after the owner and the strawman have made the foregoing false statements for the purpose of effectuation an ultimate sale to the relative could be engaging in a conspiracy to defraud the owner’s lender, even if the relative is not directly perpetrating the actual fraud.

In the case that an arms length transaction affidavit is not required at the closing, if a lender would not allow the short sale directly to the relative, then the entire plan is clearly intended to effectuate a transaction which the relative and the owner would not be able to effectuate but for creating, in essence, a fictional buyer via the strawman. By trying to circumvent the lender’s policy and requirements in order to approve a short sale, the owner and relative would be denying the lender’s right to foreclose on the property, obtain a sale thereof said foreclosure, and then obtain a deficiency judgment against the owner for the difference between the sale price and the full loan amount. A lender, by approving a short sale, will only receive the short sale purchase price and will be forgiving the amount of the loan less the short sale purchase price. Therefore, a lender has the absolute right to determine under what circumstances it will give up the foregoing rights.