Big Banks Accused of Short Sale Fraud

Wall Street didn’t merely siphon off unearned money, wealth and guarantees from homeowners, bank depositors and taxpayers. They screwed up title on what appears to be more than 60 million transactions — so even refi’s might now have rendered the title to be uninsurable or unmarketable.

Big Banks Accused of Short Sale Fraud

No surprise here. Brad Keiser points out that many of the “intermediaries” or “pretender lenders” are actually owned by these big banks. So the servicers and others turn out to be owned and/or controlled by the big players. No surprise there either. But what is good about this article is that the noose is tightening around those necks that should be in a noose — extracting NEW fees and profits to the detriment of both homeowners and investors and to the detriment of the taxpayer.

The second point is that I don’t want to sound like a broken record but if you don’t get a satisfaction of the note and mortgage from the actual creditor what do you have? NOTHING except perhaps some equitable claim that the company executing the satisfaction was authorized by the creditors. The problem with that is that the creditors (investors, Uncle Sam or subsequent purchasers of mortgage backed securities don’t even KNOW the transaction occurred, much less see the proceeds.

So if your satisfaction of mortgage is invalid (for the same reason that the foreclosure was invalid, which might also include the mortgage or deed of trust being invalid) what is the result? I think the result is that the homeowner still owns the property, OR that the original mortgage is still an encumbrance, OR that the Note is not satisfied OR that the obligation still exists. Or all of those. If any one of those things are true then you have both a cloud on title and a defect in title rendering the title to the property unmarketable.

We’ve written in these pages about how this will end up. The “Toxic Title Problem” is highlighted in neon letters in these transactions. Down the road (and not so far in the future) the title insurers and potential buyers are not going to accept title without exceptions, which means at best that there will be a flood of quiet title suits filed (millions of them) and at worst, a complete standstill in the transfer of title on any house with a securitized note and encumbrance.

Wall Street didn’t merely siphon off unearned money, wealth and guarantees from homeowners, bank depositors and taxpayers. They screwed up title on what appears to be more than 60 million transactions — so even refi’s might now have rendered the title to be uninsurable or unmarketable.

Big Banks Accused of Short Sale Fraud


On Friday January 15, 2010, 12:55 pm EST

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1800CashOffer, and Brandt has a huge network of short sale real estate agents, and over the past several months he’s been receiving all kinds of questions and complaints about trouble with second lien holders.

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.

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.

“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 is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, “That’s a red flag!”

Clearly illegal.

Brandt told me he’s heard from at least 200 agents that they’ve had these requests made by representatives of Citi Mortgage (NYSE: c), JP Morgan Chase (NYSE: jpm), Bank of America (NYSE: bac) and other large banks.

Most agents wouldn’t go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

“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,” says Gentry matter-of-factly. “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.”

Gentry says she has had the requests made three times and claims she lost one sale because of it.

“The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase.”

JP Morgan Chase simply answered, “No Comment,” when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written statement:

“Bank of America enforces a policy that all disbursements are documented on the settlement statement for short sales. When we are servicing a first mortgage with a second lien held by another investor, if the second lien holder asks for off-HUD payments, we will not approve the transaction (if we have knowledge of it). It is also against Bank of America’s policy to accept off-HUD payments on its second liens.”

Citi ‘s reply was a bit more complicated:

“We work very hard to help distressed homeowners find solutions for their financial challenges. In our attempt to amicably resolve the debt, we will generally negotiate a reduced settlement with the homeowner in order to release a second lien. Unlike some lenders who refuse to reduce the payoffs on second liens, we choose to reduce the payoff amounts in some situations to assist the borrower. We do not provide instructions to settlement agents on how to fill out the settlement statement or any other closing documents, and we certainly do not require settlement agents or any other parties to violate applicable laws.”

“When we confront the lenders and tell them that this request is illegal and a violation of RESPA, they tell us it’s been cleared through legal and they don’t care. Do it anyway,” charges Gentry.

I personally heard a recording of a phone conversation between a short sale real estate agent and a second lien lender, during which the second lien lender clearly asked for cash outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the recording was given to me by Brandt who got it from the agent. The agent would provide no information on the lender, for fear of retribution):

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place.”

I contacted the Treasury Department, HUD, FINCEN (Financial Crimes Enforcement Network) and the Federal Trade Commission, and none of their representatives could tell me of any active investigation into this. The folks at HUD said they’d be very interested to see my story.

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Questions? Comments?

8 Responses

  1. […] Big Banks Accused of Short Sale Fraud […]

  2. The agencies are highly unorganized, and the laws are not worthless if you are the lending institution. Why there is no oversight that would REQUIRE timely auditing and a fair playing field between a lender and a seller is beyond me.

    And for potential buyers or investors, sites like and RealtyTrack provide listings en masse for short sales. Are these listings legit? Does anyone have experience with these services?

    Since listing sites show the seller’s lender, I guess the idea is to check out the listings that don’t list Wells Fargo or BAC as the title holder.

    What’s the best process to find these short sales now?

  3. Glen (and all home owners who read this) You will be told by the bank that you must sign the promissory note or they will not agree. This is all negotiable and you should hire someone who will show the lenders why that dog won’t hunt.
    As an investor buying and negotiating short sales I can often get steep discounts on the property (40% or more off current value) AND negotiate these promissory notes away. You have to have a legitimate hardship though.

  4. I had to do a short sell in Utah. We received a severance package from two companies and my wife’s sickness made us so we moved to Denver for work in May.

    We did short sell and had to sign a guarantee to the bank for over $20,000 to wells Fargo or they wouldn’t accept the buyers offer, already over 20,000 from the appraisal. Was this LEGAL? Yes they are not charging interest on the program they created for me.

    Wells Fargo said every short sell in Utah they make the owner have a guarantee and have never in Utah done a short sell without this through Wells Fargo.

  5. bt,
    Do tell about this new BoA trick as this is exactly what happened in my case…as far as I can tell…

  6. From Foreclosure Fraud twitterFeed: Toxic Title In California


    In Zollars v. Kahan, the Solano County Superior Court rules in favor of a real estate investor in the bizarre case of a national bank foreclosing on itself. (Case # FCS 031010)

    Alameda, Calif. (PRWEB) January 14, 2010 — In Zollars v. Kahan, the Solano County Superior Court rules in favor of a real estate investor in the bizarre case of a national bank foreclosing on itself. (Case # FCS 031010)

    Jennifer Zollars, who purchased a home from U.S. Bank’s REO department at the same time another department within the bank was foreclosing on that home, has lost her bid to have a subsequent Trustee’s Sale set aside.

    “The court got it right,” Hanson said. “Zollars and her attorneys tried to paint a picture of Kahan as some Snidely Whiplash kind of character. That couldn’t be further from the truth.” U.S. Bank records show that the very same day Zollars’ grant deed from U.S. Bank was recorded, the bank also recorded the Notice of Trustee’s Sale based on an earlier deed of trust. Stan Kahan, an investor in foreclosure properties for the last 30 years, bought the property at the subsequent foreclosure sale.

    Kahan was forced to file an eviction action against Zollars when she refused to move out. Zollars then filed a complaint against Kahan, asserting she was the true owner of the property, because she wasn’t given adequate notice of the pending foreclosure by U.S. Bank. The two claims were consolidated into one action, and a trial was held. The Court ruled that Kahan’s ownership interest trumped Zollars’, because Kahan was a bona fide purchaser.

    California law provides protection for a bidder at a foreclosure sale, especially upon delivery of a trustee’s deed after a non-judicial foreclosure sale. But to get that protection, the bidder must be a “bona fide purchaser” – someone without notice of any defects in the trustee sale procedure. Zollars claimed that Kahan was a “professional bidder” and thus he had an extra duty to inquire of any potential adverse claims, or he would lose the bona fide purchaser protections.

    Hanson Law Firm’s Christopher Hanson, who represented Kahan during the weeks-long trial, said that Zollars’ claim raised interesting legal questions about the need for a bidder at a foreclosure sale to investigate every nuance of a foreclosure proceeding.

    “The court got it right,” Hanson said. “Zollars and her attorneys tried to paint a picture of Kahan as some Snidely Whiplash kind of character. That couldn’t be further from the truth.”

    While noting that Zollars did nothing wrong when she bought the property, the Court noted that Kahan also did nothing wrong when he bought at the subsequent foreclosure sale, and that, legally, Kahan’s was the correct argument.

    “We’ve represented many bidders at foreclosure sales,” said Hanson. “Zollars’ claim was unique in that the title company that insured her purchase mounted a very aggressive case. It simply refused to admit it had made a mistake when it reviewed the title to the property.”

    The unique feature of the claims in the lawsuit was U.S. Bank’s activity. After having already foreclosed on one deed of trust and taken ownership, U.S. Bank then started foreclosing on itself.

    “U.S. Bank never admitted that one hand didn’t know what the other was doing,” Hanson noted.

  7. Bank of America new trick- Loans were serviced by Bank of America, now they set up a new compnay called BAC Home Loan Services and they transfer the loans to them..Awe..if they do transfer default loans then they are caught to perform under the FDCPA i am told.

  8. It doesn’t matter what agency would look into this matter. All these agencies and laws are worthless.

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