OK - Here I am , back to expound. ;)
Let me divide “pretend”, “fake”, “silent” seller second mortgages into four categories:
Seller lures buyer into collusion to defraud the first mortgage lender.
Buyer lures seller into collusion to defraud the first mortgage lender.
Real estate agent lures both parties into collusion to defraud the first mortgage lender.
Mortgage loan broker or originator lures parties into collusion to defraud the first mortgage lender.
Notice a pattern here?
It’s always fraud.
The victim is always the first mortgage lender, though other parties may be harmed.
It's interesting that the person who comes up with the idea usually knows they are doing wrong. Some know it's fraud and don’t care, others at least know they are breaking rules. The sales pitch makes light of the matter, makes it seem like it’s no big deal – you know the “everybody does it” routine.
Don’t buy into that scenario. Refuse the deal and walk away. You do not want to face prosecution.
Let's talk about two real life cases I experienced in which people were instructed to defraud the first mortgage lender.
The first happened while I was a loan originator in 1980. I had just changed employers, taken on a new territory and if you remember that year, interest rates were in the double digits. The closing of the steel mills in the Pittsburgh area devastated our local economy and mortgage applications were few and far between. My product was FHA/VA mortgages. Before the layoffs started the mortgage origination staff was kept busy riding around town taking pictures of houses in default. It was tough and real estate agents and loan originators were desperate.
As I said I was assigned a new territory and started to solicit business from a group of real estate agents I had not previously worked with. One nice lady hooked up with me and started to send regular referrals. My boss was pleased. I had a few other sources of business, but she was the most reliable. People loved her and she sold a lot of houses.
It didn’t take more than a couple of months for me to get the vibe that something just wasn’t right. I started paying closer attention and realized that she was putting deals together with fake hand money and fake gifts – all money coming from the sellers. I’m sure the sellers were happy to sell their homes and the buyers happy to buy, but I stepped out of the picture. I didn’t accuse her openly, but I made no further contact. The following year I read about her arrest by the FBI. The FHA looks for patterns in foreclosures and they found her name on one too many. She was taken from her house in curlers.
The second example took place in 1999 when I was contacted by a vivacious sub-prime mortgage loan originator named Samantha. I never met Samantha but her personality screamed through the phone and all her customers loved her. This time the fraud was harder to see because it came all wrapped up with the first mortgage lender’s approval.
Samantha worked for one of the big mortgage lenders and they were approving sub-prime first mortgages with seller seconds. Their closing instructions included the terms and they instructed us to prepare the second mortgage. All fine and good except Samantha had instructed the parties – seller, buyer, and real estate agent – that the buyer really didn’t have to pay the money back. They had all agreed to artificially raise the sale price to cover the second. Everybody was happy except me. Even though I was just the title insurance agent in the transaction, my old mortgage loan underwriter cells were screaming FRAUD FRAUD FRAUD!
I contacted the mortgage processing/closing center and confirmed that they understood the terms and had no problem. Since I had my instructions in writing, I prepared to close. Just before closing Samantha called and instructed me to prepare a satisfaction for the second mortgage and told me to record it immediately. I called the mortgage processing/closing center and that’s when I realized the entire department was colluding to defraud their own employer. The written instructions from the underwriting department clearly approved terms of a seller second mortgage – a REAL seller second. I am certain that the underwriting terms had been negotiated into the price for a security pool and the underlying investors had rated the risk of the pool accordingly. Here we had a situation in which a leading mortgage lender had consciously decided to offer a high risk loan to sub-prime borrowers and their own employees, engaged in subterfuge, were escalating that risk into the stratosphere.
I refused to prepare the satisfaction and advised all parties that the terms of the mortgage called for a real seller second. Samantha advised the buyer to just close and deal with it later. Well, the seller died before a satisfaction was ever recorded and the last I heard from the buyer, they couldn’t get the estate to deal with it. The buyers were stuck. They couldn’t refinance or sell.
We had received numerous title orders from Samantha at the same time and were having the same experience on them all and in addition I found out she had counseled the some of the parties to create fake hand money. I contacted her boss and told him we did not want to close anymore of her transactions. They reimbursed us for the search costs. Samantha doesn’t work there anymore and I haven’t heard of her since.
These are just a couple of cases. I could go on and on and on. We say no to fraud all the time - it's a regular part of the job. Be strong. You can say no , too. None of us look good in stripes. ;)