Fraudulent short sales are threatening the viability of this refuge for struggling home owners.

 A recent study by financial consulting firm CoreLogic says one common practice is for a real estate salesperson representing the seller to negotiate with the lender to obtain approval for a low selling price. Then the property is sold to a straw buyer affiliated with the practitioner. After the deal closes, the property is immediately resold for a much higher price. Sometimes the new buyers are victims of identity fraud who don’t even know that their financial information is being used to buy a property.

Another fraudulent transaction involves the borrower deliberately defaulting. A friend or relative of the original borrower purchases the property through a short sale. When the short sale closes, the new owner transfers the property back to the original owner.

Frank McKenna, the vice president for fraud strategy at CoreLogic, say these deals represent only about 2 percent of short sales, but are becoming more frequent. CoreLogic estimates them by counting the number of quick turnaround resales, especially at significantly higher prices.

 Source: The New York Times, Bob Tedeschi (09/10/2010)