CNBC is reporting that some banks are being accused of, of all things, bank fraud in short sales. Those of us who sell short sales know that the hardest cases are often the ones with subordinate financing, or in layman's terms, a second mortgage. If you owe $500,000 on a house with a $425,000 1st loan and a $75,000 second mortgage, then a short sale for $400,000 cleans the 2nd loan out completely. If they are lucky, they will get $3000 from the first lender. They have little choice- if the house goes to foreclosure, they get nothing.
ON some files, the 2nd mortgage will try and negotiate an unsecured amount to be paid back by the borrower after the closing in exchange for release of the lien. That is their prerogative. It is, after all, money they are owed.
The fraud part comes when the 2nd lien wants cash paid to them that is not disclosed to the first mortgage holder. In other words, a "side deal" cash payment delivered at closing that is undocumented and not disclosed on the HUD-1 settlement statement.
So instead of Tony Soprano conspiring to defraud the first bank, it is the second bank. Has it happened? I'd say yes. Is it widespread? Hard to tell, probably not, but once is too many times. Does this surprise me? No. These are the institutions that screwed everything up to begin with. Nothing they do surprises me.
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Here in Minnesota, the second mortgage holder has an opportunity to buy the property back at the sheriff's sale...if they want to outbid the first mortgage holder. So, it is state-by-state. Good information.
I did read the article and although it sounds shocking, it just goes to the underlying issue that resulted with the industry where it is today. The only interesting thing about the article is how old investor techniques for property flipping has reared it's ugly head on the resolution side of distressed property sales. Go figure.
Philip, California is with few exceptions a "non recourse" state. So 2nd mtg. lenders asking for recourse here would be removing one of the incentives for CA borrowers to go the short-sale route. Having said that the- outside-of-escrow-payments don't have the sound of legality about them.
Steve
Philip, I haven't run into that yet here in Chicago, but it wouldn't surprise me at all that it is happening.
I've been involved in these short sales for a long time. There's three ways I know how to accomplish this:
1. Put the payment on the buyer's side of the HUD under section 1004.
2.Use the commissions to pay the difference and have a Buyer broker agreement with the buyer and buyer's broker for the difference. This will avoid the HUD issue.
3. Do a double Wire. Second want's 10k, first gives only 3k and wants to see buyer's side HUD so two wires get processed. One wire for the 3k as agreed and one wire for 7k.
I do agree with the report as I have been asked by major lenders who held 2nds that they don't care how I get the money but that I do get it to them. In one instance, Wellsfargo 2nd (home equity) with a Wellsfargo 1st (home mortgage). Go figuire.
Wow. That's a tough one. I have been lucky to not have to deal with a second like that where they get nothing. I think I'd refer it to a specialist when/if I encounter it.
I have read the report by CNN on this type of new fraud, but do not know of any title agents that would be a party to this in our area. I also find the comment by Satar very interesting, if their is a way some will find the loop hole to do the dirty deal.