Short Sale Fraud Accusations Shot at Banks

January 27, 2010 by JonBenya · Leave a Comment

In a recent CNBC story, allegations surfaced that some big name banks were committing fraud in short sale situations. The fraud is not originating with the primary lender who is initiating the short sale, but the secondary lien holder on the property (see Big Banks Accused of Short Sale Fraud).

In order to understand where the fraud plays in, let's do a quick overview of how these 2-lien holder short sales come to be.

During the housing boom, home values skyrocketed, creating additional equity that homeowners could tap for cash.
These home equity loans or lines of credit became a secondary lien on the home in addition to the actual mortgage.
When the housing market tanked, so did property values. The homes were no longer worth the amount the homeowners owed on it for both liens.
Homeowners that were so much underwater that traditional loan restructuring couldn't help them turned to a short sale.
HOWEVER, in order for a short sale to go forward, the secondary lien holder must drop the lien on the property. The primary lien holder usually pays a portion of the lien owned to the secondary lien holder to make the short sale happen.
The primary lien holder sells the home in a short sale for less than the lien, but they recoup some of the money and the homeowners avoid foreclosure.

Ok, still with me? Good. Now, here is where the fraud comes in. Like I mentioned earlier, when the primary lien holder (let's call them No. 1) approaches the secondary lien holder (they'll be No. 2) wanting to do a short sale, No. 1 will usually pay part of No. 2's lien in order for them to drop the remaining to allow the short sale. No. 2 doesn't have to agree to a short sale and opt to send people to foreclosure, but generally they cut their losses and take what they can. This is the legal way things are done.

The illegal way is for No. 2 to take the small payment
from No. 1 (legal), and THEN turn to the real estate agent or buyers
and request additional money "off the record" and off the HUD documents
(illegal). That way, No. 1 won't know they're doing it and cancel the short sale, and there's no real way for someone to find out unless someone blows the whistle. If the Realtor or buyer refuses to do so, No. 2 kills the short sale, and the sellers go into foreclosure.

If you are looking to buy a short sale property and need a Realtor to help you navigate the waters, contact me today!

Jonathan Benya

Realtor

Century 21 New Millennium

9405-A Chesapeake Street 301-609-9000 Office

La Plata, Maryland 20646 301-653-8116 Mobile