When I find “short sales” listed in the MLS with only 2% commission to the buyer’s agent, or difficult showing instructions, or other nuances that just don’t “feel right”, I wonder if mortgage (short sale) fraud is involved.

Suppose

John Smith purchased a home in 2004 for $900,000 – 0 down

Let’s go on to “suppose" the home is currently worth $765,000 but John owes $900,000
The lender is not going to reduce the loan to $765,000 because if roles were reversed and the property was worth $1,00,000, John wouldn’t call the lender offering them money.

John is not an honest man; he always has one scam or another going on.  What John decides to do is to find a friend or family member who will purchase his home on paper. John contacts a Realtor that is not “bothered” by mortgage fraud.

The Realtor lists the home subject to lender’s approval of short pay off. They decide to list the home for $765,000. 

John’s best friend writes an offer for $765,000; the lender approves the short pay off to John’s best friend. 

John “rents” the home from his best friend.  The two of them work out the final details BUT the home is no longer over encumbered and John is still living in his home. Yes, his credit is blemished but John just wiped out $135,000 in debt - not a bad trade off for the "dinged" credit.

What can lenders do to stop this?  Well they could/should require that the buyer and seller certify under penalty of perjury that they do not know each other.  Advise buyer and seller that they will be doing “occupancy checks” once a year. The seller can further certify that they will not occupy this home again for the next five years….. They can scare people into not cheating.  The Realtor should also have to certify that to the best of their knowledge this is a “legitimate” sale and acknowledge in writing that they are aware that they can lose their real estate license for participating in mortgage fraud.