Are Big Banks Committing Short Sale Fraud?

In the not-too-distant past, homeowners throughout the country were reaping the benefits of the housing boom by taking out home equity loans and lines of credit to finance their spending. With today's dismal housing and job markets, that source of funding has dried up leaving many homeowners in financial distress. Unfortunately, these people can't meet their monthly obligations, including their mortgage payments, and are unable to qualify to refinance or modify their loan payments.

For many borrowers, the only option they have to finding relief from their mortgage payment is to short sale (when the lender allows the home to be sold for less than the value of the loan) their home. However, when a home has two liens, the second lien holder must release their lien, which often means the second lien holder gets nothing from the borrower.

Clearly, second lien holders need incentive to release their liens, so first lien holders generally negotiate some partial payment to entice the second lien holder to release its mortgage. All these negotiations are fully disclosed and completely legal.

A recent article, though, discusses a new trend that big banks are benefiting from: Banks like JP Morgan and Bank of America are allegedly getting off-the-books payments from real estate agents and buyers for further enticement to release their liens. None of these "side deals" are being disclosed to the holders of the first lien, resulting in double payment to banks; first from the first lien holder, and again from the real estate agent and/or buyer. The law states that any and all payments related to a real estate transaction must be disclosed on the Closing Statement (a/k/a HUD settlement Statement).

This practice of not disclosing this information on the HUD is in violation of RESPA (Real Estate Settlement Procedures Act), which is the law requiring that consumers receive disclosures at various times in a real estate transaction. The law specifically prohibits kickbacks and its stated purpose is to provide consumer protection to homebuyers so that they can be better shoppers in the home buying process. Currently there is no investigation into this fraudulent practice by the Treasury Department, the FTC (Federal Trade Commission), or FINCEN (Financial Crimes Enforcement Network). Hopefully, though, if more attorneys and aggrieved homeowners blow the whistle, these big bank fraudulent practices will cease.


For more information, please see our page on Short Sale Counseling to learn more.

If you have any questions about this topic, you may either post a comment to this blog, contact me, a Florida Real Estate Attorney, by email, or call me at (954) 458-8655, and I will be happy to answer your questions. I offer a free initial consultation.

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