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Wells Fargo Funding

Risk Advisory Bulletin

Detecting Flipping and Flopping Schemes

Inconsistent current property owner/seller between: purchase contract, title commitment, appraisal, and settlement statement. Ambiguous or deceptive wording on the title commitment: Title is currently in the name of (or will be at time of closing) John Q. Mortgage This indicates that there may be a hidden interim transaction. Title is in the name of John Q. Mortgage by deed dated XX/XX/XX If the date listed is subsequent to the date the title commitment was issued, it indicates a future event. Title commitment is dated in the future This indicates the status of title at the time it was prepared may not be the same as shown on the commitment. Payoffs on the settlement statement appear too high based on original lien amounts on title commitment. There are no lien payoffs on the settlement statement. Seller is an LLC and there is no real estate commission. There is no earnest money. Average neighborhood values (from a source independent of the appraisal) are lower than the sales price of the subject property. Appraisal comparables have other sales in the last year and significantly increased prices. Recurrent participant combinations; for example, the same settlement agent, real estate agent, and seller/LLC are common to several loans. Borrower was renting previous residence and is purchasing a multi-unit property. Assets appear high for the borrowers income and are supported by bank statements. (Although assets may appear well-documented, high-quality bank statement alterations and fabrications are common). Down payment is a gift, and donor is not a close relative. The listing agent is affiliated with the interim buyer/LLC. The existing homeowner has designated a third party to act on his/her behalf to negotiate the short sale, and that third party is affiliated with the listing agent or interim buyer. Involvement of a transactional lender who charges high fees for a very short-term loan (such as a 2% fee plus $495 for a 1-day loan) to facilitate short sale flips.

Example: Short Sale Flop, Flip and Combination Transactions

Scenario #1 Short sale flop
Homes true value Existing mortgage balance BPO for short sale Sales price transfer to interim buyer Appraised value for new loan Sales price transfer to new buyer New mortgage amount Transaction description $150,000 $160,000 $110,000 $110,000

Scenario #2 Flip
$150,000 NA foreclosure sale NA $135,000 (below value due to foreclosure) $185,000 $185,000

Scenario #3 Combination Short Sale Flop and Flip

$150,000 $160,000 $110,000 $110,000

$150,000 $150,000

$185,000 $185,000

$142,000 Homeowner sells to interim buyer for $110,000; on same day interim buyer sells to new buyer for $150,000 $40,000 The existing lender was deceived into accepting a larger loss than necessary because the offer from the new buyer was withheld.

$175,000 Interim buyer purchases at foreclosure auction for $130,000, and re-sells for $185,000 $55,000 New loan exceeds collateral value; new buyer may be straw buyer or overpaid for property; loan qualification misrep is likely.

$175,000 Homeowner sells to interim buyer for $110,000; on same day, interim buyer sells to new buyer for $185,000 $75,000 Existing lender took larger loss; new loan exceeds collateral value; new buyer may be straw buyer or overpaid for property; loan qualification misrep is likely.

Gross profit Issues

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