There is lots of chatter out there right now about short sale fraud by 2nd lien holders, thanks to Diana Olick of CNBC.
She reports:
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.
This is absolutely illegal and it happens frequently. The problem for agents and sellers caught in the middle is that there is no one to report the crime to. And, if you choose not to cooperate, banks may deny the short sale.
Though I can’t substantiate the claim, I have heard a horror-story that there has been an instance where the first bank found out about the illegal payoff and was able to negate the sale of the property after the fact. Then, they sued everyone. I have no idea if this actually happened…but there’s no reason to think that bad things like this can’t happen.
Lately, I’ve seen second lien holders demand that the Buyers cough up extra money. (probably in cases where the Sellers don’t have it)
So, my question for all of you is: What are we doing when we’re caught in the middle? Are Sellers or Buyers caving in even though they know it’s illegal? For you agents…have you given up commission to the second lenders? That’s huge fraud…what are your brokers advising?
Most importantly, how can we stop this?
HS
Greg Fielding
Jared Higgins
Terri Tucker
Lori Mode
Doug Reynolds
Andrew Jeffery
sallyjc
missycaulk
kareneldred
Laura Lazar Kearns - 
Kristal Kraft
Terry Osburn
james bunyon
Dave Wierzbicki
#1 by Karen Eldred on January 19, 2010 - 12:38 pm
Quote
As an investor, when we do a double closing, if the spread is large enough, we put the additional funds to the 2nd lienholder on the buyers (my) side of the HUD.
The 1st lienholder sees it and all is well.
It cuts into our profit margin and we are not greedy.
We would rather pay what we can to the 2nd and take less than see the homeowner go to foreclosure.
In a traditional sale this becomes more difficult.
What we’ve done is tell the 1st lender that the buyer is willing to pay the extra amount to the 2nd but they have to lower the offer. It’s still better than the lender having to take the house into the REO department.
If anyone has any questions on this, I can explain better in “person”
Karen
#2 by Greg Fielding on January 19, 2010 - 12:45 pm
Quote
Karen, have you had issues where the first lender won’t approve it?
And, even if that strategy works to get the deal done, it’s still extortion by the 2nd lender (and illegal on their part)…have you ever tried telling them to pound sand?