Big Banks Suspected In Short Sales Fraud

[A:http://mortgage-foreclosure.org/news/podcast/banks-accused-of-short-sale-fraud-january-15-2010.mp3;Banks Accused of Short Sale Fraud]As lawmakers put new legalities in effect to reduce mortgage fraud, there is a new type of mortgage fraud being done discreetly by agents from larger banks. On Jan fifteenth 2010, CNBC real estate columnist, Diana Olick produced an alarming story about short-sales and mortgage fraud performed by agents working for larger banks.

Before posting her article, Diane was notified by Jeremy Brandt, the CEO of a few organizations such as 1800CashOffer, HomeFlux.com and FastHomeOffer.com. These organizations bring together short-sale agents, investors and sellers so as to allow short-sale transactions. Jeremy Brandt had been getting lots of negative reports revolving second lien holders.

As the real estate crisis worsens with many homeowners underwater or owing more than their houses are valued compounded with the dreadful unemployment problem, short-sales is now a top option for many homeowners who have not managed to obtain a loan modification or a refinance. A short-sale is when a bank agrees to sell the property for an amount lower than the mortgage balance owed. The National Association of Realtors indicated that short-sales was responsible for roughly 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 ).

Usually, the first lien holder will arrange a partial payment for the second lien holder to drop the lien thus permitting the short-sale to go through. The second lien holder isn’t obliged to agree but more are starting to take payments as they rather receive something instead of nothing. All of this is within the confines of the legal rules.

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 housing Settlement Procedures Act, a law that was established in 2008 permitting home purchasers to get disclosures at several stages of a property exchange. It is intended to stop and restrict illegal kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection law, founded by HUD, built to fortify and protect property buyers during their property buying experience.

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 approached all three heavyweight banks about this issue and below are their following replies. JP Morgan refused to comment when CNBC contacted its media department.

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.

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