Short sale fraud

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.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.