Saturday, April 17th, 2010 at 3:52pm

Freddie Mac Article No Reason to Panic

Posted by Ron Ballard

I wasn’t going to write about the April 12 Freddie Mac online article about “Short Payoff Fraud” for several days because it is so fraught with misstatements and misunderstandings that it’s my humble opinion that it will be modified and clarified soon. However, I have received too many inquiries from nervous real estate investors and licensees to ignore it.

The article can be found at

As my good friend and legal colleague, Jeff Watson, says today on his Facebook page ( ), “Please stay calm.”

First, it’s valuable to note that the author is not named nor is any specific contact information provided for follow up (just generic contact points). This brings the level of authority of the article into immediate question.

Second, the article is entirely inconsistent with Attachment A to Freddie Mac Bulletin 2009-24 of October 2009 which states: “Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Legitimate property flips are acceptable transactions in connection with loans purchased by Freddie Mac.” It goes on to specify, “Some indications of property flip transactions that may be legitimate include: . . . Sales of properties that the seller acquired at below market value after purchasing as a result of a distress sale (i.e. . . ., short sale, . . . ) where any increase in the sale price over the property seller’s acquisition cost can be clearly shown to be result of the difference (if any) in the market’s reaction to distress sales and typical arms-length sales.” Bulletin 2009-24 came from the division in Freddie Mac which determines the standards for loans it will purchase. The April 12 online article is attributed to “a member of Freddie Mac’s Fraud Investigation Unit” with respect to the discount Freddie Mac will allow on loans for which it agrees to a short payoff. Apparently these two units are not aware of each other’s opinions. Freddie Mac’s general counsel’s office needs to reconcile these discrepancies.

For reasons explained below, I am confident that the ultimate direction of Freddie Mac will be more consistent with Bulletin 2009-24.

On January 15, 2010, FHA announced standards for a one year Waiver of 90 Day “No Flip” Rule for investment property resales of short sale and foreclosure properties. In its comments, FHA acknowledged the important role of investors in stabilizing the housing market and reducing the number of REO properties which negatively affect communities. FHA establishes a 20% profit spread as acceptable without additional valuation review. This implies that the a typical difference between an acceptable short sale distress discount and a typical market value is about 20% without additional factors. Naturally, short sale investors see spreads larger and smaller than this. For example, a property that an investor puts under contract in January will be selling in a different market if it is going up for resale in June. Seasonal factors alone can account for several percentage point differences alone.

The unnamed “member of Freddie Mac’s Fraud Investigation Unit,” does not display an awareness of the FHA position.

The example in the article under “How is short payoff fraud committed?” doesn’t make sense. It fails to distinguish between distress property value and fair market value, as Bulletin 2009-24 effectively does. First, it states that the property “is worth $80,000” and that the facilitator negotiates a purchase price of $70,000, which represents a 12.5% discount from the $80,000 value. If the $80,000 value is the distress sale value, then the 12.5% discount is a fairly typical discount for a bank to accept in a short sale to avoid the costs of a foreclosure and of holding and reselling a REO property.

Next, the example states there is a second end-buyer for $95,000. However, there is no clarification whether the $95,000 price is the fair market value or somehow a fraudulent sale in which the “facilitator” convinces a buyer to over-pay for the $80,000 property. As active real estate investors, brokers and agents know, it’s virtually impossible in this market to find a buyer who will overpay for a property. Moreover, it is virtually impossible with the controls over appraisers imposed under the HVCC standards to obtain an over-market valued (manipulated) appraisal. The “facilitator” cannot influence the selection of the appraiser and certainly is not in the ordinary chain of communications to make any communications that could attempt to influence the appraiser.

Moreover, the bank agreeing to the short payoff has a bevy of resources at its disposal to determine a reasonable market and distress value of the property and to determine the level of acceptable loss. The “facilitator” cannot “trick” the bank into an unreasonably low value for the property. Let’s be real: the bank is in a far superior negotiating position and resource level than an individual investor.

The example proceeds to a series of convoluted and inflammatory statements equating an investor whose business model has been legitimized by Freddie Mac Bulletin 2009-24 and the FHA waiver of January 15, 2010 to a “scam artist” by “deliberately withholding the higher offer.” Real estate attorneys, such as this author, who strive to advise investors in full compliance with legal and ethical practices require investors who are engaging in short sale flip transactions to give notice to the discounting bank on the face of the purchase contract and in a publicly recorded notice or memorandum that they are an investor who is purchasing the property with the intent of rapidly reselling the property with the purpose of making a profit. Moreover, the contract states on its face that the seller grants the buyer the authority to remarket the property on the buyer’s behalf with all future offers going to the buyer. These are the material disclosures that advise the existing lender to negotiate the short payoff with the knowledge that the buyer is seeking a high discount in order to resell for a profit. The article implies the creation of a new duty of an investor to disclose its future business transactions to the discounting lender. This author is not aware of any statutory or common law duty of such wide sweeping disclosure.

[The article also seems to confuse the obvious duties of the seller’s real estate broker with that of an investor. It would be clearly fraudulent for the seller’s real estate broker to receive the $95,000 offer, not present it to the borrower or the bank, put the property under contract with the broker as the purchaser for $70,000, and then secretly enter into a contract with the end-buyer for the broker to sell the property for $95,000. This is an entirely different set of duties that must not be confused with a common, routine market-oriented transaction that is disclosed as such to the seller and the seller’s lien holders at it’s initiation by an investor who is taking the risk that it can sell the property after the investor puts it under contract.]

The article then states, “Freddie Mac also experiences a larger than necessary loss on this sale.” This assumes that the seller could have obtained the $95,000 offer without the involvement of the investor. This assumption is contrary to the typical short sale transaction. For example, the investor may put the property under contract two weeks before a scheduled foreclosure sale date when there are no pending offers and then obtains a series of postponements to negotiate and close the sale over a period of five months. In the fourth month the investor receives a verbal short payoff offer from the lender and begins marketing the property as an “approved short sale.” Now the investor receives the $95,000 offer. Neither the bank nor Freddie Mac were on track to receive the $95,000 before the foreclosure date. The only reason the $95,000 offer even appears is because the investor took the risk to put the property under contract, negotiate the final payoff, and re-market the property. Freddie Mac never could have enjoyed the benefit of the higher offer because the sale process was not on track to attract it. Hence, the “larger than necessary loss” is a mere phantom that would not materialize in real life. This concept is magnified dramatically when there is more than one lien against a property.

I don’t want to sound disrespectful to the article’s unnamed author, but the article does not reflect the realities of actual real estate transactions. Accordingly, it’s conclusions are flawed.

There are MANY other points in the article with which I take issue, but this unplanned article is too long already.

As conceded above, there are ways in which predators or “scam artists” can take advantage of sellers and their lenders in short sale transactions. However, the article improperly implies that a properly disclosed investor purchase for resale is always fraudulent if the investor puts the property under contract for resale before closing the purchase. This is a conclusion without legal merit which is likely to wreak havoc on thousands of pending deals and potentially create a short term increase in foreclosures while scared investors, seller and real estate licensees back out of legitimate, properly disclosed investor resale transactions.

If the investor has properly disclosed the transaction, as I’m confident my form system provides, then none of the parties need to have cause for concern. If Freddie Mac were to litigate a legitimate investor transaction as fraud, it is inconceivable that it can produce legal authority for the phantom duty of an investor to disclose the offers it is receiving when re-marketing a short sale property upon which this entire article is based.

19 Responses to “Freddie Mac Article No Reason to Panic”

  1. Bradley Gaskins says:


    Thanks for the reply. Yes we are panicing and a word from you and Jeff that you are on this is certainly reassuring.

    Sure would have liked to have heard from you earlier. Remember, panic is created by a void of info, not to much.

    Again, thanks and go bet these SOBs.


  2. Caesar Loche says:


    Thanks for your post. I believe it is important to remember the source. Obviously, the lenders have a skewed view of the facts when it is not in their own (seemingly) best interest to acknowledge them objectively. In this case, they display what you could call typical childlike behavior: angry because another kid got a sweeter lollipop. Sure they are taking a loss on these short sales, but they are nonetheless mitigating further losses. I completely agree that they are misrepresenting their audience in the article to believe that they are the victims here. No, the real victims we must remember are the homeowners in foreclosure.

    Besides, since when is it fraud to produce a profit in the USA? Is it because you are dealing with a bank!?

    The way I see that article is just as a window into the mind of the loss mitigation employees and into how the lenders will be (or have been) scanning and reviewing the offers submitted to them, and their attitude toward ANY investors. I think special attention should be given to what they are looking for. For example, though using the option contracts may give investors the strongest position in a short sale transaction and keep the seller from straying to another buyer, maybe the use and recording of the memorandum/notice of contract could be suffice in lieu of the option.

    Nonetheless, it’s laughable. I think this is just pea-cocking to scare new or would-be investors. When people are scared, they tend to run away or do nothing at all. Don’t let em scare us! Do not panic! Follow the law, continue what you’re doing. Ramp it up even! They’re just jealous of our profits because they erroneously believe we took it from them. We did not. Besides, our true impact as investors and agents involved in short sale flips on this whole market is still very small.

    Ron, thank you again for your continued efforts to bring clarity and voice to those of us in the trenches.



  3. benroembke says:

    The fiduciary responsibility of the agent is NOT to the bank. It is to the homeowner in foreclosure. The agent does not have to present all offers to the bank like their example states. All that needs to be presented is a contract that says the buyer intends on reselling for a profit. This fully discloses what the buyer intends on doing.

    I recommend reading “navigating the short sale jungle” by Jeff Watson. He explains the fiduciary duty of agents better than I can.

  4. Ron Ballard says:

    Caesar and Bradley: thanks for you comments.

    Ben — yes, Jeff’s e-book should be read by the regulators as well. So many regulators don’t understand markets. Jeff is giving a webinar tomorrow at 1PM EASTERN. See to register.

    It will likely be followed by a joint webinar with Jeff, Chris McLaughlin and me — but I don’t think that’s been announced yet.

  5. Rene Caro says:

    Thank you Ron. It really is comforting to have a California attorney who we can trust to monitor this type of legal issue.

    I am a proud subscriber of your services and feel it’s worth every penny. I plan on running a legitimate real estate investing business, which includes being a licensed real estate broker, for many years to come.

    Keep up the good work.


    The Dean of Short Sales

  6. Ron Ballard says:


    I agree with the fraud investigators that there can be such a thing as “short payoff fraud.” Naturally, the big disagreement is that the Freddie Mac article essentially paints all short sale flips as fraudulent. I expect to write about the differences soon.

    You, like many real estate professionals, seek and follow legal guidance about how to run a legitimate real estate investing business. Let’s hope that our government is not going so far in anti-market economics that traditionally acceptable practices will be declared illegal by regulatory fiat.


  7. Juan Escobar says:

    I think it is best to face this head on with the right information, a sound legal premise and a solid argument of the steps in the short sale flip. The correct definitions of Fair Market Value ( FMV) and Liquidation Value ( LIQ V) appear to be non-existent to not only real estate agents and brokers but, moreover, to the legal staff at Freddie Mac and other GSE.

    I’ve asked numerous licensed appraisers ( and they know the answer) and they will gladly issued Two reports for me on a property, based on the strict definitions of each one — once I have outlined that fact that one home has a pending foreclosure action against it, and the second transaction, none at all. They seem to agree with that logic every single time.

    At one point, I found it appalling that Freddie Mac (and others) would put out such conflicting and illogical statements about these short sale and fraud issues ( I think the staff must be incompetent or just that they do not have an editor on staff to point out the errors in their statements) — but NOW, well, it is just a flat out joke. They do not even know what they are speaking about — what else are they saying to their lenders, brokers, etc. on other issues???

    Anyway, Ron B. you do an excellent job. I look forward to the online discussion where you can hammer out the details.
    Please get someone from Freddie Mac on the line so THEY CAN LEARN FROM THEIR ERRORS!!!!! Please — it would make our work so much much easier. Call them, fax them, email them — get them on the webinar!!!!


  8. Heather The Hurricane says:

    Dear Ron Sherlock,

    We would be lost without you! Many thanks to you and the inestimable Mr. Watson!!! Frank has been slammed with calls and emails, too…….it is amazing that the first assumption is to go “Chicken Little” rather than shake your head….laugh and say……”All right….what stupid cadswallow crud have the stupid numbnuts in government put out now to justify their paychecks to the public and make the general republic THINK they are working and protecting them?”

    I’ve been guilty of Chicken Littling before…..but at this point…..between HAFA’s secret WHAMMIES few have figured out……and the panic from the Fannie bulletin last year….Duh……I relax and wait upon the legal level headed masters.

    That’d be you…..and someone else we know…..and about three others:) Thanks, Ron!

  9. […] of people into a panic. Naturally, I did some more research online, and found that my good friend Ron Ballard had taken the time to eloquently summarize the many problems he found with the Freddie Mac website […]

  10. Ron Ballard says:

    Heather and Juan,

    A recent poll by Pew Research shows that 4 of 5 Americans don’t trust the government to do what’s right:

    I don’t think (necessarily) that most regulators intend to damage market solutions that are working better than government solutions; the main difficulty is that they simply aren’t involved in business to know how these transactions work. Obviously there is some educating to do. Anyone who knows Freddie Mac regulators are welcome to invite them to the webinars. We have always operated in the open, not in the shadows as they seem to think. It’s simply healthy business.

    Heather, obviously you’ve been watching too much!!

    Ron Ballard

  11. Freddie Colon says:


    What’s your take as far as some lenders, such as JP Morgan CHASE, asking to have the ‘resell for a profit’ clause off the Option Contract? I’ve heard several investor buyers bring this issue up. Though I personally don’t believe any lender is withing their legal authority to be demanding such removal, but only the borrower/seller, I ask myself why will that be of any concern to a lender? Are they afraid of their investor not reimbursing the loss to the lender because of it? Could that be one reason why this unauthor of the Freddie Mac purposedly posted such article and hid its identity? I will like to hear your personal opinion as to why some lenders all of a sudden requesting this particular clause to be removed.

    By the way, on behalf of the other Fix-A-Flip members and myself, thank you ahead for the emergency webinar and your own personal contributions not only for California investors but your universal coverage on different topics, issues and type of contracts.

    New York, NY

  12. Ron Ballard says:

    Hi Freddie,

    There are some interesting things going on behind the scenes in terms of the loan investor complaints against servicers and battles over PMI reimbursements. I don’t yet have a good handle on those issues, nor reputable sources. However, anyone who understands the dynamics of short sales and real estate investor involvement would recognize that investor involvement is more likely to result in directly lowering bank losses on the particular transaction.

    There are also indirect losses that are avoided because investor short sales result in fewer foreclosures and fewer vacant homes, thereby improving local property values. This helps to reduce losses by reducing further declines in property values. Moreover, the investor resale typically is at a higher price than a foreclosure sale or REO sale (certainly in net present value terms) — and in a much shorter time. The investor resale becomes the active comparable sale value for future neighborhood valuations. This also increases local property taxes and the investor’s profit on the sale is often ordinary income subject to federal and state income taxes. Unfortunately, few regulators and bankers think through the entire series of causes and effects.

  13. Social comments and analytics for this post…

    This post was mentioned on Twitter by guardianassets: Short Sale Investors! Don’t Panic About Freddie Mac’s Newsletter! Read Here:

  14. russell valena says:

    Hi Ron,
    a few weeks ago you mentioned that certain California counties reject a “Memorandum of Contract” but accept a
    “Memorandum of Agreement.” Do we have an update section to post what certain counties will and will not accept.
    Do you think it is as easy as, just calling up the county and asking?

    Thanks, Russell

  15. Ron Ballard says:

    Hi Russell,

    I’ll have the results out to my form subscribers to

    Often a county recorder won’t give much information without a pending document in front of them. You can find ways to contact me on my other sites or on Facebook and ask specifics privately.


  16. […] There is no reason to panic. Be clarified and informed about this misleading article that has been circulating around. Get expert advice and find out why here. […]

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