Short Sales, Bank Fraud and Off-HUD Payments

We recently uncovered a massive fraud in how some banks are handling short sales…

First, read “What is a Short Sale?” for an overview of the short sale process.

There has been a disturbing trend recently of lenders asking for back-channel, secret deals in order to approve a short sale on a home. These lenders demand that the payments are not disclosed on the HUD statement, intimidate agents and home owners, and even say up front that if the payments are disclosed, they will stop the short sale from proceeding.

The typical scenario is when there are two loans on a property (a “first” and a “second”, sometimes called an 80/20 or 90/10).

In a foreclosure, the lender in first position usually gets the house, and all the other loans are wiped out and get nothing.

On a property with two liens, both lenders must agree to the short sale, and the first lender will typically dictate that the second lender only receive a small amount of money (usually 5% or 10% of remaining loan balance) because the second would lose everything if the house was foreclosed on.

If anything more than a token amount is paid to the second lender, the first lender will generally not agree to a short sale.

Some lenders in second position are now asking sellers, agents, and buyers to make a large, cash payment before closing, that does not appear anywhere on the HUD statement or closing documents in order to approve a short sale. They say this payment must not be on the HUD-1 statement, because if the first lender found out about it they would likely stop the short sale.

These are major lenders encouraging real estate agents and others to commit fraud, and extorting money out of buyers in order to approve the short sale transaction.

This problem is massive, and over the past 45 days I have spoken to over 120 real estate agents and investors around the country who have seen this issue with many different lenders. Most do not want to speak up because they feel that if they say anything negative about these banks, they will be “blackballed” in the industry and will no longer be able to negotiate short sales with banks – thereby destroying their livelihood.

The net effect of all this is that homes are being foreclosed on when there is a ready buyer, agents are put in a position of choosing between their ethics and helping their client, and the housing downturn will be prolonged as more homes are unnecessarily foreclosed on. Banks are behaving in an incredibly unethical (and in some cases illegal) manner, which is the type of activity that helped bring on the housing crisis.

An addition, when buyers pay extra money to buy a home, and it is not disclosed in the closing documents, all future appraisals in the neighborhood are based on artificially low values – further depressing the local housing market.

If you see this happening please speak up! The only way to prevent banks from continuing to engage in this fraud is to publicize it, report it to the authorities, and refuse to engage in unethical, fraudulent or illegal transactions.

6 thoughts on “Short Sales, Bank Fraud and Off-HUD Payments”

  1. Blogs are now the real journalists…The mainstream media cares more about ad revenue than real journalism. No wonder the newspapers are going broke.

  2. Is it fraud or the is the 2nd position merely using a negotiating tactic to recieve a higher payoff? Does the 2nd position not have a right to recoup as much of their principal as possible? I was recently involved in one of these situations and am presently involved in a second. The first was a large known military member servicer who would not accept the payoff offered. We negotiated a payment and rework of the loan at 75% of outstanding principal payable at a reduced rate over 10 years. They then released the lien on a seaprate letter, which was presented at closing but not recorded on the HUD.
    The present one is a military branch credit union that has refused to accept the token payoff even though an idependent appraisal was completed. The difference in this deal is the seller is truly distressed having lost the principal home through foreclosure and in bankruptcy right now. The 1st has already filed for foreclosure. The buyer offered a higher cash settlement POC but the lender refused, full well knowing they were going to end up with zero dollars at the bankruptcy.
    The days are gone when lenders would work with folks on keeping them in their homes. The overwhelming work loads have placed inexperienced paper pushers in positions of responsibility. It’s only going to get worse.

    The other practice I have seen which is downright criminal is the lender authorizing a loan modification for 6 months, re-upping for an additional 2 months during which the homeowner has paid on time and then refusing to accept the next payment because the homeowner is still in foreclosure from the original default 8 months prior! Read the modification papers carefully it always states that the hoeowner is still in default. This is just another way lenders are giving false hope to homeowners. Something needs to be done quickly because these mods will be coming due soon and Mr 7 Mrs middle class will be out on the street.

  3. I agree with you Greg on the overwhelming workload placing the inexperienced paper pushers in positions of responsibility. It’s a complete mess.

    As for Fraud the one thing my attorney reminds me of often is anything ommitted from the HUD is a violation of Federal law based on RESPA. So why play games at this level? When this happens to us we politely bring this up and often find a way to get back on track, all legal and proper. 🙂

    On the same hand we Realtors/Negotiators for the sellers often see our home owners thinking it is the only option to them. I think the duress and strong arm tactic from these banks have to stop.

    I understand and agree with the banks wanting the best bottomline. But after the mess with predatory lending and microscope on them now WHY would they be so stupid? Probably because they keep getting away with it.

  4. Is there some where that we should report this to? I just had a second lien holder ask me to omit the additional amount they want to approve a short sale.

  5. Most banks want the offers this way. They set up a time limit to cclelot offers and then all of them are presented at the same time. This helps keep the offers straight, they stay together instead of getting all spread out.Presently they pick one within 24 hours of presentation or none at all if not qualified offers came in.References : Was this answer helpful?

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