By Edward Harrison of Credit Writedowns
CNBC’s Diana Olick has the breaking story on alleged fraud in the mortgage industry. She has been writing about this for a few days now. See Big Banks Accused of Short Sale Fraud – Realty Check with Diana Olick at CNBC’s website.
Basically, second liens on properties like home equity loans have a blocking interest that can prevent a home from being sold for less than its mortgage value – a so-called short sale. If they refuse to agree to a primary mortgage holder’s short sale, they can send a homeowner into foreclosure. This sets up a conflict between the primary mortgage holder and the secondary liens.
However, these piggy back mortgages and HELOCs get wiped out in a foreclosure or bankruptcy. So, some second lien holders are therefore now taking cash settlements from the homebuyers or agents on the side as blackmail, threatening to derail the short sale. This is also known as fraud.
Why are these guys doing this? Two reasons. Money and fear.
See What are the legal rights of lenders and homeowners in foreclosure? for a case where the holder of the secondary lien was stiffed because MERS (the central repository which tracks changes in mortgage ownership and servicing rights) was not notified of foreclosure as it was not deemed a “contingently necessary party.” That’s the fear side.
The money side of things is simple. Banks like Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have enormous exposure to HELOCs. That’s why banks were cutting HELOCs in the lead up to the crisis in 2008 and have not increased them since. And from a Tier 1 capital perspective, many regional banks are worse.
By the way, Olick finished a second post and Short Sale ‘Fraud’ Follow yesterday saying:
I also went on another real estate Web site that specializes in Realtor blogs, and there was a huge string/conversation of real estate agents explaining to each other how to keep second lien payments in short sales off the HUD settlement statements. Right there, in black and white, on the web.
I hope someone in regulation land is listening!
(video embedded below).
For a first hand view on short sales in action, see my posts Cruising foreclosures, REO and short sales with Jim the Realtor and Short Sales in North County: “Feeding Frenzy” as banks pretend and extend.
And if you’re interested, House flipping back in vogue in North County San Diego shows you what low interest rates do for animal spirits in short sale properties.
Gotta love it.
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From my own observations, and I don’t watch the channel all that much, Diana Olick was ringing alarm bells WAAAYY before the rest of the crowd at CNBC. (Still far too late, though.)
She also took a far more sceptical stance about some of the mortgage modification proposals.
Agreed she seems to be one of the few in CNBC who actually presents (and looks into) the facts whatever way she finds them. My kind of reporter
Interesting that at the end of the video, the commentator asks Diana Olick if the cash is going to the company or the person asking for it. But Diana doesn’t seem to understand the question, instead just referring to the party asking for the money as “they”. I know these questions at the end are supposed to appear spontaneous, but my understanding was that they were usually rehearsed. And to not answer such an important question just seems odd. Is it the bank perpetuating the fraud, or is it an employee trying to skim a bit for themselves? My guess is the second, but that’s the question that is asked but never answered.
“some second lien holders are therefore now taking cash settlements from the homebuyers or agents on the side as blackmail, threatening to derail the short sale. This is also known as fraud.”
This sounds more like extortion.
I guess I’m missing something here. If I’m the holder of a second lien, and will get nothing from the short sale, why exactly would I agree to release the second lien to make the short sale possible? In fact, in California a second lienholder whose loan was not a purchase money loan, can pursue the borrower on the debt if the first forecloses (i.e., if they are a “sold out junior”), so from the perspective of the second lienholder they’d be better off if the first forecloses. Perhaps the issue is all about whether it needs to be recited on the HUD form, but I don’t see how a second lienholder who refuses to give a release in order to receive absolutely nothing is acting fraudulently, nor do I see why this is “extortion” any more than ruthless default by a borrower is “immoral.” Although I have seen these reports on CNBC, I have yet to see any really analysis of what law is supposedly being broken. Maybe the practice among secondlienholders is “rampant” because there’s no law against it. On the other hand, just as a matter of backscratching I would think that the banks might not want to employ this tactic lest the other banks employ it against them when the shoe (lien?) is on the other foot.
This is no surprise. There has been no extensive personnel purge at the top of these institutions. Both the institutions and their existing management remain in place.
The overall ethos that law are for peons also remains intact in the banking industry.
Olick writes, “I hope someone in regulation land is listening!” Ha-ha-ha! Good one.
After reading the link, it appears that the fraud issue is related to the documentation of the payments to second lien holders. Is it that the payments are meant to persuade the second lien holders to keep quiet about the existence of their liens, thereby making it appear that the property is not encumbered? In this case, the buyer’s cash flow numbers as presented to the new first mortgage lender would be fraudulent, as they’ll have to keep paying on the second mortgage.
If I recall correctly, some states do not require that mortgages be recorded at the courthouse. One of the risks of buying foreclosures is that there will be a mortgage you don’t know about.
Howzabout fraud in the insurance industry too?
Of interest:
http://www.justice.gov/opa/pr/2010/January/10-crm-053.html
Greenburg’s “dropping my reserves in the Atlantic Ocean”, redux.
I see berkshire hathaway’s name in there too.
Start the fraud prosecutions! Begin with Obama. His campaign promises versus performance have been an order of magnitude greater example of fraud than any previous President.
Openness and transparency? We get opacity.
Bipartisanship? Republicans aren’t even invited to the table. Negotiations are Democrat-only and closed-door.
Guantanamo? Still not closed. That’s a good thing, but still contrary to his promises.
Gays? No hope and change. I also happen to agree with “don’t ask, don’t tell,” and oppose civil unions, but Obama campaigned as the friend of homosexual rights.
Get America back to work? No, the priority is to save badly-run banks, cover up their fraud, backstop their bad investments, while foreclosures climb.
Obama promised to go over the federal budget “line by line” to carefully evaluate and eliminate redundancy, inefficiency, waste, abuse, and unnecessary expenditures. Ummmm, not even a token effort there. He’s signed the most pork-laden deficit-busting bills in history.
He also promised to make electricity costs “skyrocket” as a result of carbon legislation, and thankfully no move there, contrary to his platform. Hail King Coal!
At the very least, can we now officially declare Obama “all hat, no cattle”??? He’s the greatest gift to conservatives that the Democratic Party has ever given us. And I want to thank all of you who voted for him. Without an Obama, there would be no Republican Senator from Massachusetts.
I join the chorus asking for clarification. The clip suggests that it’s customary for first lenders to offer second lenders 10% of the second lenders’ outstanding loan amounts. Demanding more — say 20% — would not seem to constitute fraud, which would only seem to enter the picture upon a second lender demanding that a payment not be properly reported.
Can someone offer elucidation?
Please also answer the following related questions:
1. Does a second lender that has provided a loan that is subordinate to an original mortgage always have the right to block a sale?
2. In the event that a sale goes through, under what conditions would a second lender who has not “officially” agreed to any settlement have a right to any compensation from the seller, the new owner or any other party?
3. How would the answer to 2) above be affected if the second lender accepts any properly reported settlement? Would the second lender retain any right to further compensation or would the settlement ipso facto close the matter?
Thanks.
The fraud comes in because the payment extortion is not recorded in the settlement statements. The HUD-1 statement is a standardized form used to record ALL fees charged by a broker or lender. Taking this cash and then not recording it is fraud.
The question is who pockets this money.
Here’s the form in PDF:
http://www.hud.gov/offices/adm/hudclips/forms/files/1.pdf
Notice lines 300 and 600.
The point is not that an agent is pocketing the money but that she is hiding it from the fist lien holder because their interests conflict (cash to second lien is cash first lien doesn’t get).
Edward, I’m not sure I follow you. Where do the lienholders’ interests conflict, given that it is significantly in the first lienholder’s interest that the second lienholder approves the sale? Why would the second leinholder be in a better position to negotiate extra cash from the agent than from the first lienholder? Is the point that it is in fact the first lienholder, rather than the second, who is in effect threatening to send the deal into foreclosure if the second lienholder doesn’t eat whatever’s put on its plate?