Flopping: The Latest Short Sale Scam

By Lisa A. Tyler
National Escrow Administrator

The option for homeowners to short sell their property is not new, but the market downturn has caused short sales to become the rule, rather than the exception.

A short sale is a mechanism for a property owner who owes more on the existing loan(s) than the market will bear to sell the home. This occurs when the lender agrees to release the lien of record in exchange for all the sales proceeds with the understanding that the seller will do everything necessary to sell the property for the maximum amount the current market will allow. A short sale is about getting the buyer the best deal for the property or to facilitate a reduction in debt to the homeowner. Unfortunately, some fraudsters think it is. Learn more in the article "Flopping: The Latest Short Sale Scam."

Industry professionals (especially escrow officers) should also read "Escrow Officer Indicted In Mortgage Fraud Scheme." This is a report of an escrow officer who, when sentenced, could lose it all her money, her assets and even her freedom due to improper preparation of the HUD-1 settlement statement.

The Company's shared goal is to not only provide stories of fraud and forgery and other despicable acts, but to also equip readers with tips and tools they can use to do a better job in their chosen careers as real estate professionals. This month we include the article, "How To Properly Store And Protect Your Notary Seal And Journal," which is a must-read for all notary publics in our industry.

In the great words of Zig Ziglar, "The only thing worse than training an employee and losing them is not training them and keeping them." The National Escrow Administration team at FNF provides training on a variety of topics through Web-based training modules available at home.fnf.com. The latest additions include training for:

  1. Escrow Losses and Recovery Methods
  2. The Importance of Recording and Policy Instructions
  3. FIRPTA for Real Estate Agents
  4. Holdback Agreements

We also make these modules available to our agents and fee attorneys on CD-ROM or USB drive. To order a specific module or the entire library, send your request to settlement@fnf.com.

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Flopping: The Latest Short Sale Scam

It is estimated lenders lose hundreds of millions annually in undervalued short sale transactions. Loss mitigators working on behalf of the lenders have anywhere from 450 to 600 active files on their desks at one time. Working the best deal for the lender is an all-consuming task for the loss mitigators and each short sale has its own complexities.

When a seller applies for short sale approval, the seller submits hardship affidavits and signs forms such as a Purchaser Eligibility Certification which includes statements such as:

In making this request for consideration of a short sale I certify under penalty of perjury:

  • All of the information in this document is truthful.
  • I/We agree that the financial information provided is an accurate statement of my/our financial status. I/We understand and acknowledge that any action taken by the lender of my/our mortgage loan on my/our behalf will be made in strict reliance on the financial information provided.
  • I understand that if I have intentionally defaulted on my existing mortgage, engaged in fraud or misrepresented any fact(s) in connection with this document, the lender may cancel any modification of foreclosure prevention agreement and may pursue foreclosure on my home. I understand the lender will use the information in this document to evaluate my eligibility for a short sale.

Even with statements such as these, the loss mitigator still goes through a process to confirm the information provided by the seller is true, but some fraudsters have found ways around this.

In August 2010 our South Pasadena, Fla. office of Fidelity National Title closed a short sale transaction. The seller (we will call him Jim Kling) had two loans on the property and the lender on both loans was Bank of America. The sales price was $425,000. Bank of America agreed to the sale and issued short pay approval letters for both loans.

The buyer was a LLC and the managing member of the LLC was Bill Hamley. The buyer purchased the property with cash and did not get a purchase money loan. At closing, the buyer and seller both signed an arm's length affidavit which contained these statements:

 "There are no hidden terms or hidden agreements or special understandings between the Seller(s) and the Buyer(s) or among their respective agents which are not reflected in the Agreement or the escrow instructions associated with this transaction.
  
 There is no agreement, whether oral, written, or implied, between the Seller(s) and the Buyers and/or their respective agents which allows the Seller(s) to remain in the property as tenants or to regain ownership of the Property at any time after the consummation of this sale transaction."

Cindy Archer at Fidelity National Title was the settlement agent. She closed the sale in accordance with the terms of the short sale approval letters. Upon receipt of the payoffs, Bank of America promptly prepared and recorded a satisfaction of mortgage for each loan.

In April 2011, the buyer decided to sell the property. The seller entered into a purchase and sale agreement, and opened escrow with Cindy Archer. The title report was ordered, and upon receipt of the title report Cindy reviewed the requirements. She ordered the HOA demand, checked the property taxes and looked up the LLC with the state. The LLC was in good standing but the managing member had changed. According to the state the managing member was now Jim Kling. Remember that name? Jim Kling was the borrower who signed an arm's length affidavit when he sold his home via short sale stating he had no side deals with the buyer. This same Jim Kling was now re-selling his home for almost one hundred thousand more than what he sold it for just eight months earlier. Not in our office he's not!

How could Jim re-sell the same property less than a year later for $100K more when the real estate market is still depressed? This is the latest trend in mortgage fraud and it is called flopping. Flopping is the opposite of flipping. Flopping is where the buyer of a short sale purchases the property for less than the true fair market value by influencing the appraiser or real estate agent to provide a Broker Price Opinion (BPO) which undervalues the property. This information is provided to the loss mitigator who approves the sale based on the fraudulent information. The buyer then turns around and sells the property at fair market value, realizing a profit the lender should have received. In this instance, both the buyer and seller participated in defrauding the lender.

Flopping is a serious concern. According to Fannie Mae a flopping scheme requires the perpetrator to conceal or provide falsified information to the loan servicer. This is information the servicer needs to make an informed short sale decision. These concealments may include hiding:

  • The true parties to transaction
  • Any contingent transactions
  • The true value of property

The transaction described above was not an arms-length short sale. Clearly the principals worked together to facilitate a reduction to the existing loan, resulting in the original borrower making a profit from the sale of his home. This is mortgage fraud on the part of the seller.

Our Company will not knowingly participate in defrauding or misrepresenting to a lender any facets of a transaction. Cindy had no knowledge of the fraud during the prior transaction. But, in the subsequent transaction, she could see what transpired and was not about to facilitate the completion of this crime. Cindy resigned from the transaction. For her high degree of integrity Cindy has been rewarded $1,000.

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Escrow Officer Indicted In Mortgage Fraud Scheme

In May 2010, an escrow officer by the name of Donna Demello pled guilty to conspiracy to commit wire and mail fraud for her role in a mortgage fraud scheme. Demello was the escrow officer on approximately 80 condo purchases in the San Diego area. She acted as a co-conspirator by concealing large disbursements in the transactions.

After the lender foreclosed on all 80 loans and investigated the transactions it was discovered the properties were purchased by straw buyers who obtained purchase money loans. At closing, the escrow officer would prepare two HUD-1s. The first HUD-1 reflected all the receipts and disbursements including the payment of a "marketing fee" (usually in the amount of $150,000 payable to individuals and entities who were not a party to the transaction). The second HUD-1 did not disclose the payment of this "marketing fee." Instead, the second HUD-1 stated all the proceeds were disbursed to the seller. The disclosure of the payment of the "marketing fee" proved to be material to the lender, and would have affected their decision to approve the loan.

Demello was just one of six co-conspirators. The mastermind, James Delbert McConville, also recruited a notary, personal banker, loan officer and real estate agent. The indictment indicated these co-conspirators prepared false and misleading loan applications, false bank statements, false verification of assets, forged signatures, and notarized documents when the signer was not present and knew the signatures were forged.

Demello is currently waiting to be sentenced. She faces a maximum prison sentence of 30 years and maximum fine of $1,000,000. Her plea agreement includes a forfeiture provision. It says she, "shall forfeit to the United States all property, real or personal, which constitutes or is derived from proceeds traceable to said offense, including but not limited to the following property: a sum of money equal to the total proceeds from the commission of the offense."

Per Title 18: U.S. Code Section 1010 it is a crime to knowingly make false representations to the U.S. on a HUD or similar statement. Penalties upon conviction can include a fine and imprisonment. Unfortunately Donna Demello did not take this seriously. Not only has she lost her career but she now has a felony conviction against her.

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How To Properly Store And Protect Your Notary Seal And Journal

A notary is a public official commissioned to serve the public as an impartial witness. This appointment has a long and distinguished history dating back to Roman times, when officials in this capacity rose in rank from being mere scribes to a learned professional prominent in private and public affairs. Today the functions of a notary public might include administering oaths; taking acknowledgments; attesting to or certifying photocopies of certain documents; and performing other duties specified by the laws of the state.

Usually individuals need no special training to be commissioned as a notary public. Depending on the state, applicants must only pass a simple test and have some form of background check, or obtain a bond or insurance to ensure their integrity. As a result, commissioned notaries do not always have a complete understanding of the state requirements or the seriousness of their role.

One requirement often misunderstood or overlooked, is how important it is to properly secure the notary seal and/or journal of notarial acts. Most notary statutes or rules contain provisions which state the notary is responsible for keeping their official seal and journal locked, secured and under direct supervision. This means it is illegal for anyone other than the notary to possess these items. A notary should never surrender control of the seal or journal to anyone, even if the employer has paid for them or the journal contains entries related to the employer's business. Notaries who fail to keep their journal secure could have their commissions suspended or even revoked, and could also be fined for the infraction. States that require the notary to keep some sort of record or journal of notarial acts include:

AlabamaArizonaCaliforniaDistrict of Columbia
Colorado*Delaware*HawaiiLouisiana*
Maine*MarylandMississippiMissouri
MontanaNevadaOhio*Oregon
PennsylvaniaTennessee*TexasVirginia*

 *CO: If the notary's firm or employer, in the regular course of business, keeps the documents s/he notarizes, or copies of them, the notary is not required to make a journal entry.
 *DE: A notary performing electronic notarial acts shall keep, maintain, protect and provide for lawful inspection an electronic journal of notarial acts.
 *LA: Notaries public should record all acts of sale, exchange, donation, and mortgage of immovable property passed before them, together with all resolutions, powers of attorney, and other documents annexed to or made part of the acts, in their proper order.
 *ME: A notary public is required to keep and make a record of all marriages performed.
 *OH: A notary is required to keep a copy of every certificate of protest and copy of note, which seal and record shall be exempt from execution.
 *TN: A journal is only required if the notary charges the statutory fees.
 *VA: An electronic notary is required to keep, maintain and protect a journal of all electronic notarization acts.

Although keeping a journal of notarial acts is not always required, every state and the Company recommend every notary keep a journal. A notary journal is a permanent detailed written record of all notarizations performed by the notary. The notary journal protects the notary from accusations of wrongdoing and helps prevent the notary from engaging in wrongdoing. Every journal entry is legally presumed to be truthful. It can both protect the rights of citizens and help notaries defend themselves against false accusations.

If a notary chooses to keep a journal, it should list all notarial acts in chronological order. If the journal is kept in paper format it should be in a permanently bound book (since bound pages are more difficult to remove from a journal than loose-leaf pages). It is also recommended to record the following information:

  • The date and time of the notarial act
  • The nature or type of notarial act performed; an acknowledgement or jurat
  • A description of the document
  • The signature, printed name and address of each person for whom a notarial act is performed
  • The method by which a person's identity has been determined
  • The fee, if any is charged

Stopping and taking the time to record an entry of a notarial act in a journal ensures the notary does not miss any steps. It is a place to record whether the notary administered an oath. If the notary was concerned about the signer's competency the notary can indicate whether or not they asked the signer key questions and what the answers were. If the notary decides not to notarize a document, a journal is a great place to indicate why they refused.

Some states do not require a notary to keep a journal if the notary's employer, in the regular course of business, keeps copies of the documents they notarize. It is not in the best interest of the notary to rely on these exceptions since the notary may not have access to those copies over any period of time due to a job change, loss of records, employer going out of business or the notary being dismissed. If the notary cannot produce a copy of the originally notarized document, and has failed to maintain a personal journal, the notary may have no defense if a complaint is filed against them.

Being a commissioned notary is a huge responsibility. Documents are notarized to assist in deferring fraud. The notary serves as an impartial third party who ensures the signer of the document is who they say they are. The notary makes sure that the signer has entered into the agreement knowingly and willingly. The notary must ensure they know and understand their state specific notary statutes in order to fulfill their responsibilities. Notaries who are Fidelity National Financial employees have access to National Notary Association (NNA) products and services at discounted prices.

These products include:

  • Notary Bond, if applicable
  • Official Notary Seal
  • Journal of Notary Acts
  • Notary Law Primer (per applicable state)
  • Acknowledgement Certificates (per applicable states)
  • Inkless Thumb Printer
  • First Year Free NNA Membership (with package purchase)

Log on to www.nationalnotary.org/fnf and type the code "NNAFNF" upon checkout to receive the discounted price.

Bottom line is this: Notaries should always protect their seals and their journals to ensure they are complying with their state statutes and not allowing any unauthorized access.

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