You’ve heard of “flipping” houses, well now there’s “flopping.” While the first was speculative, this one is outright fraud.

“Flipping” refers to when home values were rising so fast and the market was so hot that you could buy a house, slap on some new paint and fix up the yard and throw down some marble countertops and turn it around and sell it for a tidy profit.

Now that the bubble has burst and people are trying to offload all these houses, one of the ways they are doing it is in a “short sale” where the bank agrees to allow the house to be sold for less than the value of the mortgage. Doing so lets them avoid the costly foreclosure process and gets the bad loan off their books.

But what “floppers” are doing is pay a crooked appraiser to say that the house is worth even less than its real current market value. They then have a “straw purchaser” buy it, and then they turn around and sell it for what it’s really worth.

The Federal Financial Crimes Enforcement Network (FinCEN) recently released a report indicating that mortgage fraud suspicious activity reports rose 7% in the first half of 2010, the terms “short sale” and “broker price opinion” showing up 827 times and 41 times, respectively.

THE TAKEAWAY: What this means for homeowners is that banks are making it harder to do short sales, preferring to instead go for foreclosure, even when it costs them more money. Several cases have come out where the bank has insisted that the short sale price was too low to allow the sale to go through, only to turn around and try sell the house at auction for less than what the short sale price was.

What you can do if your short sale is initially declined is try to convince the bank that the “auctionable cash-price,” the price they can sell the house for at auction, is lower than what they think. Submit in one big packet at once any interior deficiencies, renovation costs, or engineering reports that you think will make the case. Include several different contractor estimates and bids and broker price opinions to help make your case.

For more information on preventing foreclosure, check out this Consumer Reports article.

Mortgage Fraud Suspicious Activity Reports Rise 7 Percent Increase in the First Half of 2010 [FINCEN.gov]Wary lenders denying short sales [Boston] (Thanks to chiieddy!)
SIGTARP Quarterly Report to Congress April 20, 2010 (PDF) [SIGTARP.gov]
Short Sale Denied; Advice to make Bank Reconsider? [ths.gardenweb]

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