Replies to This Discussion

Permalink Reply by Jill P on July 31, 2011 at 3:31am

Well, isn't it true that the banks are getting 70% of all past due income income from the government?  I'd like to see this forum discuss that if possible.

 

So, they drag their feet during the short sale process (and get 70% of the missed payments), making it so incredibly slow and frustrating that no normal buyer would stick around.  Can you imagine a VA buyer who needs to move waiting around for a short sale?  Or are you telling them, like we all do, that they should stick with other kinds of purchases that have more assurance of actually changing ownership.  

Only investors, usually with spare cash, hang around for the 4-12 months that it takes for a short sale.   Discount for the cash and the wait time, the as is, no repairs agenda, and, voila, you have a recipe for a discounted sales price.  

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Permalink Reply by Rita Legan CDPE (440) 227-4461 on July 31, 2011 at 3:48am

I agree with Richard. If a short sale could close in 30 to 45 days "normal buyers" would be more apt to make an offer and prices on the SS property would go up. Also seller would not have to maintain the property as long which may cut down on repairs.

I think the banks should be thankful to investors. Nobody quacks when investor buys a foreclosure, maybe pays cash, rehabs it and then sells it for 40% more after they work their but off getting it market ready. It also pulls up the prices in the neighborhood.

 

 

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Permalink Reply by Nate Gerard on July 31, 2011 at 3:57am

I like the investor who comes in and writes a real PA, sticks in there for however long it takes to get the file closed, and of course has the agent marketing the home to an owner occupant to close as quickly as possible after the investor's sale is closed. My take is that although they are making money fast, they are performing the service of hanging in there for an unlimited amount of time plus in many cases they are doing whatever needs to be done to close the sale and keep the seller from foreclosure.

 

I do get concerned about investors who get an option to purchase the property and who have no intention of buying it if an owner occupant never shows up to buy it from the investor at a profit. In that case the seller is left holding the bag.

 

Of course if banks think this is such a bad thing they could take a lot of action to change that. Firstly, they could consider a modification that includes principle reduction! Or they could bid 10% lower than market value at the sheriff's sale, which would provide enough money to redeem the property and maybe even give some money to a second mortgage if needed. Finally, of course, the banks could shorten the approval time after a contract is presented. This could be accomplished by outsourcing their short sale process. BOA has actually done this successfully with their Co-Op short sale.

 

The bottom line is that there will be scam investors out there but not all investors are scammers. Many legitimately care about the sellers and the buyers and are trying to perform a service to get the ivnentory moved so it is no longer a drag on our market.

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Permalink Reply by Toni Campbell on July 31, 2011 at 3:59am

If a home short sale or not needs work and "standard" buyers like the FHA, VA, and some conventional buyers today can not afford to or don't have the knowledge or will to do even minor repairs then I can understand the investor coming in buying the home making the repairs and then selling it. This can actually help the neighborhoods bounce back.

Unfortunatly I am still seeing homes being listed for way under value and an offer is being accepted in the first day on the market. Then they sit for 3 months or more and they close for even farther under value. In the same neighborhood I will see another home being sold for over asking price. Why? Are we not as Realtors and listing agents still working in the best interest of our sellers? Just food for thought.

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Permalink Reply by Will Pollock on July 31, 2011 at 4:02am

My response to author Tom Kelly would be:

1)  CorLogic merely reports market data, they have no agenda but to report this data and charge money for it and it's very valuable to all of us.

2)  The servicers and investors are entirely in charge of their own due diligence in determining market values and their take prices and net proceeds.  Since 2008, I've never had a servicer ask me or a buyer how much the investor should accept in a short sale.  On 7/29/11, I closed a two lender short sale where BAC was the junior (and not the senior).  BAC purchased 3 appraisals (not BPOs) at $$200/300/400? per to determine if the contract price was fair...and their payoff was only  $3k..go figure! 

Servicers and investors have a lot more to consider when making a short (or REO) sale decision than just the market value. Active and shadow inventory levels, loan-loss reserve ratios, servicing costs, litigation costs, state-by-state foreclosure compliance costs, cost of money, non-performing asset costs, shareholder expectations...these are elemental components of the equation that factor into investor short sale decisions...all of which would quickly die a lonely and anonymous death inside of Mr. Kelly's pretty little head.

As a 1/310 millionth owner of 70% of all existing home mortgages in the US, I for one am glad investors are now realizing the faster they dispose of the distressed inventory and get homes back into the hands of homeowners capable of making a mortgage payment,  the faster this mess ends and the faster our economy recovers.

3) What Mr. Kelly fails to mention is that these "scammers" incur significant risk to their capital and often take losses on their investments.  We need these "scammers" to move this inventory and get these assets out of distressed status and into performing status.  If not the "scammers", then who?

4) Capitalism, home sales, mortgage lending, mortgage servicing (and even freelance editorial writing) are all about using creativity and providing additional value  in selling something for more than what was paid.  If a flipper can satisfy an investor's net proceeds requirements (reduce the investor's loss acceptably) by flipping the collateral, why shouldn't that flipper be compensated?

 

Go back to sleep Tom Kelly.  We'll wake you when it's safe out here again.

 

Thanks Jeff!  I really needed to get that off my chest!

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Permalink Reply by ALLAN ARTHUR on July 31, 2011 at 4:05am

 

Simultaneous Escrows, with 2 different buyers, on the same property, without disclosure to ALL Parties (including the seller, sellers lender, and listing agent) may be considered fraud.  With that said, the reporter of this story Tom Kelly failed to point out an additional point about Core Logic. Core Logic Parent Company First American Title Company (aka FATCO) has financial interest in an asset management Co. Therefore as Short sales pick up steam as the transaction of preference, it cuts into their bottom line. 

Articles that are written with a spin hurt everyone. typical reporter not telling the whole story.

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Permalink Reply by ALLAN ARTHUR on July 31, 2011 at 4:21am

Will Pollock said:

My response to author Tom Kelly would be:

1)  CorLogic merely reports market data, they have no agenda but to report this data and charge money for it and it's very valuable to all of us.

2)  The servicers and investors are entirely in charge of their own due diligence in determining market values and their take prices and net proceeds.  Since 2008, I've never had a servicer ask me or a buyer how much the investor should accept in a short sale.  On 7/29/11, I closed a two lender short sale where BAC was the junior (and not the senior).  BAC purchased 3 appraisals (not BPOs) at $$200/300/400? per to determine if the contract price was fair...and their payoff was only  $3k..go figure! 

Servicers and investors have a lot more to consider when making a short (or REO) sale decision than just the market value. Active and shadow inventory levels, loan-loss reserve ratios, servicing costs, litigation costs, state-by-state foreclosure compliance costs, cost of money, non-performing asset costs, shareholder expectations...these are elemental components of the equation that factor into investor short sale decisions...all of which would quickly die a lonely and anonymous death inside of Mr. Kelly's pretty little head.

As a 1/310 millionth owner of 70% of all existing home mortgages in the US, I for one am glad investors are now realizing the faster they dispose of the distressed inventory and get homes back into the hands of homeowners capable of making a mortgage payment,  the faster this mess ends and the faster our economy recovers.

3) What Mr. Kelly fails to mention is that these "scammers" incur significant risk to their capital and often take losses on their investments.  We need these "scammers" to move this inventory and get these assets out of distressed status and into performing status.  If not the "scammers", then who?

4) Capitalism, home sales, mortgage lending, mortgage servicing (and even freelance editorial writing) are all about using creativity and providing additional value  in selling something for more than what was paid.  If a flipper can satisfy an investor's net proceeds requirements (reduce the investor's loss acceptably) by flipping the collateral, why shouldn't that flipper be compensated?

 

Go back to sleep Tom Kelly.  We'll wake you when it's safe out here again.

 

Thanks Jeff!  I really needed to get that off my chest!

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Permalink Reply by Lev Mills on July 31, 2011 at 4:21am

I have Investors that have their own Mitigation depts. and say they offer full disclosure.  What I don't understand is... what bank is going to agree to accept thousands less on a house than what a Buyer is willing to pay?  It doens't make sense.  Would one of the Short Sale Investors please explain to me.. with "full disclosure," how you convince a bank to accept an offer lower than what you flip it for.

 

Lev

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Permalink Reply by The Negotiator on July 31, 2011 at 4:22am

Monday, June 6th, 2011 at 10:19am

The Ill-Logic of CoreLogic: Suspicious Transactions

Posted by Ron Ballard

It’s easy to make headlines when you control the data, the definitions and the conclusions.

That’s what CoreLogic did last week – as an unwitting disservice to the double dipping real estate market, ethical real estate professionals and the legitimate private investors who are providing necessary liquidity into distressed markets that banks refuse to touch.

Washington Post syndicated columnist Kenneth R. Harney appears to have been duped by a promotional brochure produced by CoreLogic in writing an article dated June 3 that has filled my email box with questions.

The article can be found at http://wapo.st/ssalarm .

It opens with the alarming question: “Are banks and distressed home sellers getting rooked on a massive scale in the booming short-sale arena, leaving hundreds of millions of dollars on the table for white-collar criminals?”

The resounding answer is “NO.” Certainly not based on the “study” Harney writes about.

CoreLogic is a Santa Ana, California based “real estate and mortgage data research firm.” That means it sells data and research services, particularly to deep-pocketed banks. It is an affiliate of the gargantuan First American financial services and title insurance conglomerate.

At the end of May, CoreLogic released its “2011 Short Sale Research Study.” How can you get the study? You need to go to a CoreLogic marketing opt-in page and give them your contact information at http://bit.ly/clstudy . (The study says it cannot be redistributed, so I’m honoring that even though I feel its newsworthy character overrides the restriction on every page.)

The purpose of the “study” is to show banks that they need CoreLogic’s service designed to detect “suspicious” short sale transactions in order to avoid “potential” and “unnecessary” losses. This sounds seductive if you’re a banking executive looking to blame losses on someone else, like residential real estate investors.

And it could be helpful if the study’s methodology was explained deeper and rang true and legitimate. Unfortunately, it was designed to sound alarming in order to sell data research services.

The alarming conclusion is that lenders MAY incur up to $375 million in “unnecessary losses” in short sales. How are these losses “unnecessary”? Because CoreLogic would like banks to think the losses could be avoided by purchasing their data services.

This marketing sizzle is created by the dubious definitions upon which the study is based and the resulting creative conclusions.

The study coins yet another term for short sale resales: “suspicious transactions.” Then it creates study parameters created to capture pretty much every short sale resale that takes place within six months of the initial sale.

A short sale by definition and undeniable market behavior is a “distressed property sale,” which means that it will sell at a discount compared to non-distress sales because the seller usually has to sell or face foreclosure. There are credible, independent (non-product selling) studies quantifying short sale discounts as easily ranging between 10% to 25% depending upon the particular local market and date. The average of the studies I’ve seen is easily 15%. (Unfortunately, my email box is so full of messages asking about the CoreLogic “study” that I’m not taking the time in this article to conduct a survey of the independent studies of short sale discounts, but I’m sure readers commenting on the article will add their experiences and knowledge.)

For the purposes of this article, I’ll assume a range of 10-15% as being a conservative consensus of the magnitude of distress property discounts for short sales. So how does CoreLogic define “suspicious”? It offers three parameters for “suspicious” short sale resales:

1.   Resales within 30 days with a 10% or higher resale value; or
2.   Resales within 90 days with a 20% or higher resale value; or,
3.   Resales within 6 months with a 40% or higher resale value.

See how clever the definitions are?

If a short sale by nature has a discount of 10% or more, then a resale as a non-distressed sale property will NATURALLY have a price increase of 10% or more. To CoreLogic the mere fact that a resale occurs apparently makes it “suspicious.” The study tags 1 in 52 short sales over the last three years as “suspicious.”

This sounds alarming, but it’s merely a reflection of natural market behavior.

If a home buyer purchases a property at a 10% discount, then it’s natural that it can be immediately resold for a 10% increase. Considering typical resale costs of 7-8%, a 2% gross profit is not particularly alarming. But when did buy low and sell high become illegal? It’s the basis of all commerce.

The longer resale intervals are largely a natural reflection of changing markets and the likelihood that the property has been improved (“rehabbed”). In many cases, investors purchase properties for which banks will not approve traditional loans due to disrepair. The inability of typical retail buyers to purchase the property creates an even larger discount (20% or more) by reducing the pool of potential buyers. It may take as little as $5-10,000 of cosmetic improvement and relatively minor repairs to make a home eligible for a loan, but neither a distressed seller nor typical retail buyer will invest that money in advance, especially without a short sale approval at a known price.

If the investor can sell the property for 20% more, then I think the majority of investors would take the opportunity. If the property has a relatively small increase (or a loss – yes that happens!), then the investor may rent out the property until the particular local market recovers. The investor will avoid selling at a loss if possible, so “bad” investments don’t show as suspicious transactions, only good ones. Bad ones become a “hold” in which the unlucky buyer overpaid and the bank had an “unnecessary gain.”

A resale of a short sale property does not CREATE a loss to the lender, it merely QUANTIFIES the discount. (I’ve studied this in depth in an earlier article at http://bit.ly/3myths .) If a buyer does not resell a property in the 6 month parameters of the study, then the “loss” is not quantified by the study parameters. Under the study’s methodology, the discounts obtained by EVERY home buyer who lives in the house and every investor who holds (either to rent or to avoid a short term loss) is not defined as “unnecessary.” Yet the “loss” (discount on short sale) still occurred. The bottom line to the bank is the same if there is a resale or not.

“Unnecessary” is neither defined in the study nor is the method of quantifying it explained. That leaves the reader to make assumptions. Here’s mine:

1. The loss is “unnecessary” because CoreLogic assumes that the seller could have obtained the investor’s buyer and sold at the higher price.
2. The loss is calculated as the difference between the short sale and the resale.

Both of these assumptions are typically inaccurate.

In a legitimate investor resale, the short sale contract is made at one time and the resale contract is made at a much later time. Two different sets of market circumstances apply. Moreover, the marketing for the first contract is for a distressed sale in which the seller must sell and the property is encumbered by liens in excess of value. If the investor has purchased the “right” property, the resale is marketed close to, or after, the short sale approval is granted and the property can be marketed as a non-distress sale.

This reveals a simple, irrefutable truth: A distressed seller (and, hence their lender) can never eliminate the distress sale discount, only a subsequent owner who cleared the liens can. Hence, a subsequent owner should always have a higher resale price that offsets the short sale discount. There is nothing “suspicious” about that. It is undeniable market behavior.

By defining irrefutable market behavior as “suspicious,” CoreLogic is able to dupe an otherwise reputable journalist into becoming its marketing mouthpiece who parrots an unwarranted alarm into a newsworthy headline.

That is not to deny that fraud occurs in short sales. But ordinary market behavior is not fraud.

The alleged behavior of the Connecticut real estate agents in Harney’s article is improper. Many of us in the industry refer to what they did as “front running.” The unscrupulous listing agent interjects their own buyer at a lower price in front of the independent, higher offer and then withholds the higher offer for their own benefit. That is wrong and is not what legitimate investors and their agents do.

As in all of business and of crime, timing is everything. When a higher, legitimate offer is obtained first and a lower subsequent offer is fabricated to supplant it, then fraudulent activity occurs. But when the higher offer is received as a result of the investor’s marketing after the property is under contract, then normal economic behavior occurs (a higher price results from the removal of the short sale stigma against the property).

CoreLogic doesn’t identify even one “fraudulent” short sale in which this kind of improper practice occurs to label it as “unnecessary.” Mr. Harney’s research uncovered one case (albeit well-known in the industry).

Neither the CoreLogic study nor the product it promotes does anything to distinguish between ordinary, unavoidable market behavior that it identifies as “suspicious” and actually fraudulent transactions.

The study’s methodology creates an unconscionably inflated valuation of “unnecessary losses” by applying a calculation that fails to distinguish between fraudulent transactions and legitimate resales.

The calculation of actual resale price minus short sale price places a value on a difference that banks, by definition, can never realize. The bank cannot remove the short sale stigma, so the bank cannot receive the benefit of a non-distress sale. To calculate this difference as a “loss” is academically dishonest. But a sales brochure masked as a “study” does not need academic credibility.

One “statistic” from the study stands out as totally incredulous in today’s market and transactional environment. On page 6 of the study, CoreLogic states that short sales “resold on the same day have an average of 34 percent ($56,947) gain between sales prices.”

Now that would certainly have legitimate investors salivating and stampeding into the market if possible.

In California, county recorders do not permit title insurance and escrow companies to record two deeds for the same property on the same day. So this alarming statistic is not physically possible in California. Moreover, it’s not practically possible in most other states when the end buyer needs a bank loan. Most Lenders require that the property seller actually hold record title before they will update the appraisal and prepare loan documents. Hence, the fastest resales typically take a week or more.

The “study” includes three years of transactions. The “same day” resale data is a red herring transaction that could have been accomplished three years ago but is virtually impossible now. To the informed reader, CoreLogic suffers a dramatic loss in credibility by even making the point.

Nowhere does CoreLogic state the size of the data pool for this alarming “fact.” It could have been ONE short sale for $110,544 that resold for $167,491. (This calculation fits the “average.”)

CoreLogic has been creative in dubbing legitimate transactions as “suspicious.” This leads journalists seeking to write interesting articles to label entrepreneurs who are bringing necessary liquidity to the housing market as “white-collar criminals.” It sounds intriguing but rings hollow because the study is a sales brochure and a non-story.

If a credible journalist like Mr. Harney has been duped by this kind of information, how much more so have other journalists, government regulators, and lawmakers?

Only the ONE short sale resale fraud case Harney discusses has received national industry attention. If short sale fraud were truly a rampant problem creating hundreds of millions of dollars of losses, there surely would be more publicized fraud cases. Legitimate independent studies are needed. Not self serving sales brochures.

 

From: http://californiashortsalelawyer.com/2011/06/ill-logic-of-corelogic...

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Permalink Reply by ALLAN ARTHUR on July 31, 2011 at 4:24am

Believe me Core Logic has an agenda!

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Permalink Reply by The Negotiator on July 31, 2011 at 4:25am

Wednesday, June 8th, 2011 at 2:20pm

Exposing Fallacies in the CoreLogic Suspicious Short Sale Report

Posted by Ron Ballard

Could a highly publicized “study” warning of $375 million of “unnecessary” loan losses in “suspicious short sales” be manipulating figures just to sell more of its author’s services?

Prepare to read the following in depth analysis and I’m confident you’ll find that the answer is obvious.

Last week, articles began appearing in real estate oriented web sites and news services about CoreLogic’s “2011 Short Sale Research Study” and its alarming conclusion that lenders MAY incur up to $375 million in “unnecessary losses” due to “suspicious” short sales in 2011 alone.

It’s easy to parrot this fantastic conclusion. It’s another thing to analyze it. On Monday, June 6, I wrote my first article analyzing the study and found significant holes in it.

When looking deeper, one finds even more.

I understand that most journalists aren’t investigators and don’t have the time and resources to dig deeply into studies like this, particularly when the study’s title is so authoritative and the data looks so extensive.

Unfortunately, policy makers and regulators rely on information like this to make critical decisions.

What’s the result? Garbage in. Garbage out.

Give them faulty information and they will make ineffective decisions.

SUMMARIZING THE REPORT

It’s best if you read my June 6 article at http://bit.ly/illogic for background. I suggest the key premise of the study (besides that banks should buy CoreLogic’s over-hyped research services) is: If bank’s knew that a short sale property was going to be resold, then they could require the seller to breach the pre-existing contract with the current buyer and force the seller to enter into a contract with a subsequently found buyer who is ready to pay more now that the short sale has been approved.

Bear in mind that the study contains no discussion of consequences to the seller for breaching the contract with the buyer, nor to the banks for interfering with the contract of the buyer. As is the case in today’s political environment: it’s all about the banking corporations that are too big to fail and not about the individuals involved in the transactions.

The CoreLogic Study reportedly examines over 450,000 short sale transactions for single family residences (apparently excluding condos and coops, which in my clients’ experiences have a much lower level of resales and would skew the data downward) occurring over the last three years and categorizes them into “suspicious” and “not suspicious.” CoreLogic uses three parameters to categorize “suspicious” short sale resales:

1.    Resales within 30 days with a 10% or higher resale value; or
2.    Resales within 90 days with a 20% or higher resale value; or,
3.    Resales within 6 months with a 40% or higher resale value.

Bear in mind that there is no legal basis for establishing these standards. No law sets forth an amount of “allowable profits” on real property resales. CoreLogic’s standards conceivably could be argued based on national averages, but real estate values are local. RealtyTrac is another large data provider. It’s study of pre-foreclosure discounts (short sales) for the first quarter of 2011 found a national average discount of 9.49 percent. (See http://bit.ly/q1RT2011 .) HOWEVER, the discounts for California and Arizona were 20.2% and 8.4%, respectively. Tennessee came in the highest at 34.9%. These numbers are affected by the overall decline in property values in a specific market. For example, if prices in Arizona have already dropped more than 50% from their peak, then the current discounts will be smaller because prices can’t go much lower.

Statisticians love math, so let’s crunch some numbers. Let’s assume a house with a current, non-distressed “fair market value” of $100,000. If the property is in Arizona, then the average discount last quarter would have been $8,400 for a short sale price of $91,600. If the property is in California, then the average discount would be $20,200, resulting in a short sale price of $79,800. Quite a difference.

Now let’s try to resell those homes for a “suspicious” 10% profit. The Arizona house would have to sell for $9,160 more than it’s $91,600 initial purchase price, resulting in resale price of $100,760. The California home would have to sell for $7,980 more resulting in a resale price of $87, 780.

Keep in mind that the assumed “fair market value” for each property is $100,000. Therefore, it unlikely that the Arizona house would have sold for more than $100,000; hence, investors likely would not even enter into the transaction because there is barely enough gross profit to cover closing costs when one considers acquisition costs of the initial purchase. The CoreLogic study implies that there should be a lot of “suspicious” short sales in Arizona due to the high volume of short sales generally, but the discount numbers indicate that “suspicious” short sales are unlikely in Arizona under market conditions of the first quarter of 2011.

It is unclear from the CoreLogic study (since the methodology is not clearly explained) if any “unnecessary losses” are speculated for Arizona. If so, the likelihood that they would actually be realized appears to be extremely unlikely in the lower mark-up ranges.

Now the “suspicious” California example sells for $87,780, which is more than 12% below the assumed “fair market value.” The end buyer is still buying at a discount from “market” and this hardly looks like a transaction in which anyone is being “gouged” at either end of the deals. The first buyer in this case could sell for a 20% profit and the difference merely represents the irrefutable market difference between selling the very same property as a short sale and not as a short sale – the 20.2 percent discount identified by RealtyTrac.

CORELOGIC’S MISLEADING EXAMPLES

Page 7 of the study shows two “real life examples of investor-involved, back-to-back short sale transactions. Profits to investors mean unnecessary losses for lending institutions” — according to CoreLogic.

The editorial bias demonizing investors is made without presenting necessary facts regarding the transactions. I sent out several emails asking for information on these transactions.

What I found out is astounding – but not for the reasons cited in the study or the articles about the study.

The Kings Beach Property: Kenneth Harney’s article characterizes the first example as follows: “A house in Kings Beach, Calif., was purchased near the height of the boom in 2005 for $530,000. On Oct. 28, 2009, it was sold to an investment group in a short sale . . . for $247,500. Later that day, the investors resold the house to a non-investor purchaser for $375,000. This produced a quick $127,500 profit — a 52 percent gain for the investment group in a matter of hours.”

Kings Beach is located on Lake Tahoe, right next to the border with Nevada. The buyer purchased the home as a demo-rebuild when the local market was still rising. At some stage in the construction there was a fire and the property was substantially damaged. Apparently the owner was under-insured or simply the victim of slow insurance claim reimbursement and was unable to complete the construction. Due to destruction of the roof, the property developed a mold problem. All the while, the local market was plummeting.

It’s hard to find a property with greater distress than this one – fire damage and mold in a declining market. Moreover, there were two judgments recorded, 4 mechanics liens, and past due income taxes to the Franchise Tax Board. It almost looks like CoreLogic intentionally picked the worst case example while withholding the relevant facts.

The property was listed in January 2009 and the foreclosure was commenced with a Notice of Default on March 25, 2009. (In California, the actual foreclosure auction can occur about six months after the NOD, which made the property at risk of loss by October.) The property went into contract for $375,000 but the buyer then backed out, presumably after conducting property investigations and finding how difficult it would be to clear the liens and complete the rebuild. The property went back on the market for $479,000.

Why $479,000 when the only contract was for $375,000? My guess is that the bank responded with a minimum price for short sale approval of $479,000. Unfortunately, there were no takes for $479,000, not even for $375,000. Understand that the cost to repair and complete the house exceeded $500,000. Who would want to touch that?

The property went into contract with the investor on June 21 and the short sale package was submitted to the bank on June 24. The investor made sure the homeowner signed an extensive affidavit showing understanding of the investor’s intentions with the property. Not only was notice of investor intent given in the short sale contract, the investor recorded a notice in July in the county records stating they were purchasing the property with investment or resale intent so no one would think they were hiding anything.

The investor got busy negotiating six liens and two judgments. All EIGHT lien-holders had to accept a discount, get paid in full, or get foreclosed out by the lender. Everyone involved in short sales knows it’s difficult to negotiate two and three lien cases. I have never heard of an eight lien case, much less an eight lien successful closing. That is an inordinate amount of work with a minimal likelihood of success. But this investor was bold enough to take a risk that no one else would take.

The original buyer who independently backed out of the first contract without collusion by anyone, subsequently told the investor they would still be interested in purchasing for $375,000 IF the property could be delivered clear of liens and ready-to-build. On August 31, 2009 the end buyer entered into a contract to purchase from the investor, subject to the contigency.

The investor completed numerous inspection reports, construction plans and building estimates based on the deteriorating condition of the property. They then obtained the building permits so the buyer would have a ready-to-build project.

The investor did not complete any physical improvements (although they likely carried the property preservation costs for four months). But the investor contributed substantial value by clearing eight liens and delivering a ready to build project with known construction costs, approved plans and active building permits. People involved in these kinds of projects would consider this accomplishment nothing short of a miracle. In no way was there any fraud or “suspicious” activity contributing to bank losses. There is absolutely no way that the bank could have obtained that price without doing all of the work the investor did. But banks don’t do that; investors do.

The bank likely netted far more from this sale than it would have by foreclosing on a mold ridden, fire damaged, deteriorating, partially constructed house. I know first hand. My son’s house suffered a serious fire less than six months after he moved in. Construction estimates kept rising while the insurance claim languished. Eventually, the costs to repair the 40+ year old house (which now had to meet current codes) rose to more than his original purchase price. If he had let the house go to foreclosure, it would have netted no more than land value LESS demolition cost, or less than $10,000 for a $107,000 house.

Moreover, CoreLogic misrepresents the numbers to exaggerate the “profit.” The study states that the investor made a 52% “profit”. (Harney uses a more vague term, “gain.”) That is entirely distorted. The property resold for a gross mark-up of 52%. “Mark-up” and “profit” are two entirely different accounting concepts.

“Mark-up” is based on the difference above purchase cost. “Profit” is based on the difference between sales price and costs. The true gross profit was only 34% ($127,500/$375,000), not 52%.

With real estate commissions of 6% plus typical closing costs of 2% ($30,000 total) and qualified inspections, biological hazard evaluations, structural engineering evaluation of fire damages, preservation costs, architectural/building plans, cost of closing funds, building permits, and the utility lien and mechanics liens that were held for the second closing,  easily exceeding $25,000, the net profit was likely less than $72,500 or less than 19.4%.

This gain wasn’t made “in a matter of hours” as reported in the Washington Post, but earned over a period of four months of understandably hard work that likely consumed most of the investor’s time. All with the risk that the purchase might not close and that the property might not resell.

There is obviously nothing illegal, unethical, fraudulent or obscene about the Kings Beach transaction when one gathers the facts. What is obscene is the way CoreLogic and the press have mischaracterized it by omitting the critical back story.

The Gilbert, Arizona Property: Since my practice is in California, my sources of information for Arizona are more limited when reporting in a short time span like this, but this example is distorted as well. Harney reports, “A house in Gilbert, Ariz., sold for $400,000 in 2006. On March 2, 2010, it was bought in a short sale by investors for $220,000 and resold the same day for $267,500 — a 22 percent gain of $47,500.”

The real estate agents in Arizona that I contacted found one property meeting those parameters, so I’m pretty confident that they found it.

The original sale for $220,000 does not appear to have a listing on the MLS, so it likely was “for sale by owner” and I don’t know for how long. I also don’t yet know the foreclosure status. The MLS listing for the resale was entered for $275,000 on February 17, 2010 and indicates both that the property was vacant (because prospective buyers were required to turn on utilities for inspections) and that it was an investor resale that had not yet closed the first leg. Accordingly, prospective buyers knew what was involved. The property went into contract quickly on February 23 for $267,500. The $220,000 sale recorded (presumably closed) on March 11 (Deed Recording ID ending 5794, deed notarized March 3). The $267,500 sale recorded (presumably closed) on March 12 (Deed ID ending 9135, deed notarized March 6).

The deeds were pre-typed with a date of March 2, 2010, so that apparently is what CoreLogic used to report the “same day” sale, but that does not agree with the facts of actual recording dates. It appears that CoreLogic’s data services are not as accurate as they claim to be.

I don’t have the back story on the original seller, other than that the original mortgage on the $400,000 purchase was $320,000. This appears to be a conventional loan (20% down) and purchase in which the buyer was not engaging in aggressive financing. Since the house was vacant, some change in circumstances apparently occurred which caused the owners to move. Title was held as husband and wife.

CoreLogic again distorted the “profit” by using “mark-up” instead. The gross profit was only 17.76% ($47,500/$267,500), not 22%.

Assuming real estate commissions and closing costs of 8% ($21,400), the net profit was only $26,100 (or 9.75%). Incidentally, the investor’s purchase of $220,000 shows a mortgage of $227,172, which implies that its cost of funds was $7,172 and that it’s net-net profit was less than $18,928 (or 7%).

Without more information, this doesn’t look like the home run for the investor that CoreLogic implies. Since we don’t have any indication of collusion or wrongdoing, we don’t know if any of the “loss” is fraudulent. Moreover, the net spread potentially lost to the bank was only $26,100, which is $21,400 (45%) less than speculated by CoreLogic.

Hence, the $375 Million grossly exaggerated speculation of “unnecessary losses” is based upon:

CORELOGIC’S FUNDAMENTALLY FLAWED ASSUMPTIONS:

FIRST FLAW: CoreLogic’s first fundamentally flawed assumption is that the seller in distress could have received the same, subsequent, higher offer that the initial buyer (“investor”) received. As the RealtyTrac data shows, short sales sell at a discount below non-distress sale properties.

This presents a fact that is astounding to many uneducated observers: The very same house CAN have two different values on the same day. When the day begins, the house is a pre-foreclosure property with encumbrances in excess of value. In the morning, the initial buyer pays off the discounted lien for an amount to which THE BANK AGREED AFTER CONDUCTING ITS OWN INDEPENDENT PROPERTY VALUATION which considers the short sale stigma. Now the property is no longer a short sale or a distressed property. This eliminates the pre-foreclosure/short sale discount and the property returns to market value (in reality most short sales are in poorer condition than non-distress properties so the rebound probably isn’t to full fair market value). In the afternoon, the new end buyer is prepared to pay full value because they don’t have to deal with the delays, hassles, unpredictability and uncertainty of a short sale.

The investor buyer HAS added value to the property, even without hammering one nail or waiving one paint brush. How? The investor cleared title and eliminated the delays, hassles, unpredictability and uncertainty that exists for a short sale buyer. Therefore, the bank COULD NOT HAVE OBTAINED the second, higher price offer because it is based upon the prior, actual payoff of the liens and the bank does not payoff the liens for nothing.

If an accurate, unbiased study would be conducted analyzing the difference between the sale price of an “ordinary” short sale directly to an owner-occupant versus an investor based resale with clear title, my expectation is that the study would find: 1) that the price for the resale is higher than for the “ordinary” sale; and, 2) that the higher offer would not have been obtained but for the marketing done by or on behalf of the investor buyer (because it ordinarily occurs close to or shortly after the short sale approval when clearing title is essentially assured). Accordingly, most of the $375 million “unnecessary loss” estimate would disappear if the study would cure this one flaw alone.

SECOND FLAW: The “2011 Short Sale Study” states on page 4, “Not all transactions deemed suspicious using these criteria will result in a loss to the lender or mortgage note holder.” However, it does not state how, if at all, the study discounts the “unnecessary losses” for “suspicious transactions” which are not fraudulent – as only fraudulent transactions would be recoverable, not legitimate resales. If a high estimate of 20% of “suspicious” resale transactions are fraudulent in some respect, then that alone would lower the $375 million speculated losses to just $75 million.

THIRD FLAW: The CoreLogic study appears to assume that ALL of the gross profit on a resale constitutes “unnecessary loss” to the bank. This is never the case. As we saw in the Arizona example, closing costs and commissions likely consumed 45% of the $47,500 gross profit showing in the study. Alternately, if this sale had not been “for sale by owner,” it would have required a retail sales price of about $234,050 to net down to $220,000 after commissions on the first leg only. This would have greatly eaten into gross profits instead.

At a bare minimum, unavoidable closing costs and real estate commissions on the resale profit would reduce the marginal spread by 8%. This means the $375 million estimate is overstated by a minimum of $30 million and that no more than $345 million should be the starting point even if all transactions were somehow, remarkably fraudulent and recoverable.

Moreover, the study also assumes that none of the gross spread goes to pay liens outside of escrow. Few people like to admit it or talk about it, but one of real estate’s “dirty little secrets” is that junior lien holders often require payments outside of escrow greater than the amount approved by the primary lien holder. Hence, some of the gross profit which CoreLogic counts as “unnecessary loss” is actually repayment of junior lien holders to reduce their losses. Unfortunately, since these payments are “hush-hush” they are very difficult to quantify.

The $375 million speculative estimate is further falsely inflated by not allowing for property improvement costs. Resales with the longer holds of 30-90+ days likely involve more than cosmetic property improvements. These would often be more than 10% of the purchase price and reduce the “suspicious” 20% profit of “unnecessary losses” in half.

FOURTH FLAW: The potential losses are further overstated by not providing variations for local market conditions. As shown by the RealtyTrac data, the short sale discount in California was more than 20% last quarter. Therefore, any gross profit less than 20% should not be tagged as “suspicious” because it represents merely the difference between distress sale price and non-distress sale price. The reported discount last quarter for Florida was 14.85%, so the two States with the greatest number of short sales (and close to 40% of all short sales in the country per RealtyTrac) also have the highest overstatement of “suspicious” transactions, which easily could total 30%-40% of the $375 million – or more than a $100 million overstatement.

FIFTH FLAW: Finally, the study exaggerates losses by improperly alternating mathematical and accounting comparisons. For example, it tags a resale as “suspicious” when “the new sales price is at least 10% higher than the short sale price.” This means that a profit as low as 9% is tagged as “suspicious.” How is that? If the investor purchases the short sale for $100,000 and sells it for 10% higher, then the resale price is $110,000. When one calculates percentage profit ($10,000/$110,000), result is 9%.

IS THE RATE OF SUSPICIOUS TRANSACTIONS INCREASING OR DECREASING?

CoreLogic conveniently speculates the amount of “unnecessary losses” by creating an estimate of “suspicious transactions” for the first half of 2010 at $150 million, doubling it to annualize it, and then projecting a 25% increase for 2011.

Is this guess at a rate of increase reasonable under the current short sale environment in which banks have increased staffing and automation dramatically and added extensive independent valuation processes to determine acceptable short sales discounts? Not according to CoreLogic’s raw data. Figures 4 and 5 on page 4 show a decrease in the growth of suspicious transaction in second quarter 2010 compared to first quarter 2010. The spike in first quarter 2010 is understandable when one recalls the temporary spike in market prices resulting from the federal new home buyer tax credit. This brought a rush of buyers to the market who bid up prices. This also bid up resale prices for investor purchases that were already under contract and skewed the percentage mark-ups thereby resulting in more “suspicious transactions” merely to due market appreciation.

The suspicious transaction rates of the second quarter of 2010 returned to levels similar to the third quarter of 2009. Even though CoreLogic’s study was just published in May 2011, why was the data for the second half of 2010 omitted? CoreLogic conveniently states that it is still processing it. That makes sense for tagging “suspicious transactions” in the 90-180 day category after the third quarter. But why didn’t CoreLogic provide the comparative data for the less than 30 day and the 30-90 day categories, as well as complete third quarter data? Could it be that the rates of “suspicious transactions” are declining and that would be detrimental for CoreLogic to report?

WHAT IS A REALISTIC LOSS ESTIMATE?

The CoreLogic 2011 Short Sale Research Study obviously and grossly overstates the magnitude of “unnecessary losses.” Unfortunately, the vague, imprecise and summary nature of the “study” makes it impossible to state how badly the loss estimate is exaggerated.

By applying the high end of reductions estimated for the fatal flaws discussed above, the losses speculated about in the study would be entirely wiped out. However, this author has been involved in combating fraud in transactions in which my clients would have been a victim, so I don’t deny there are actual losses.

It’s hard to imagine that the methodology employed by CoreLogic can readily be corrected to result in a realistic number; however, the overstatement appears to be in a magnitude greater than 80%. That makes likely, actual losses far less than $75 million dollars, and probably closer to $40-50 million.

In this economy where Freddie Mac and Fannie Mae alone are receiving bail out support upwards of $140 BILLION, a $50 million potential loss could not even be seen on a budget chart showing the distribution of the bail out funds for these two institutions alone, much less spread among all short sales.

I’m certainly not saying that all short sale resale transactions are fraud-free. I’m sure that market manipulation occurs in a fraction of them. However, CoreLogic has overly exaggerated the magnitude of the problem.

The 2011 Short Sale Research Study does not provide a legitimate basis for banks to decide on purchasing CoreLogic’s dubious anti-fraud systems and it certainly is not a valid basis for policy makers and regulators to base any decisions.

Instead, it’s a perfect example of garbage in – garbage out. Banks and regulators would be well-served by treating it as outgoing garbage.

 

 

http://californiashortsalelawyer.com/2011/06/exposing-corelogic/#mo...

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Permalink Reply by The Negotiator on July 31, 2011 at 4:26am

Wednesday, June 8th, 2011 at 9:07pm

FDIC Sues CoreLogic for Appraisal Fraud

Posted by Ron Ballard

I hate to give you too much too fast, but I just came across a lawsuit filed a couple weeks ago in Santa Ana, California in which the FDIC is suing CoreLogic for $129 million in connection with alleged appraisal fraud relating to the failure of Washington Mutual alone. Could there be more losses at other banks?

See http://bit.ly/FDICvCL

 

http://californiashortsalelawyer.com/2011/06/fdic-sues-corelogic-fo...

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