Are banks being fraudulent? Only Pinochio can tell. (photo by Lorenzo González and used with permission)
I’m usually not a “negative nilly” but I have to admit that when the news that banks were being fraudulent in their short-sale efforts was not shocking to me at all.
Diana Olick wrote “Big Banks Accused of Short Sale Fraud” on CNBC that appeared on Friday.
Olick’s findings were that banks with second liens are requiring sellers to make a payment outside of the HUD Settlement statement. In “real terms” if you have a second-mortgage on the house and have to do a short sale, the big banks would require you to give them cash outside of closing which is not being reported to anyone else.
This is call an enducement to faciliate the sale and is a very-bad thing. As a licensed real estate agent, if I want to buy you a home warranty for that new house, it has to be an addendum in the contract and shown on the settlement statement. That’s a $300 home warranty, most of these second-mortgage are probably talking about thousands of dollars.
This is a BIG no-no in the real estate world. The settlement statement is the “bible” of the transaction, everyone’s expenses and income are outlayed on that sheet. Not only are the Realtors commissions disclosed but on the new statement the mortgage brokers have to show how much they made on the transaction along with title companies. It is about the seller, lender, banks, and everyone else having a “clear” document.
So what is the issue with this level of fraud? Okay, I owe Jimmy $5 and Bobby $2 and borrowed the money from Jimmy first. I am unable to pay them both off, so we negotiate new terms for the $4 that I have. Since Jimmy was first he has more say in how much he gets and Bobby will in essence get what remains. This would be outlined on the settlement statement so that everyone understands the opportunity for this to happen.
The issue isn’t that the banks are asking for money from the sellers, it is that they are asking for money OUTSIDE of the settlement statement. Think about it this way, I still owe Jimmy $5 and Bobby $2 but only have $4. Bobby agrees to let me get away with only $1 if I agree to give him the other $1 outside of closing. So Jimmy is now getting $3 and thinks it is all fair. However, Jimmy is being frauded by Bobby in this situation. Bobby knows that if Jimmy knows about the $1 that is being paid off the books, then Jimmy will try to get it back.
And Jimmy should. He is the first lien holder and has the right to whatever he can recover. By being in a second-mortgage position Bobby accepted the risk of being subservient to Jimmy and only able to recover what is available after Jimmy is paid off.
Why do you think that your mortgage wants you to escrow your home owner’s insurance and property taxes? To help you? Right. It is to protect their asset from damage and foreclsoure. You see taxes are one of the few things that can trump the first lien-holder if the home goes into foreclosure.
Basically, the key is to make sure that any form of money to be paid to anyone as a portion of a real estate transaction be documented on the settlement statement. If they don’t want it on the statement, then you need to contact an attorney to protect your interests.
