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More Bank Fraud

Posted by Larry Doyle on January 16, 2010 12:53 PM |

The bailing out of our largest financial institutions was a violation of moral hazard of the greatest magnitude. With that violation well in place, America is now facing violations of other moral hazards. What do I mean?

The mortgage modification program is a joke because the banks holding the mortgages have no incentive in modifying them. Why? Because, to a very large extent, if the bank modifies the primary mortgage then it has to write off the value of a second lien, if in fact a second lien exists. Given the amount of equity borrowers took out of their homes, there are a lot of second liens outstanding.

How are the banks handling these second liens? Violating a moral hazard and committing fraud in the process. A report from CNBC, Big Banks Accused of Short Sale Fraud, highlights this reality.  The report outlines:

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.”

Why is this fraudulent activity happening? First, let’s accept the fact that our banking system is an oligopoly. An oligopoly allows for and promotes conspiratorial practices. Secondly, and even more important, the banking system has Uncle Sam by the balls and is squeezing them whenever and however it wants.

That is the economic reality of United states crony capitalism circa 2010.

LD

  • Pingback: CNBC Reports The Short Sale Fraud Some Banks Engage In()

  • Dave

    thank you – informative website,

  • Larry Doyle

    I am a contributing author at Daily Markets. This comment was left on my article More Bank Fraud at Daily Markets. I believe the color provided is very insightful. As such, I would like to share it with our audience here.

    As one of the last of the mortgage brokers still standing in Las Vegas, I can confirm this is happening. But it gets worse.

    The bank holding the foreclosed first is NOT recording title after the sale, but rather leaving the title in the name of the former owner. This allows the bank to NOT pay taxes, HOA dues, and mechanics liens. Further, the local board of clowns (Realtors) now requires that the buyers of all bank owned properties and short sales include a blanket waiver, effectively leaving the buyer stuck with any back taxes, penalties, HOA and mechanics liens. The title companies will NOT insure the buyer for these liabilities if the waiver is signed.

    There is another nasty game going on with foreclosed properties here. Although the Notice of Default (NOD) (Foreclosure) is posted 90 days prior to a future court house sale, this PUBLIC information is not freely available from the local government. Rather, one must subscribed to one of several services from $100 to $500 annually to get information early enough to investigate a possible courthouse sale purchase.

    Even though in most cases, the foreclosing bank has ordered and received a Broker’s Professional Opinion (BPO) to estimate the market value of the home, (similar to a full appraisal), and the condition of the home (usually including photos), this information is not made available to the general public.

    Next, the government requires that the winning bidder immediately pay the full price in cash or certified funds, effectively shutting out the average person and restricting the Courthouse sale process to wealthy insiders.

    The result is that more than 75% of the foreclosure sales revert back to the bank, and only the well connected and those flush with cash have access to bargain homes which they promptly flip.

    All of this is designed to allow the banks to continue the “pretend” game of holding homes on their balance sheets until they get a better sale price.

    It could be changed by allowing full and free access to foreclosure information; allowing the winning bidder a minimum of 60 days to finalize the purchase via a mortgage with a 5% cash deposit; and requiring that the bank must accept the highest bid; and that the bank must pay all property taxes, HOA fees, and mechanics liens from the sale proceeds.

    This would allow potential homeowners to get a bargain.

    Of course, this will never happen as the banks own the US Government.






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