Learn About Short Sale Mortgage Fraud
Short sales are supposed to be transparent transactions, but some short sale banks encourage the sellers to commit mortgage fraud. They do it openly because the banks don't seem to care, or perhaps they believe they are above the law. The short sale banks committing mortgage fraud are generally the junior or second lenders. These lenders try to extort money from the seller, known as a seller contribution, without telling the first lender.
Short sale mortgage fraud is punishable by the F.B.I. Here is how the F.B.I. defines mortgage fraud: "Any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." All monies paid in a transaction are required to be reflected on the HUD-1.
Foreclosure and Second Lenders
In a short sale, many second lenders hold loans without any equity. If an underwater property went through foreclosure, the second lender's security gets wiped out, and that lender gets nothing. For example, if a home was purchased for $200,000 through an 80/20 combo loan, the first lender would have loaned $160,000, and the second lender's loan would be $40,000.
When a market declines, if that home is now worth $100,000, the second lender has no equity, and the first lender lost $40,000. The way many foreclosure laws work, the second lender would need to foreclose, pick up any back payments to the first lender and begin its own foreclosure proceedings. But second lenders don't do it because they would still be underwater.
Second Lenders and Short Sales
In a short sale situation, often the only lender who is receiving any money is the first lender. Generally, it is up to the first lender to give some of its proceeds to the second lender. This encourages that lender to agree to the short sale and release the loan. That amount, whether it's $1,000, $3,000 or $15,000, is negotiated between the first and second lender.
Short Sale Mortgage Fraud and Second Lenders
Some second lenders believe the buyers, sellers or the agents should contribute money to the short sale transaction, effectively bringing cash to the table, and pay more to the second lender. These lenders refuse to issue short sale approval unless their demands for cash are met. The problem with this is the second lenders want to hide this extra cash from the first lender. Here are some of the ways they do it:
- The seller can make a payment on the seller's account.
- The buyer can pay the lender after the transaction closes.
- The listing/selling agents can pay the bank directly out of their commission.
This may sound innocent enough until one realizes that none of this money is on the HUD-1, yet this money is part of the real estate transaction. Moreover, if the first lender had the knowledge, the first lender might want part of those funds as its own repayment. Some banks require an arm's length affidavit. These documents state there are no secret agreements between any of the parties.
Report Short Sale Mortgage Fraud
Sellers and buyers often feel pressured by the second lender's demands. The seller wants the short sale to close because there are benefits to a seller to do a short sale vs. a foreclosure. The buyer wants the transaction to close because the buyer wants to buy the home.
Sellers and buyers don't generally understand the laws surrounding mortgage fraud. However, their agents, by the sheer fact the agents are licensed to sell real estate, should know. If you suspect mortgage fraud, call your lawyer for advice. Here are a few places where you can report second lenders that try to commit mortgage fraud:
- Your state Attorney General's office.
- The F.B.I.
- The media -- newspapers, television, radio.
- Internet bloggers / columnists.
- The Fannie Mae Taskforce (for Fannie Mae short sales).
Mortgage fraud is a prosecutable crime and against the law. No bank is too big to take down.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.