DataQuick Outlines Five Best Practices to Fight Short Sale Fraud

DataQuick Outlines Five Best Practices to Fight Short Sale Fraud

06/13/2013 BY: ESTHER CHO

As long as short sales remain a common strategy to handle distressed properties, related fraudulent activity should also be expected. To help lenders, servicers, and investors develop tactics to combat short sale fraud, DataQuick outlined five solutions as starting points in a recent white paper.

The first is to understand activity levels to pinpoint markets with the greatest potential for fraud.

Over the past two years, DataQuick identified 205,177 short sales in 14 of the largest counties. Based on the analysis, a handful of counties stood out due to their high levels of short sale activity.

In Wayne County, Michigan, 38 percent of all sales were short sales, the most out of any other county.

Counties located west such as San Diego, Los Angeles, and Maricopa, in Arizona also had a high prevalence of short sale activity, ranging from 19 to 26 percent of all sales.

The second strategy narrows down activity even further by determining the “fraudster profile.” For example, DataQuick compared suspicious short sales to all short sales to identify a property-centric fraudster profile.

The data provider found 7,139 short sales between April 2011 and April 2013 were re-sold within 6 months of the short sale.

Out of those specific sales, 516 transactions were found to be suspicious because the original short sale price was less than 50 percent of the market value at the time of the sale, and the subsequent sale was at least 200 percent higher than the short sale price.

Though, DataQuick noted it’s important to understand activity on a neighborhood/ZIP code level since trends can vary greatly within a county. For example, in Maricopa County, which was found to have a high occurrence of suspicious activity, one ZIP code accounted for 6.6 percent of suspicious activity but only 2.2 percent of short sales. Meanwhile, another ZIP code in the county accounted for 0.7 percent of suspicious activity, but 3.5 percent of short sales.

The data provider also noted the incidence of suspicious activity was more common on lower-priced properties below $200,000.

However, anticipating short sale fraud based on location and profiles is just aspect of the overall strategy.

DataQuick also suggested leveraging certain tools to implement early warning triggers as the third strategy. For example, an automated solution can be used to flag problem transactions that might require further evaluation from an expert.

The next strategy is know what discount should be expected on a short sale before the offer is made. According to DataQuick, automatic valuation models can assist with calculating appropriate discounts at different stages of default.

The last step is to leverage technology to quickly evaluate the offer. This practice is an extension of the previous step and provides “an automated, more comprehensive evaluation of the short sale offer and a more in-depth view of the potential for fraud.”

DataQuick stressed that the best practices provided are just outlines to provide a foundation, but ultimately, solutions also need to be developed based on business requirements and one’s specific knowledge of short sale fraud.

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