Big Banks Accused of Short Sale Fraud
Published: Friday, 15 Jan 2010 By: Diana Olick
CNBC Real Estate Reporter
Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.
I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.
His companies include 1800CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he’s been receiving all kinds of questions and complaints about trouble with second lien holders.
As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used “piggy back” loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don’t qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.
In order for a short sale with two loans to happen, the second lien holder has to drop the lien.
If they don’t, and there’s no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.
In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn’t have to agree, but more and more are doing so.
That’s all legal.
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.”…
I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, “That’s a red flag!”
Clearly illegal.
Brandt told me he’s heard from at least 200 agents that they’ve had these requests made by representatives of Citi Mortgage [C 3.54 — UNCH (0) 
] , JP Morgan Chase [JPM 43.28 — UNCH (0) 
] , Bank of America [BAC 16.32 — UNCH (0) ] and other large banks.
Read the rest of the story: http://www.cnbc.com/id/34877347/site/14081545
HERE IS MY STORY:
I was contacted by Jeremy Brandt, http://www.jeremybrandt.com/, a few months ago about this subject. I replied to him about my story. But because I had no documents or recordings to back it up I was not included in the story. I knew that I should have turned on my recorder when they asked us to wire them $10k directly.
I had a client very interested in a patio home just north of Whisper Rock country club in Scottsdale. This was in late 2008 and most homes in Scottsdale were not priced for their true market value. This buyer was ready to pay cash and invest in our market. So we found this property at Solstice at Sevanoand it was priced for the value. My client was excited and we wrote an offer. It was a short sale. It took several months but we got approval on the first mortgage. Then the second mortgage made their request, “we need payment of $10,000 directly to us in order to give you a letter of approval.” I said what, that is bank fraud. They didn’t care, they would not put it in writing, nor email. I asked what guarantee my client would have and they gave none. I asked what would happen if we didn’t close escrow? They told me they would refund the money if the buyer did not close escrow. I checked around with people at my office and around my community in the real estate world. I found this was happening all over. Every person I spoke with had a successful closing with no snags, the “payoff” worked.
I had kept the client in on what was going on. We reviewed the process and he really wanted something to spend the winter of 08 – 09 in Scottsdale and use his new golf membership. He decided to go forward with the purchase and wired $10k directly to CIT mortgage. They gave us the wiring instructions. The buyer flew out for inspections and to meet with interior designers and decided they really wanted a more luxurious place. Now it was “Jeff please get my money back.” OMG! I contacted everyone and started the process. But let me tell you it was a nightmare. One thing I learned working through this financial crisis is that big business is run the same as government, slow and poorly! It took a little over 3 weeks to get the money back, right before Christmas of 2008. I was scared I would be paying my client $10,000. The money was finally returned and I decided No way not again!
There was a back up buyer. They stepped in and closed escrow a month later. I called the listing agent and said, “you found another fool willing to pay $10k directly to the second mortgage?” “No problem” was her reply. The paid, got the approval and closed escrow.
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