Great baseball managers constantly monitor all aspects of the game: how many pitches are thrown, who's warming up in the bull pen, what's the best lineup against the opponent's pitcher and, most important, did the umpire make the right call? And not unlike great baseball managers, servicers that manage real estate owned (REO) properties also need to monitor all aspects of the property.
It may sound surprising, but an REO property is more susceptible to mortgage fraud than is an existing home sold at current value on the market. A report from the Federal Bureau of Investigation (FBI) showed the most prevalent forms of real estate fraud in 2010 included mortgage rescue fraud and title fraud.
And the fraudsters might even pull schemes that are totally unexpected. For example, a home inspector could be in collusion with a handyman to extract more money from a servicer by finding more problems than actually exist – which would, of course, require them to inspect the property again. Or, the home inspector could be in collusion with the buyer, who submits an offer saying he will accept the falsified defects in the property, thus attempting to lower the property's value.
The proactive monitoring of an REO property will help in assigning real estate brokers, inspectors, repairs and maintenance experts, and valuations professionals to that property. This will give servicers the ability to score all third-party vendors to make sure they are performing their jobs properly. A reconciled market value process can assist in determining an accurate value and whether fraud should be considered. This pertains both to homes in default and to REO properties, and it helps to expose fraud risk in flipping and appraisal valuations.
Another case in point for collusion includes fraudulent appraisers placing the property at a lower value, only to have someone flip the property and sell it to an unsuspecting buyer at a higher price, pocketing the difference. Property tax monitoring can help to reduce escrow, title and valuation fraud in REO properties.
One of the complexities of REO fraud is the nature of the transaction. Unlike normal sales that include face-to-face transactions between borrower and lender, the REO sale mostly involves buyers who never get to meet the seller and/or servicer. As a result, this can create an opportunity for fraud among unscrupulous real estate brokers and criminally minded buyers.
In one of the more notorious recent examples, eight people in the San Francisco Bay Area were indicted for mail fraud and accused of rigging a real estate auction by agreeing to submit low bids for the REO property. As you can imagine, having REO management-defined standards in place to monitor the owned property through every stage of the process is more important than ever.
Fannie Mae, citing the FBI's 2010 report, noted that short sale, foreclosure rescue and REO sale fraud schemes continue to thrive as a result of opportunities created by defaulting markets. Fannie Mae is in the process of investigating fraud schemes perpetrated by real estate agents who manipulated Multiple Listing Services data to bolster sagging sales prices.
Fannie Mae has also investigated REO flipping involving real estate agents who withheld competitive offers on REO properties so that they could control the acquisition and subsequent flip. Although the real estate brokers said they submitted the highest offer on a home, the servicer did not always see it. In the majority of instances, the listing agents submitted the highest offer and did not involve another broker so that they could receive the full commission rather than split it.
Going forward, it would be helpful to determine what percentage of listings are split commissions versus full commissions with listing agents who only submit offers that get them a full fee. Even better, all offers could be submitted directly to the servicer, but that would require some intricate technology and logistics.
As the volume of REO properties increases, the need to maintain REO properties becomes more pressing. Technology advances are helping, to a large degree – not only can default management systems monitor REO properties with accuracy, but servicers can also quickly obtain documentation on an REO property through a Web-based platform.
As the housing market continues to present tumultuous challenges, there will be a vigorous need for increased diligence in REO property monitoring. The REO landscape is not showing any evidence of shrinking, and the fraudsters have yet to show any sign that they are ready to move on to other pursuits.
Or, to use our earlier baseball analogy, it is easy to consider the state of the REO market by recalling a celebrated observation of legendary baseball manager Yogi Berra: It ain't over till it's over.
Fred Melgaard is executive vice president and chief operating officer of DRI Management Systems, headquartered in Newport Beach, Calif. He can be reached at firstname.lastname@example.org.