Biz Brief: Mortgage Fraud in Short Sales Rising

Bloomberg News reports that a new form of mortgage fraud may be spreading as banks increase the use of short sales to their cut losses from the growing number of foreclosures. The practice is known as "flopping," where a buyer or investor hires a broker to assess a home for far less than its market value and convince banks to accept a low-ball offer, only to turn around and quickly resell the property at a profit to another buyer who was lined up before the short sale.

The Federal Bureau of Investigation, mortgage finance company Freddie Mac and the California Department of Real Estate have sent out warnings about the scams. Criminals are taking advantage of the Obama administration's effort to encourage short sales by offering incentives of as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who close short sales through its Home Affordable Foreclosure Alternatives Program.

According to estimates from real estate data and research firm CoreLogic, flopping is occurring in more than 1% of short sales and may cost lenders $50 million this year.