Exposing the Flaws in CoreLogic’s Short Sale Report

CoreLogic recently released its 2011 Short Sale Research Study.  Of note is CoreLogic’s suggestion that lenders may be incurring unnecessary losses in processing “suspicious” short sales.  (To read the actual report, you’ll need to register at CoreLogic’s website).

According to CoreLogic’s own website, here are the highlights of the study:

  • It is estimated that lenders, servicers and investors may incur potential losses in excess of $375 million in 2011 due to suspicious short sale transactions. This is up more than 20 percent from $310 million in estimated losses for 2010.
  • Rates of suspicious transactions are on the rise. In the first half of 2010, approximately one in every 52 (1.9 percent) short sale transactions appears to be suspicious, wherein the lender may have incurred unnecessary loss.
  • Some of the states with the largest short sale volume (California, Arizona, Colorado and Florida) are now the same states with the highest rates of suspicious short-sale transactions. This convergence results in maximum negative impact on the industry.
  • Consortium analysis and reporting are necessary to mitigate risk and fully leverage data and experiences across multiple lenders.

Before we get started, it should be noted that one of CoreLogic’s primary business ventures is marketing to lenders.  According to CoreLogic’s website, it “is a leading provider of consumer, financial and property information, analytics and services to business and government.”

Ok, so let’s dive in a little deeper with some help from another short sale attorney, Ron Ballard from California.  Ron’s website features a great article about the CoreLogic study.  You’ll need to register on his site to view it, but it’s free.  While you’re there, I suggest reading this article as well.

So, what exactly are “suspicious” short sale transactions, and how would they lead to unnecessary losses for lenders?  According to Kenneth Harney at The Washington Post, who wrote about the CoreLogic report, properties sold within 6 months for 40% profit are “suspicious.”  Harney goes on to report about the case of Anna McElaney and Sergio Natera, who are being tried for their involvement in defrauding Regions Bank.  However, the case is not based on the fact that the defendants made a profit, but on the fact that they withheld an existing contract from the lender and supplanted their own lower contract ahead of the legitimate contract.  Of course, this is fraud.

The CoreLogic report also assumes that short sale lenders could attract market value offers.  Real Estate 101 teaches us that this is not the case.  Short sales, by definition, have title defects that can not easily be cured.  They cannot close quickly, and therefore cannot compete with retail-ready properties unless a concession is made on the price.  The Washington Post article also suffers from an incorrect assumption:

To back up the investors’ low-ball offer, the realty agent produces an appraisal or a “BPO,” a broker price opinion, of the distressed home’s value that confirms the low valuation.

The problem here is that lenders do not accept BPO’s or appraisals submitted by buyers.  As part of the short sale offer evaluation, the lender will order its own valuation of the property, and the lender always has the final say about whether or not to accept, reject, or counter a short sale offer.  In other words, the author seems to have no idea what he is talking about.

Further, it is unfair to assume that short sale investors have turned a profit “overnight,” or between closing the short sale and re-selling the property to another buyer.  An important part of the investor’s efforts take place before it is even certain that the short sale will be approved, during which time the investor works to clear the title of the property and make it marketable to other buyers.  The short sale lender will never be able to effectively market the property to a retail buyer without first foreclosing, which will usually require an even lower price to be placed on the property.

But we really shouldn’t be surprised by such a report from CoreLogic.  The FDIC has sued CoreLogic for appraisal fraud, claiming it found negligence during a review of 194 appraisals (you can read the summons and complaint here).  CoreLogic’s defense?  85% of the loans involved “desk reviews,” meaning there was no interior or exterior inspection.  That doesn’t sound like an appraisal to me.  If CoreLogic is so mixed-up about what an appraisal is, how can they be writing reports on short sales?

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