CNBC – Big Banks, Short Sales, Kick Backs and Fraud

This morning CNBC aired the story we brought them regarding short sales, bank fraud and kick-backs to banks.

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Diana Olick  — CNBC Real Estate Reporter
Big Banks Accused of Short Sale Fraud

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 1-800-CashOffer, 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.”

(RESPA is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

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, JP Morgan Chase, Bank of America and other large banks.

Most agents wouldn’t go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

“I think it’s wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client,” says Gentry matter-of-factly. “Aside from being illegal and a violation of RESPA, it’s immoral and truly it’s just sad for the client that it’s hurting.”

Gentry says she has had the requests made three times and claims she lost one sale because of it.

“The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase.”

JP Morgan Chase simply answered, “No Comment,” when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written 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 ‘s reply was a bit more complicated:

“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.”

“When we confront the lenders and tell them that this request is illegal and a violation of RESPA, they tell us it’s been cleared through legal and they don’t care. Do it anyway,” charges Gentry.

I personally heard a recording of a phone conversation between a short sale real estate agent and a second lien lender, during which the second lien lender clearly asked for cash outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the recording was given to me by Brandt who got it from the agent. The agent would provide no information on the lender, for fear of retribution):

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place.”

I contacted the Treasury Department, HUD, FINCEN (Financial Crimes Enforcement Network) and the Federal Trade Commission, and none of their representatives could tell me of any active investigation into this. The folks at HUD said they’d be very interested to see my story.

59 thoughts on “CNBC – Big Banks, Short Sales, Kick Backs and Fraud

  1. I have worked dozens of short sales and every one has been different. The banks have no consistent guidelines. I always advised my client to first try to get a loan modification. One home owner has been trying since Sept, he is on his 9th contact phone number and still no answer. I have not seen a single successful modification. The President’s Plan is a joke. The bank “negotiators” are mostly inaccessible or rude. One has a voice mail that says “do not leave a message on the phone, I will contact you if I need more information”, of course she does not call. I called a supervisor who said the file is incomplete and they need current pay stubs from the borrower (which are not current by the time they review them). I have had three deals actualy go to foreclosure when I had good offers on the table. All three were put back on market for considerably less than the offers I presented. When borrowers/buyers are asked to pay additional blood money, they often just throw in the towel. BofA is, by far, the worst with Chase close behind. Does anyone care that it is a blood bath out here?

  2. Jeremy, great start, now for some action!

    Fellow Realtors, we must awaken to this reality: These practices are illegal, and destructive to our livelihood and the Entire US economy. Amongst our allied industries there surely must be litigation specialists in these markets whom our Associations can, as a class, engage to bring suit against these thug companies? Also, turn these companies in the the Federal Trade Commission. Also, send letters (as well as emails… though they are easily deleted) to your Congressmen, and Senators! Send copies of the tapes!

    When 100,000 of us raise enough racket and send enough paper to Washington, the Bureaucrats will act, if only to save trees and their hairy behinds!

    The Obama Administration is the throne of corruption, and inept as it is corrupt. You will have to bludgeon it into ‘change’, and you’d better get your stick out and start swinging…now!

  3. I have a 1 YEAR OLD contract, yes same buyer, Cash, above appriased value.!! Wamu let it fall through the cracks at 8 months when they merged with Chase. One year later (and 5 new packets) it has been ‘reassigned’. Here we go again! And, BOA is the ‘invester’ behind Chase so I am sure we are in for at least another 2-3 months!!! If it goes back on the market it will cost them at least 150,000 right now.

    Maybe someone will finally get something going correctly with short sales now. It is so bad that most of my fellow agents won’t work a short sale purchase and are willing to loose the client or referr them because of the process. So, these homes prices are plumeting right now around here thus affecting all the other values.

  4. Think about how much the business of Real Estate has changed. WE are being asked to help people dissolve a major investment. We are being asked to make value judgements on what is right and wrong. Those judgements are way out of the scope of our licenses.
    The banks change the rules each and every day. When you ask them they say you can not give anything outside of escrow to the second. When you asked them if they ask for money outside of escrow the answer is yes.
    Our clients end up paying more for the home which has been stripped of sinks, copper piping, built in’s and many other valuable assets all because the banks don’t have their act together.
    If you want to stop this nonsense it will have to come from the top down not the other way. We need real leadership and right now we are not getting it.
    Solution: Change the percentage owners pay on their loans to 3% for the next ten years. Don’t even ask for a hardship just do it. We will save thousands upon billions of dollars.
    By the way I closed personally myself last year over 15 million in short sales. It is easier then any one thinks and all these outside negotiators have nothing to offer if someone is willing to simply work.
    Just my thoughts.

  5. Infuriating, yes. BUT, none of this surpirses me. It does connect some dots as to why banks obviously are not motivated to deal rationally on short sales…it’s more profitable for them to foreclose…thanks to the tax payers. RESPA violations and the appropriate enforcement agencies ignore this behaviour? If it was a single lowly Realtor, they would be locked up. BUt, since it’s the banks who write tha laws via our duly elected legislators, they get away with behaviour that can only be described as “DOMESTIC TERRORISM.” Throw the heads of the banks into that little resort in Cuba. Seriously, these people care about nothing except to make a buck. They are within their rights to seek a profit, BUT this activity demands actual people see jail time. Name one person in the banking industry who has gone to jail yet? they cause billions in damage and get 140 billion in bonuses?!
    Lastly, I agree that our legislators are asleep at the wheel. It’s time to wake them up. Call your legislators.

  6. As a short sale specialist, I believe these Banks are afraid of investor/shareholder backlash when the amount of toxic assets finally comes to light.
    Top executives at these banks are quaking in their boots that the day of atonement is almost at hand. Of course then they cash in the stock options and walk away-no harm no foul.

  7. I am a paracticing Mortgage Banker in California. In addition I buy short sales every month as an Investor. We have had many issues with B of A in stalling and postponing quality short sales while they try to get cash on the side. Now from what i understand regarding 2nd trust deeds in California is that the junior lien holder can release their security in the real estate and become a unsecured debt and can then settle outside of the short sale transaction and HUD/RESPA rules. But if they hold a security interest in the residential property all items payable including payoffs of a deed of trust must be on the HUD-1 form. I understand the 2nd TD holders right to collect but to hold the real estate hostage in the meantime is not right as if their true intent is to collect a unsecured debt they must release the security and allow the sale to proceed. I believe a mandatory short sale process where 80 of current value is the final max sales price and seconds get $2,000 or 2% which ever is less and authority is given to the the title ins co to reconvay on behalf of the TD holders with Rec of the mandatory funds. That would speed up the sales process and put equity positions in the market place to bolster the housing market and sub service markets like contractors.

  8. if some one lied about their hard ship stating they can no longer pay mortgage,but in fact they have the money.I know a person who got a loan thru their mortgage for a friend.The friend was making the payment to pay back the loan,and one day he pays back all the money he borrowed 160.000.00 dollars istead of the her paying back the mortgage company,she applies for a shortsale when in fact she got the money back that she lent she was not out of work she also had a roomate who was paying rent,short sale approved sold town house she now has 160.000.00plus her paychecks because she stop making payment and money from her renter she buys a new town house and owns out right she paid 169.000.00 she owes no money to the bank.
    bank lost money and people are struggling to make ends meet. is that even legal?

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