Tag Archives: hud

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.

HUD Anti-Flipping Laws

Wednesday the U.S. Department of Housing and Urban Development ruled that homes sold within 90 days of purchase will not be eligible for FHA financing.

The rule will go into effect July 9 and homes sold between 91 and 180 days after purchase will require additional documentation if the sales price is 100% or more of the previous purchase price.

This is another example of a government entity attempting to regulate an industry without understanding the core issues, much like the recent lease option law in Texas.  Preventing a home owner from easily selling their house within 6 months of purchase does nothing to protect the potential buyer, and certainly won’t stop fraud.

Flipping refers to selling a house quickly after purchase for any reason and is in no way illegal.

If HUD wants to stop mortgage fraud (which is their stated intent), they should crack down on mortgage brokers and appraisers that act in collusion to provide an appraised value of a property that is more then it is actually worth.  As long as an appraisal is legitimate and reasonable, there should be no problem providing FHA financing on a property.

The most ridiculous part of this ruling is that HUD itself is exempt, along with Fannie Mae, Freddie Mac, and housing agencies.  “Do as I say, Not as I do”.