The sun is shining right now on this Monday, January 18, 2010 in Bellingham, WA. Enjoy it while you can - it’s simply beautiful! Boulevard Park is a great place to take a walk and, while you’re at it, enjoy a coffee from Woods Coffee House.  

FRAUD - an ever growing problem from internet scams to now, big banks! Big banks - how? you might ask. With all the regulations to guard against such a thing, we tend to wonder. But, it appears, the fraud has been perpetrated by agents of second lien holders on mortgages. This is made clear by Diana Olick, CNBC Real Estate Reporter, Realty Check (online) in her blog, Big Banks Accused of Short Sale Fraud.

During the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used “piggy back” loans in order to get even lower interest rates on their primary mortgages. Now, in view of the economical downturn, many of these borrowers are so far underwater on their loans that they don’t qualify for a refi or loan modification and are choosing short sales as a way out. Short sales are when the lender allows the home to be sold for less than the value of the loan. About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien. If they don’t, and there’s no short sale, the home goes into foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

SO, second lien holder gets little or nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. More and more are agreeing to do this even though they don’t have to.

OK, so far everything is LEGAL. What’s not legal are the requests by second lien holders for money on the side - either from real estate agents or the buyer in the short sale. This they want in the form of cash or a cashier’s check, kept off the HUD statement, off records, so the first lien holder doesn’t see it.

According to Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together, “They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale.” He continues, “so these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashier’s check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal.”

 Brandt told Olick that he’s heard from at least 200 agents that have had these requests made by representatives of City Mortgage, JP Morgan Chase and Bank of America. Most of these agents wouldn’t go on record with Olick as they feared retribution by the banks they have to work with every day. One brave agent did go on record and confirmed that she’s had three such requests and lost one sale because of it. The three requests for payments outside of the closing statement were made by City Mortgage and JP Morgan Chase. For more details, check out Diana Olick’s blog at www.cnbc.com.

 *Information for this article obtained online from Diana Olick’s blog, Big Banks Accused of Short Sale Fraud (Jan. 15, 2010).