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Fraud & Deceit — It’s Just Business As Normal For Some Short Sale Lenders

January 26th, 2010 categories: Foreclosures / Short Sales, Loans / Financing, Viewpoint

Thankfully, Someone’s Finally Blowing The Whistle


We’ve all heard the banks moan and complain about how they were duped into making bad loans to unscrupulous borrowers in the subprime era.

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Or how homes were appraised at values clearly tens of thousands more than the property was really worth.

Well, these banks certainly had a right to be angry.

But now, it seems, the shoe’s on the other foot.

For, these same banks who have positioned themselves as the innocent victims in the mortgage meltdown are now aggressively and openly trying to defraud each other with short sale side-deals in a manner that essentially holds the down-and-out homeowner — who’s trying to make the best of a bad situation — hostage.

What’s A Short Sale?

For those who don’t know how or what a short sale is, it’s usually the only way a borrower who owes more money than the home is currently worth can sell their home.

They sell the home at market value and ask the lender to agree to a reduced loan payoff so they can do so. It saves both the lender and the borrower from what otherwise would be a costly and more damaging foreclosure.

Before escrow can close, the title company requires a copy of the short sale approval letter, which includes a minimum payoff amount as well any other conditions the lender wants to impose (things like “escrow must close by such-and-such date” or “seller to receive no funds at close of escrow”).

Some borrowers have only one loan on their property. But many have both a first and a second mortgage.

And it’s on those 2-loan properties where many banks are now openly demanding that the seller and their real estate agent deceive the other bank and close escrow, even if it means defrauding the other lender.

When There Are 2 Loans

When there are two lenders, the first mortgage holder often will often agree to reduce its payoff marginally so that the bank holding the second mortgage can have a few thousand dollars in exchange for releasing its lien.

The premise is that the holder of the second will be wiped out entirely if the home forecloses, so they should be happy with a token $3,000.

But in agreeing to leave that $3,000 for the 2nd, the “1st” also usually will insist that that’s all the 2nd gets and that any contributions from any other party (seller, buyer, real estate agent, whoever) are to be remitted to the 1st.

To make sure that all monies that come in and out of the escrow are fully disclosed, the title company is required by law to prepare a form created by the Dept. Of Housing & Urban Development. The form is known as a HUD-1 or more commonly, simply a “HUD.”

But what’s frequently happening with many short sales is the lender on the 2nd is asking the seller (or anyone else the seller can convince to pay) to come up with an amount over and above what the 1st has offered them.

That part is okay. But here’s where it goes from legal to illegal.

Cutting A Side Deal

Instead of going back to the 1st and saying Bank B needs another $5,000 or it won’t release its lien, the bank with the 2nd is simply instructing agents and their sellers to give it them on the side — in a manner where the holder of the 1st will never know about it.

So you have Lender A, the holder of the 1st, which has instructed all parties — seller, agent, title company — to pay Lender B (the 2nd) not a dime more than $3,000 with explicit instructions that any overage goes directly to the 1st.

But Lender B tells the seller and the agent to send them another $5,000 in a cashier’s check outside of the escrow. That way they get their money and when the 1st gets their HUD at close of escrow, it looks like all the 2nd got was the $3,000 that the 1st had authorized.

That’s Fraud with a BIG Capital F.

The Banks Don’t Care

So what happens when the agent or the seller says “no can do, that’s illegal?” The 2nd simply says, do it or we won’t release the lien and you can let the 1st foreclose.

Yes, these same people who chastised the American public for duping them into loaning out so much money to so many under-qualified borrowers are now openly trying to coerce agents and sellers to defraud another lender.

And worse yet, Lender B does it to Lender A without any hesitation, but when the roles are reversed and Lender B is now the 1st and  Lender A is 2nd, guess who cries foul? You got it — the same lender who was willing to stab the other lender in the back on the previous short sale.

Yes, that’s the seedy under-belly of our nation’s banking system. At least that’s what seems to be happening more and more with many of our country’s largest institutions.

I’ve never directly had a lender on a 2nd ask me to do this. If they did, I’d try like heck to get the lender to see why what it was asking us to do was fraud. But in the end, if I couldn’t convince them to remove their lien without forcing my client to break the law, I’d walk away from the deal. And I’d encourage my client to do so, too.

And then I’d blow the whistle loud and clear.

Someone FINALLY Blew The Whistle

And that’s just what several real estate agents in other parts of the country recently did — and loudly enough, that it caught the attention of CNBC and even HUD itself.

Jeremy Brandt, the CEO of a real estate lead-generation company, put CNBC reporter Diana Olick in touch with several agents who talked openly about the blatant coercion they had experienced from various well-known national lenders.

Brandt’s web site has a transcript and actual recording of a conversation between a lender a real estate agent, where the lender repeatedly instructs the agent to break the law, going as far as telling her that if she’s not comfortable doing it, she should just assign it to a colleague who will.

And, CNBC reporter Olick’s original story and her follow-up a few days later tells more of the gory details. In her initial report, she says that HUD was not aware of this practice when she first contacted them.

Will The Banks Keep Doing This Anyway?

So hopefully this recent whistle-blowing will make its way to Capital Hill and we’ll see some major crackdowns on lenders who advocate fraud and deceit.

Going through a short sale can be emotionally and physically exhausting for the borrower, not to mention very humbling.

Those who opt to try for a short sale rather than taking the easy way out and simply walking away from the home are for the most part trying to make the best of a very unfortunate situation — both for themselves and for the lender.

In most cases, the lender will usually come out far ahead by agreeing to a short sale instead of foreclosing and re-selling the home.

Yet, instead of working with the borrower in a cooperative spirit, they instead kick these unfortunate buyers at their weakest moment…and then try to coerce them into doing something they know is against the law.

And the banks wonder why their image has become so tarnished with the American public…

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This entry was posted on Tuesday, January 26th, 2010 at 11:32 pm and is filed under Foreclosures / Short Sales, Loans / Financing, Viewpoint. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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