It was bound to happen. Short sales, the new salvation for an inconsistent real estate market, have too many characteristics which facilitate fraud. One party, the Lender, is being asked to take a “hit” for immediate payment on a delinquent mortgage. Another party, the Buyer, is getting a great deal on a home or condominium . The third player, the Seller, is getting out from under an onerous debt, and given the chance to “move on” with his or her life.

I have written in the past about the dreadful performance of many Lenders in addressing requests for short sales. I have a request in front of an unnamed Lender right now that is for fair value with a cash Buyer. The last word I have from the Lender is that the “analyst” who will make the short sale decision has not as yet been determined. In a word, this transaction has little or no chance of succeeding, even though it represents a good opportunity for all people involved.

That is one side of short sales. The more tawdry other side is the apparent current practice of providing post short sale credits to Buyers (and Sellers) by realtors once the transaction is completed. In effect, the parties are “re-arranging” the real substance of the short sale, generally to the detriment of the Lender who gave approval to same.

I heard today about a transaction where the closing agent for a short sale, had two HUD-1 Settlement Statements  prepared to reflect the transaction, one which described the sale the way it had been presented to the Lender who approved the short sale, the other which described the credit given by one or both realtors, probably designed to backstop the realtor’s tax ramifications.

My advice to each and every one of you. Do not participate in ANY of these types of post closing credit schemes. They are fraudulent, and people involved with the fraud can, and will, be punished. There is no positive spin you can put on HUD-1 (Version 1) and HUD-1 (Version 2). There is only one legitimate Settlement Statement, and it is the one that was presented to the short sale Lender who approved the sale.

I urge you to disseminate this gospel far and wide. It has been difficult enough to obtain Lender approval of short sales; if the Lender starts to suspect wrong-doing after the short sale, there will be an impasse in short sales that will certainly not accelerate the recovery which all of us all hoping for, and desperately need..