Wednesday, September 29th, 2010 at 5:00am

Freddie Mac: Fighting “fraud” or “crying wolf”?

Posted by Ron Ballard

Here we go again.

Freddie Mac is out lumping legitimate resale transactions in with the fraudulent ones in order to deflect accountability for its massive loan losses due to buying loans it had to know were bogus.

I’m tired of exposing their fallacies and lack of effective reasoning, but apparently they aren’t tired of exposing themself. Maybe they are getting ready to go to Congress for billions more dollars to cover losses exacerbated by the market fear they have fostered and the drag it is having on housing sales.

The Freddie Mac web site has a new article rehashing old issues. This time it’s titled “Fighting Back Against Mortgage Fraud” and has a real, named author in Ed Haldeman, the CEO of Freddie Mac. I put my byline on and stand by all of my articles and published legal forms. I have good reason to believe that legal and investigatory people at Freddie read them. I’m glad someone at Freddie will finally take credit for these ludicrous statements. Find it at

If you’re not a regular reader of my blog, you only have to look at last week’s article at to understand how rapid short sale resales are not a cause of lender’s losses (at least when using the type of disclosures and procedures that the leading investor-friendly attorneys in this niche business recommend). I’d like to think that this exposee’ so ruffled Freddie’s feathers that they felt they had to give a high-powered, yet indirect response.

I’m all for an active legal debate. When Freddie first woefully attempted to define “short payoff fraud” in April 2010 four attorneys took to the Internet to provide extensive legal arguments debunking the concept. You can find links to the webinars and insightful article at . Beware: there’s more than 5 hours of substance-packed content there.

The final sentence to my blog post listing the replays was: “Let a LEGITIMATE debate begin!” To date, no one has made a contrary argument on my blog nor has anyone in my extensive network of contacts sent me a link to any article that approaches this issue using strict, legal analysis.

Freddie Mac’s latest article is no exception. There’s nothing instructive there.

I am a well-published advocate for open market solutions to the housing and finance “crisis,” including the use of small, private-investor assisted liquidation of difficult short sale properties when proper ethical principles are followed by all involved and appropriate disclosures are provided. For no rational reason, Freddie Mac apparently doesn’t want this kind of assistance to help clear its non-performing assets. Maybe because it reveals the magnitude of the losses they are creating.

Let’s look at their September 27 article.

Freddie Mac says that the problem with short sale flips is that the industry professionals may work “against the borrower’s best interests by misleading the lender into settling for less than what an informed buyer would pay for the property.” [Emphasis added.] (Apparently Freddie feels the borrower they are foreclosing on shares the same “best interests.” Few borrowers in foreclosure whom I know feel their lender is sharing their best interests.)

Now look at their “relevant” case study:

  • “A real estate agent in Pennsylvania recruited an associate to act as the buyer on the short sale of a property backed by a Freddie Mac-owned loan, for a price of $160,000. Simultaneously, the agent was marketing the property for sale as if the associate was the owner, and found a buyer unaware of the actual sale price who was willing to pay $225,000. Both loans were scheduled to close the same day.”
  • “Our fraud investigators were tipped off about the plan and successfully stopped it. But had the deal gone through, the new owner would have paid more than an informed buyer probably would have, Freddie Mac would have been denied a legitimate recovery, and the real estate agent would have fraudulently netted a $65,000 profit at the taxpayers’ expense.” [Emphasis added.]

Slap yourself on the back Freddie Mac, but what did the fraud investigators “successfully” stop? Did they stop the $160,000 sale that Freddie already agreed to in open negotiations? Did they stop the $225,000 sale of the buyer “who was willing to pay” $225,000? Did they renegotiate the deal with either buyer? Did they let the $225,000 buyer close at that price but cut out the initial buyer who successfully negotiated a good deal? Just what did Freddie do? Who did it help? How?

More importantly, when did it become fraud in the United States market-based system to openly negotiate a good purchase price?

Note that there is no statement that the short sale processor or “negotiator” in the transaction provided any false information to the loan servicer. Nor is there any discussion that typical short sale processing involves the lender’s loss mitigation department conducting their own market due diligence. I refer the reader back to about all the omissions of reality this kind of “fraud” analysis conveniently overlook.

Here’s the real kicker. The article states, “had the deal gone through, the new owner would have paid more than an informed buyer probably would have.”

Two paragraphs earlier, Freddie said the problem is with the lender “settling for less than what an informed buyer would pay for the property”? Now their self-congratulatory case study says the end buyer was going to pay more than an informed buyer. There’s an obvious disconnect.

Does this mean that the first buyer at $160,000 was the informed buyer with the right price?

The “case study” does not hold water. It is like a leaking ship called U.S.S. [United States Subsidized] Freddie Mac. Note that the alleged $65,000 loss would have been “at the taxpayers’ expense.” You and I now get to foot the bill rather than anyone in the food chain who made the risky loan and Freddie’s loan purchase decision in the first place.

Interestingly, the article states, “the real estate agent would have netted a $65,000 profit . . . ” I’m not sure how this would happen. How does all of the difference go to the agent’s commission? There must be no closing costs, other commissions to pay, profit to the intermediary buyer, local transfer taxes, nor federal and state income taxes on the profits. Nor is there any recognition that the $225,000 sale price would have raised the local comparable sales prices, collateral values and eventually the local property taxes.

Is it truly likely that the $225,000 was “more than an informed buyer would pay”? Hardly. If it was a financed buyer, the buyer’s lender would have one or more appraisals plus other strict lending requirements to assure that the new loan is properly secured. The days of easy money and manipulated appraisals are long over. If it was a cash buyer, then the buyer likely would have been too sophisticated to pay too much. In my experience, the overwhelming majority of cash buyers are shrewd purchasers looking for discount properties.

Conclusion: Either the $225,000 sale was not going to close in reality or else it was a reasonable market price, not “more than an informed buyer would pay.”

Don’t get me wrong. I agree there’s mortgage fraud out there, including a small percentage of short sale flips. To Mr. Haldeman’s credit, his article provides a link to FBI mortgage fraud information. When one reads the examples the FBI has successfully and properly prosecuted, they do not resemble the “case study” in any material respect. The link to the FBI web site is merely a deflection to add an air of legitimacy to a fallacious argument and example. For the casual reader who won’t follow the link, it can create a sense of fear of involvement in legitimate investor-driven short sale transactions. To the serious reader who will read teh FBI true life cases, one can learn about real mortgage fraud.

When one looks at the dramatic declines in the number of home sales in July and August of 2010 vs. those of 2009, we see that the drop follows the assault on investor-driven transactions. I’d hazard a guess that all of the “fraud” scares put out by Freddie Mac, various State real estate departments, and loan servicers have contributed to a chilling affect on the market. I look forward to finding data that shows this is a reason why home sales are so depressed despite remarkably low interest rates.

Mr. Haldeman’s article ends with “Four Tips for Avoiding Mortgage Fraud.” I agree with all four tips. I think I know my legal colleagues to which my blog articles often link well enough to guess that they would agree with them too.

Not surprisingly, these tips have nothing to do with the Case Study nor with properly structured and disclosed, investor-driven short sale resales.

Based on the feedback I’m receiving from investors and real estate licensees, most simple, single lien, short sales go through a usual retail sale. On the other hand, typical retail buyers and their agents have learned that properties with multiple liens and/or some additional property or title defects are difficult to complete. That’s where investors come in. They clear difficult title problems and often rehab difficult property characteristics. Both sets of actions, when successful, result in a higher final price for the property than would have been obtained without the investor’s involvement.

Bottom line: legitimate investors add liquidity to the market by purchasing the more difficult properties and add value to the market by converting distress market assets to cleanly titled and freshly rehabbed properties which are sold at higher values.

Rather than acknowledging this important contribution to the economy, Freddie Mac’s CEO disingenuously cries “fraud.” Those who understand the law, as well as market and investor behavior, see it more like crying “wolf.”

16 Responses to “Freddie Mac: Fighting “fraud” or “crying wolf”?”

  1. Dave Tudor says:

    Great article Ron. I wish more agents/brokers would subscribe to reading your blog and the other 3 attorney blogs you refer to. Perhaps they would become more educated with how the legitimate investor actually helps the housing market.

  2. I wonder out loud about the brokers who read the Freddie Mac article and then instruct their agents to not be involved with short sale investors. They are really doing their listing clients a disservice!

  3. ali shahrokhi says:


    Thank you as always. It seems to me yet another scare tactic without any real Facts tied to the case study as how they are even Fraud??? I too wish more agents and brokers were reading the actual stuff rather than speculations and press releases like that. Thank you as always putting stuff out there. They are throwing rocks at investors like myself as its so much hassle to even participate in these deals as look forward for other deals that are not associated with short pay offs as the reward for them are not even worth the problems almost.

  4. Rodney Williams says:

    Great article Ron. there is a lot of fear mongering going on out there,

    To find out what the media is doing to spread this fear google the term “Flopping Real Estate”. According to one source Keller Williams has set a training to alert their agents to this so called illegal scam.

    I wish they would wake up and smell the coffee.

  5. nodakson says:

    Ron, did you hit the nail on the head!!!! It seems like every time the Government gets involved through one of it’s agencies or quasi-agencies, things get out of sorts. If the Government would admit that it hasn’t got a clue what to do with our housing crisis and get out of the way. Private enterprise will take over and we would be out of this crisis within several years.

    We do need someone to be a watchdog. But let it be someone who understands the marketplace.

    I am older but I believe we were taught in Economics 101 that if you let the marketplace dictate the prices, the marketplace will reach its level through supply and demand.

    Once again, Ron, thanks.

  6. […] This post was mentioned on Twitter by Teresa Pringle, Brown Investments and, Christina Blackmon. Christina Blackmon said: […]

  7. Roger Richey says:

    Ron – excellent and well put. Those of us who are in the short sale business have been attacked relentlessly by those who are uninformed. You outline perfectly the benefit we bring to the housing crisis. We act much like “developers” by buying these properties (many which have been vacated and have become a sore sight to the neighborhood) and put them back on the market improved and occupied. Do traditional developers make a profit? We all know they do. In many cases our developments are much more difficult. Traditional developers do not need to wade through liens, second mortgages, bank politics and uncertainty with government agencies. We have the priveledge of dealing with all of the above and much more.

  8. e3 says:

    I am a SS investor and transactional lender and as much as I would like to say great article, I can’t. I don’t think you put anymore substance into your rebuttal than they did in their article.
    Just because they did not provide you with all the pertinent details of their case study does not mean it is not legit.
    You have not cited any legal precedent or statute to affirm these flip transactions are ok.
    Maybe they are trying to blame losses on others, but that is irrelevant to whether the flips they describe are fraud.
    You ask, when did it become fraud to openly negotiate a good price. Well maybe it just did! This type of flip didn’t really exist a short while ago. So in creating a new type of flip, we may have inadvertantly created a new type of fraud. Until it is challenged, you can’t really say it isn’t fraud. But the real issue is the phrase “open negotiation”. That may be the crux of it. Is it really “open negotiation” if there is material information that is not available to both sides? I think one could certainly make the case it is NOT open negotiation.
    You also ask whether a negotiator made false statements. Doesn’t omission count as a “false statement” in the statute against making false statements to a financial institution?
    You also tried to confuse the issue by claiming a “obvious disconnect” between the seller settling for less and the buyer paying too much. First, that is irrelevant to the claim of fraud. Second, there is no disconnect. There is a $65,000 spread. The obvious connection is that if the negotiation and the process were truly “open” an A-C transaction would have occurred at a price between 160 and 225. So the seller would get more and the buyer would pay less.

    Finally, in that I assume your desire is to advise SS investors, I am surprised you didn’t mention what I thought was the most important new info, That is this affidavit they are now requiring. I have not seen it yet, but if they put language in it that says you have to disclose more and they are requiring it, then investors will HAVE TO COMPLY. Or they certainly risk fraud charges.

    Look, I don’t like this anymore than you do, but I don’t want to be the test case for them either. Are you so confident that you will represent us PRO BONO if we are charged?

  9. e3 says:

    Oh and one more, your “bottom line” is that we provide liquidity. Yes, but so what? Just because there is some redeeming quality of these flips has nothing to do with whether they are fraud.

    The heroin dealer who employs 50 people is doing good by employing people but still is committing a crime.

    Don’t tell me why they are wrong. Tell me why you are right. Please, tell me EXACTLY why I am allowed to hide the fact that I have a signed contract with a buyer in the other room ready to pay $65K more than I am currently telling this financial institution the property is worth.

  10. kellis says:

    At e3

    I’ll tell you why. As an Investor and a licensed realtor:

    Number 1: I have yet to see a lender accept a short sale without having THEIR own BPO / APPRAISAL performed. They hire someone to perform it. Refuse to provide you with a copy of it. Refuse to provide the homeowner with a copy of it IN THE HOPES THAT ONCE THEY KNOW THE VALUE YOU WILL BE DUMB EMOUGH TO OVERPAY FOR THE HOME !!!!! Don’t believe me..ask for the actual copy of one after it has been performed and tell me what they tell you. I dont care what they tell me over the phone…i want to see it in writing. When they accept an offer it is based on their DUE DILIGENCE. If they wanted MORE $$$$$$… THEY SHOULD’VE ASKED FOR MORE ..PERIOD. If I take the time to TRASHOUT the property and due some fix up work and mark the price up while finding a higher paying buyer it doesnt make a difference. They could have foreclosed and did the same thing if they chose to do so. Their fault for making the bad loan. Their fault for not asking for more money. Their fault for not foreclosing, fixing, and reselling. THERE IS NO FRAUD BECAUSE THEY DID THEIR APPRAISAL AND TOLD ME WHAT THEY WANTED. I never told them the value..they told me what their alledged value was. I told them what I’d be willing to pay for it. They could accept or deny based on their appraisal or financial common sense.

    Number 2: As a licensed realtor I HAVE FIDICIUARY RESPONSIBILITY TO THE OWNER OF THE HOME…NOT THE BANK. I dont answer to the bank. I SIGN AN AGENCY AGREEMENT WITH THE SELLER…not the bank. The bank is trying to enforce law in places they really dont have legal enforcement to do so. My LEGAL AND BINDING CONTRACT IS TO THE HOMEOWNER.. PERIOD. Agency agrement states I work in the homeowners best interest. (not the lender) Too many lender all of a sudden believe that the realtor who works for the homeowner…works for them and on top of it..have the nerve to dictate how much money the realtor can make when we are help to save their ass out of the fire….which is another reason why I stay on the investing side and away from the realtor side.

    Number 3: They are going to lose money either via short sale from me….or on the back end when it goes REO..thats right…I’ma scoopin coming and going….. which is the whole reason I have a license. Thats right lenders I’m flippin your REOS too !!!!

    Numer 4: If the deal closes A to B…its a sell …PERIOD. I own it. I can do whatever the hell I want to do with after the fact. If I want to sell it in 2 mins..I house. If I want to donate it to charity..I house. If I wanna burn that bitch to the ground…I house. If I know someone wants it for more because I have either done something to improve the property or know something of the value that the lender doesnt…not my fault.. They again had their own independent appraisal performed which they are not willing to share copies of..(hmmmm I wonder why?) They are trying to sucker folks into over paying for homes that are no where near pay off.

    Also..this strategy has existed for years. There is no such thing as a new strategy. The reason very little people did it the same reason very little investors focused on bankruptcy or foreclosures. With the market sells at an all time high what lender would ever agree to take a step discount when all the homes in the area are selling at an all time high. If they pull comps they see they have no reason to take a step loss. Why as an investor would I wait 3 – 6 mos for the lender to tell me ..your offer is too low. So we chased other deals. The bank would foreclose and sell themselves. It was only in the last 2 yrs that short sales ramped back up again because of the credit crunch and pile up of inventory..(again their fault…their bad loans)


  11. Ron Ballard says:

    Hi e3,

    Thank you for your comments. As a first step with respect to legal citations, please review the content at . This article builds on that foundation which is too voluminous to restate.

    Also, in July and August Chris McLaughlin and I present 3 hours of legal analysis full of citations in two 1.5 hour webinars. Those replays are currently available to members in each of our respective programs.

    So for starters, please review the 3 replays that are publicly posted. I think they pretty well address the points you raise.

    Best Regards,

    Ron Ballard

  12. Steve Pawera says:

    Hi Ron.
    You have said all that can be said on this. I’m tempted to just ignore Freddie. Let them sue someone if they believe a wrong has been committed. But then reality sets in: we have judges out there who by comparison make Freddie look like they are open-minded. 🙂
    All the best!

  13. vincent eata says:

    This is in response to e3’s posts.

    As far as the issue of fraud, Mr. Ballard has thoroughly covered that in his recent webinars. Some of the main points are, if you are disclosing material facts, not misrepresenting, not lying, etc, there is no fraud.

    As an example, from the beginning, in our purchase contracts, we state that we “plan to quickly RESELL for a PROFIT”. (This is disclosed in other documents as well).

    Question: If I trade in my car, does the dealer who sells it at a profit have an obligation to tell me what he sold it for?

    You have to look at this as two separate transactions, a DISTRESSED sale & RETAIL sale (arm’s length). Typically, short sales, REOs, distressed properties have lower values.

    In a short sale, the property is upside down, encumbered with liens, foreclosure has started, takes forever to close, etc. Because of this, investors (& regular folks) demand LESS & banks know this. The “Open Negotiation” begins & bank, w/ their vast resources, order their BPO’s, AVMs, & appraisals. So the banks know what’s going. They are just trying to limit the hit they’re going to get. When Investor & bank(s) agree on a price (lower than retail), investor buys property & that’s the end of the 1st sale. (Keep in mind the bank KNOWS our intent to resell for profit).

    2nd Sale: The buyer willing to pay $65K more ONLY SHOWS UP because the property is now an arm’s length sale. Because of the TIME, EFFORT & Resources Investor put in to ADD VALUE to property & make it desirable. No more upside down, liens, foreclosure (it may even have equity), can close tomorrow!

    **I need a buyer’s Agent like Kellis

    Vincent Eata

  14. Aaron Ayotte says:

    Nice job, AGAIN, Ron! The “fear” is being discussed more and more in my area as Realtors “don’t have time” to learn the real deal. Thanks for your continued ammunition in the battle.

    Aaron Ayotte

  15. Dolores Rivera says:

    Thanks, Ron. No doubt that Freddie Mac has big and very real problems. One would think that its CEO’s time would be better spent focused on resolving the root cause that is impacting US taxpayer pockets rather than on spin and propaganda.

  16. altiste1 says:


    I will agree that Freddie Mac is engaged in a hypocritical battle with a legitimate business practice that would ultimately help it out of the mess it helped get itself into. And while we can wring our hands and write blog posts and op-eds, what do we DO?

    The fact is that Freddie Mac is still one of the largest mortgage lenders in the country. They still control the money, and they have huge influence on the market. For example, here is what is being required on my latest flip:

    Freddie Mac’s loan products now require that the seller be on title before the buyer signs a purchase contract, gives earnest money, or even begins the application process for a loan. That means that the short sale investor has to buy the property before having a buyer on the hook. In effect, Freddie Mac is seeking to do away with the short sale flip by cutting off the money.

    So now I’m faced with a choice: do I continue doing short sales and take what I consider to be unacceptable risks by buying properties without buyers lined up, do I restrict myself to cash buyers only, or do I get out of the business? I don’t see any realistic way of fighting Freddie Mac head-to-head.


    Tyler Hokanson

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