Mortgage fraud is part of what started this whole housing crash, and it hasn’t gone away now that we’re in an economic recession. In fact, this is the kind of climate that encourages mortgage fraud.
When hearing the term “mortgage fraud” most people think of borrowers falsifying information on their loan application. And that is one form of fraud. However, a new form of mortgage fraud has emerged, and it’s the banks who are promoting it.
That latest form is short sale fraud.
When a homeowner has both a first and second mortgage on a home and the home’s value drops dramatically, the second lien holder often has no equity at all. For instance, if a home sold for $150,000 with an 80-10-10 closing, the first mortgage would have been in the amount of $120,000 while the second was for $15,000 and the borrower would have made a down payment of $15,000.
Unfortunately, when the housing market crashed, values dropped more than 20% in many locations, so that house might now be valued at only $100,000 – or even less.
In a short sale, assuming the house sells for $100,000 the first mortgage holder will lose about $20,000, and the second lien holder will lose the entire $15,000.
During a short sale negotiation, the first lien holder often agrees to let the second take a small portion of the proceeds – often just a thousand or two. But some of those banks want more, and they attempt to “hold the transaction hostage” until they get it.
They ask the seller, the buyer, or the real estate agents to agree to pay them “on the side” before they’ll give approval for the short sale.
“On the side” means they don’t want the first lien holder to know, and the transfer of money doesn’t show up on the HUD-1. They hide the transaction by getting the homeowner to make an extra payment or two on their account, or by asking the buyer or the real estate agents to pay them after the transaction closes.
What they don’t tell the parties involved is that by keeping this money transfer off the HUD-1, they’re committing mortgage fraud – and the parties who agree to it will be accessories to the crime.
Naturally the buyers, the sellers, and the real estate agents want the transaction to close. Thus, they may rationalize that it’s OK to go along with the bank’s request. But it could be dangerous. Mortgage fraud is a felony. Participation could result in six-figure fines and even jail time.
If you’re involved in a short sale and the bank asks you to do something that simply doesn’t feel right, talk to a real estate attorney before you agree.
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