Rampant fraud in short sales

[Joanne98]

By Edward Harrison of Credit Writedowns

CNBC’s Diana Olick has the breaking story on alleged fraud in the mortgage industry. She has been writing about this for a few days now. See Big Banks Accused of Short Sale Fraud – Realty Check with Diana Olick at CNBC’s website.

Basically, second liens on properties like home equity loans have a blocking interest that can prevent a home from being sold for less than its mortgage value – a so-called short sale. If they refuse to agree to a primary mortgage holder’s short sale, they can send a homeowner into foreclosure. This sets up a conflict between the primary mortgage holder and the secondary liens.

However, these piggy back mortgages and HELOCs get wiped out in a foreclosure or bankruptcy. So, some second lien holders are therefore now taking cash settlements from the homebuyers or agents on the side as blackmail, threatening to derail the short sale. This is also known as fraud.

Why are these guys doing this? Two reasons. Money and fear.

See What are the legal rights of lenders and homeowners in foreclosure? for a case where the holder of the secondary lien was stiffed because MERS (the central repository which tracks changes in mortgage ownership and servicing rights) was not notified of foreclosure as it was not deemed a “contingently necessary party.” That’s the fear side.

The money side of things is simple. Banks like Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have enormous exposure to HELOCs. That’s why banks were cutting HELOCs in the lead up to the crisis in 2008 and have not increased them since. And from a Tier 1 capital perspective, many regional banks are worse.

By the way, Olick finished a second post and Short Sale ‘Fraud’ Follow yesterday saying:

I also went on another real estate Web site that specializes in Realtor blogs, and there was a huge string/conversation of real estate agents explaining to each other how to keep second lien payments in short sales off the HUD settlement statements. Right there, in black and white, on the web.

I hope someone in regulation land is listening!

(video embedded below).

Continued>>>
http://www.nakedcapitalism.com/2010/01/rampant-fraud-in-short-sales.html

[Salmonslayer]

1. I can't comment on the legality of the 2nd lien holders actions, but

How is it fraudulent? Who are the fooling?

It seems to me they are trying to collect money the borrowed by the home owner. If you are trying to collect money a borrower owes you, how is that "blackmail".

Why should a borrower walk away from his obligations if he can pay part or all of a loan back.

I would do the same thing

[clear eye]

2. Self-delete.

[bemildred]

4. I agree, hard-bargaining, not fraud.

They got as much right as anybody to use the powers availible to them.

[PassingFair]

5. The homeBUYERS are paying the bribes, not the home owners.

Illegal.

[bemildred]

6. How is it illegal?

Seriously, I don't get it. What law is broken? Why must they eat their loss gracefully?

[bemildred]

7. Ah, here it is:

But here's what's not legal and what's apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn't see it.

"They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale," says Brandt. "So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal."

[bemildred]

3. Most of the US equities business is founded on massive fraud.

It's like going to Las Vegas and being surprised at all the gambling.