Big Banks Accused of Short Sale Fraud

Second lien holders are demanding side payments (not on HUD) to release liens so short sales can be completed. And their doing it without telling first lien holders.

Palm Coast, FL – January 15, 2010 – Some large banks are flouting the law by demanding cash payments to release second liens before a short sale can go through. The payments are made outside the settlement documents and without the knowledge of the first lien holder according to a report by CNBC’s real estate reporter, Diana Olick.


By: Diana Olick: CNBC Real Estate Reporter
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 to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.
In short, the second lien holder gets 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. The second lien holder doesn’t have to agree, but more and more are doing so.
That’s all legal.
But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say "on the side," I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it.
Toby’s Commentary: Some large banks are alleged to be complicit in several mortgage fraud lawsuits. Criminal investigations are also underway. Is this new twist another link in the chain? Are all the payments actually going to the second lien holder or are some of them going to the individual lender employees empowered to release the lien? We may never know. The investigating and regulatory agencies are too overwhelmed.


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2 replies
  1. George Meegan
    George Meegan says:

    A lien is a lien, first or second or even third

    You can’t expect the lien holders to just remove the lien at no cost. They have to process the paperwork and issue the lien release to the clerks. They also do not have to remove the lien, and could stop the title search in its tracks. They are only being asked to drop their claim, and should be able to get payment, perhaps not from the buyer, but from the seller or the primary lien holder that wants to close the books on the loan. They also can release it and reattach a lien on the sellers other assets, such as vehicles. They simply have no responsibility to just drop the lien.To prove them wrong would be more costly than letting them demand the payment, out side the buyers new primary loan. They simply put the sale closing off by not removing the lien, and that’s their right.They did not sign on to the short sale leaving them nothing, if they had they would not demand the payment.


    Backing out of a short sale

    WE have decided to back out of a short sale. Called our realtor and she states we will not get our deposit back, stating "I am being told that the only way out out of this contract is if it doesn’t close by August 13th."

    I pointed out to her the following in our contract: "Part III lines 26 through 30. Time for acceptance of offer and counter offers; effective date: (a) If this offer is not executed by and delivered to all parties or Fact of Execution communicated in writing between the parties on or before May 3, 2010, the deposit (s) will, at Buyer’s option, be returned and this offer withdrawn." We have never been notified that the contract was accepted and have not received a sign document.

    when she received this communication, she sent the following: The Broker in this office says you have mis-interpreted this and it is not a valid reason to back out. If you simply want out just send me another email stateing that you are no longer interested and wish to have your $1000 returned. Because there are other offers I think the owners will cooperate. You were the highest bidder and probably going to be notified shortly.

    We replied with the following: we are no longer interested in the property and have no intention of forfeiting our deposit as our offer was never acted upon.

    The realtor then replied:
    It was acted on, but I don’t want to argue about it. I will do what I can to get your deposit back.

    Any comment on getting out of a short sale. No signed contract from the seller. And the only communication we received is that we are 2nd in line.


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