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California Warns Of Rising Short Sale Fraud

Having recently warned of rising incidents of short sale fraud, the California Department of Real Estate promised to step up enforcement and borrower education efforts to protect struggling homeowners from scammers.

Short sales - an agreement allowing the sale of underwater homes for less than the amount owed - have become a popular recourse as California home values fall and homeowners risk going into foreclosure.

Tom Pool, the department’s spokesman, said the rise is similar to the fraud incidents that plagued the loan modification program. He said it usually starts with a few complaints with one or two companies before swelling into a bigger problem later on.

The Department has already issued accusations against IQ Smarter Investments, a San Ramon-based company offering mortgage workout assistance, saying it was taking unfair advantage of the current problem.

Fraud became a bigger issue with the launch of the government’s short sale program, the Home Affordable Foreclosure Alternatives (HAFA), in April 2010. Several companies offering to intervene end up just walking away with borrowers' money, just like loan modification scammers did.

Jeff Davi, California's Real Estate Commissioner, wrote to a number of mortgage lenders last week reminding them to stay on guard. Experts agree that lender participation is vital to battling fraudulent companies, especially in hard-hit markets like California.

Borrowers are warned to watch out for telltale signs of fraud, particularly upfront payments. Upfront fees have been banned in most states as a measure against mortgage scams, and companies who charge them should automatically be put under suspicion.