Illegal Short Sale Transactions
As congressmen establish new laws to prevent mortgage fraud, there seems to be a new sort of behind the scenes mortgage fraud performed by agents from big banks. On Jan 15th 2010, CNBC real estate journalist, Diana Olick wrote a provoking story regarding short-sales and mortgage fraud conducted by agents representing big 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.
Short-sales can be difficult. They get complex and troublesome whenever there are two loans in the picture. For a short-sale to occur, parties need the authorisation of the second lien holder to release the lien. If the second lien holder rejects the release, then you can forget about the short-sale and the property ends up in foreclosure with the first lien holder keeping the property. The second lien holder will be entitled nothing since its debt is not superior to the 1st debt ( first lien holder ).
Customarily, the first lien holder will organize a partial payment for the second lien holder to drop the lien therefore allowing the short-sale to work. The second lien holder isn't required to approve but more are beginning to agree to payments as they rather gain something than receive nothing. All of this is not illegal.
For most 2nd lien holders, they might get either little or less. Due to this, many 2nd lien holders are requesting real estate agents or home purchasers in a short-sale to pay 'under the table'. Under the table means not revealing the transaction in HUD settlement statements. According to Brandt, second lien holders are very forward with their demands proposing that if the first lender realizes the 2nd lien holder is getting payment, the first lender will cease the short-sale. These 2nd lenders usually demand a cashier's check prior to closing while selecting not to reveal in the closing documents and HUD statements. Once the 2nd lender obtains payment, they will then agree for the short-sale to go through. According to RESPA rules and the lawyers that Diane Olick had discussed with, the actions above are not legal.
RESPA is the property Settlement Procedures Act, a law that was passed in 2008 to allow buyers to obtain disclosures at different periods of a property exchange. It is meant to prevent and prohibit illegal rebates that increase the price of settlement services. RESPA is a HUD consumer protection law, established by HUD, built to reinforce and protect home purchasers during their home buying process.
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 benefiting 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.
Article Source: FxTradingStock.com
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by: Jeffrey Fisher
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Word Count: 863
Date: Wed, 30 Jun 2010
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