Short-Sale Fraud Or Not? Major Banks Accused

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Jan 15^th, 2010

 

As legislators put new laws in place to curb mortgage fraud, there appears to be a new kind of undetected mortgage fraud conducted by agents from major banks. On January 15^th 2010, CNBC real estate reporter, Diana Olick produced a controversial story involving short-sales and mortgage fraud performed by agents acting on behalf of major banks.

 

Before publishing her story, Diane was alerted by Jeremy Brandt, a CEO of several companies ranging from 1800CashOffer, HomeFlux.com and FastHomeOffer.com. These companies arrange marriages between short-sale agents, investors and sellers in order to achieve short-sale transactions. Jeremy Brandt had been getting a lot of complaints with problems arising from second lien holders.

 

As the housing crisis continue with many homeowners underwater or owing more than their homes are worth coupled with the severe unemployment problem, short-sales have become a popular last resort for many homeowners who have failed to get a loan modification or a refinance. A short-sale is when a lender agrees to sell the home for less than the mortgage amount owed. According to the National Association of Realtors, short-sales accounted for about 12% of all home sales in 2009.

 

Not all short-sales are easy. They get complicating and difficult whenever there are 2 loans involved. In order for a short-sale to work, parties will need to seek the permission of the second lien holder to release the lien. If the second lien holder refuses to do so, then there will be no short-sale and the home enters into foreclosure with the first lien holder getting possession of the house. The second lien holder will not get anything since its debt is subordinate to the primary debt (first lien holder).

 

In most cases, the first lien holder will negotiate a partial payment payable to the second lien holder in order to drop the lien thus allowing the short-sale to go through. The second lien holder is not obligated to agree but more are beginning to accept payments as they rather get something rather than nothing at all. All of the above is legal.

 

For many second lien holders, they will either end up with little or nothing. As a result of this, many second lien holders are asking real estate brokers or buyers in a short-sale to pay cash or money ‘under the table’. Under the table translates to it being not disclosed in HUD settlement statements. According to Brandt, second lien holders are pretty upfront in their demands indicating that if the first lender finds out that the second lien holder is getting paid, the first lender will kill the short-sale. These second lenders normally demand a cashier’s check before closing while choosing not to disclose in the closing documents and HUD statements. Once the second lender receives the payment, they will allow the short-sale to go through. According to RESPA laws and the lawyers that Diane Olick had contacted, the above is deemed illegal.

 

RESPA is the Real Estate Settlement Procedures Act, a law that was enacted in 2008 to protect consumers so that they receive disclosures at various times of a transaction. It is designed to curb and outlaw kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute, enforced by HUD, designed to enhance and protect homebuyers during their home purchase.    

 

Brian Sullivan, a RESPA specialist confirmed that it was clearly illegal.

 

Jeremy Brandt said that he was informed by 200 agents claiming that they’ve had these illegal requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America including other major banks. While many of these transactions go undetected and undisclosed, it helps to clock in more short-sales which translate into more home purchases thus benefitting the housing market. Although there has not been any active investigation into this matter, a review of RESPA laws clearly confirm it to be illegal.

 

CNBC contacted all 3 major banks about this issue and below are their following responses.

 

JP Morgan replied ‘No Comment’ when CNBC contacted its media representative regarding the charge.

 

Bank of America denied any practice to CNBC and replied with the following statement: “Bank of America enforces a policy that all disbursements are documented on the settlement statement for short sales. When we are servicing a first mortgage with a second lien held by another investor, if the second lien holder asks for off-HUD payments, we will not approve the transaction (if we have knowledge of it). It is also against Bank of America’s policy to accept off-HUD payments on its second liens."

Citi Mortgage responded to CNBC with the following statement: “We work very hard to help distressed homeowners find solutions for their financial challenges. In our attempt to amicably resolve the debt, we will generally negotiate a reduced settlement with the homeowner in order to release a second lien. Unlike some lenders who refuse to reduce the payoffs on second liens, we choose to reduce the payoff amounts in some situations to assist the borrower. We do not provide instructions to settlement agents on how to fill out the settlement statement or any other closing documents, and we certainly do not require settlement agents or any other parties to violate applicable laws."

 

 

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