Yet more bank fraud

Image by Getty Images via Daylife

A reader sent me a link to this story with this attached note: “I was in real estate a few years back and attempted to report mortgage fraud to the FBI a couple of times. Seems they were too busy. Guess they still are.”

The article is written by CNBC’s Diana Olick and should be read in its entirety. It’s one of those examples of journalism done right: a complex issue broken down in simple, understandable terms so the citizenry can be properly outraged when confronted with the underhanded practices of banks.

Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together (1800CashOffer, HomeFlux.com and FastHomeOffer.com,) first alerted Olick to yet another layer of widespread mortgage fraud.

This time, the culprits are some second lien holders, or second-tier lenders.

As we all know, 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, many of the borrowers in trouble, and many who are so far underwater on their loans that they don’t qualify for any refi or modification, 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 to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

The second lien holder gets nothing. To motivate the SLH to drop the lien, the first lien holder usually negotiates some partial payment to the SLH. That’s the legal part of all this.

Where it gets into illegal territory is when the SLH begins requesting money on the side from 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.

“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,” says Brandt. “So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers 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.”

RESPA, or the Real Estate Settlement Procedures Act, is the 2008 law requiring that consumers receive disclosures at various times in the transaction.

Olick contacted Brian Sullivan over at HUD about this to which he replied, “That’s a red flag!”

Yup.

The illegal activity involves the usual players, according to Brandt. He told Olick that he’s heard from at least 200 agents that they’ve had these “on the side payment” requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America, and other large banks.

It’s hard to get current and former agents to go on the record about this kind of stuff because many whistleblowers fear retaliation from industry. (I’m still waiting back to hear from my whistleblower about my interview request.)

One brave agent, Kayte Gentry, of Keller Williams Integrity First Realty, was willing to go on record with Olick.

“I think it’s wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client…Aside from being illegal and a violation of RESPA, it’s immoral and truly it’s just sad for the client that it’s hurting.”