cnbc: short sale requires illegal pay off to 2nd lien holder

"This is also known as fraud"

lol

I don't see why this would be fraud. It seems healthy to have both lien-holders cooperate to prevent foreclosure, which would adversely affect both of them, plus the borrower, plus the person who is willing to offer money to take the place off their hands (generally at a price higher than post-foreclosure). It also prevents the deliberate trashing of the house by the angry homeowner, immediately prior to foreclosure.

The fraud isn't about money changing hands to induce an agreement among the parties (that could be beneficial for all concerned for the reasons alanhart cites). It's about that money changing hands without disclosure, as discussed in the MSNBC piece.

"So, some second lien holders are therefore now taking cash settlements from the homebuyers or agents on the side as blackmail, threatening to derail the short sale. This is also known as fraud."

it's also known as "paying your debts" in other societies as well as in USA before this housing mania started. doing a short sale (selling the house for less that what the homeowner owes including of course seconds and HELOCs) while bringing cash to the table to pay down all debts associated with the home is known as "sacrilege" now in USA.

welcome to the "dream of homeownership" where the homeowner never lose money, it's the taxpayer the one on the hook... well the dollar actually, as the loses will be covered with printed money. savers: you are screwed! please reconsider that nasty habit of living within your means.

it is neither blackmial nor fraud. I am surprised to hear you say that Riversider -- it is called exercising you remedies under the law. If you can delay and add uncertainty to the process -- and people who took the money CHOOSE to settle -- it is just that -- a settlement.

"welcome to the "dream of homeownership" where the homeowner never lose money, it's the taxpayer the one on the hook... well the dollar actually, as the loses will be covered with printed money. savers: you are screwed! please reconsider that nasty habit of living within your means."

Is this what we say about every company that goes into bankruptcy and emerges "stronger" and "healthier"?

This reminds of the "evil bondholders" of a company that don't agree to get fracked out of their money to keep a company from going chapter 11.

Secondary lien holders have the right to recover what they can, if they can.

"it is neither blackmial nor fraud" I sometimes wonder if anyone actually reads the thread, in particular the OP, before posting. Naked Capitalism has a link to the CNBC story below. See further below for a couple of the more entertaining bits.

http://www.cnbc.com/id/34937452
"And then just a few minutes after the story aired Friday, I received another email from my whistle-blower, Kayte Gentry:

Diana - we thought it funny that this came in about 10 minutes after the 2nd airing of the story...the email is to my Lead Negotiator.

"Linda,

The agent contribution of $500.00 can't show on the HUD. Have that removed and resend just the HUD.

If it shows on the HUD the investor thinks they are getting it and not the 2nd lien holder."

The author of the email reportedly works at Citi, as her email address shows. I have to believe/hope that she doesn't even know what she's demanding is illegal, otherwise I can't imagine she would put it in an email. This is clearly fraud. "

"I also went on another real estate Web site that specializes in Realtor blogs, and there was a huge string/conversation of real estate agents explaining to each other how to keep second lien payments in short sales off the HUD settlement statements. Right there, in black and white, on the web."

"it is called exercising you remedies under the law." So the theory is that fraud is OK as long as it is committed in the process of exercising remedies? Interesting.

truthskr10
"This reminds of the "evil bondholders" of a company that don't agree to get fracked out of their money to keep a company from going chapter 11.

Secondary lien holders have the right to recover what they can, if they can."

EXACTLY

Sung to the tune of tiny bubbles. 'moral hazards, moral hazards.... It makes the all Americans liars, moral hazards... Moral hazards'

No matter which side you are on, this kicking the can and eliminating 'loss' for idiot investments will have a more profound effect on our real 'economy' in the next 20 yrs than the $$$$ amount would suggest.

"Secondary lien holders have the right to recover what they can, if they can" You forgot "how they can." Although I guess it's implicit since the fraud doesn't seem to bother you.

sidelinesitter
Is it anymore fraud when an owner who uses non payment of a mortgage to negotiate better terms?
I never said I like the system. I put tort reform at the top of the list.
Until then, why should the "too small to survive" not use every legally gray avenue to get their money back?

A half related personal story;
I am a secondary or primary lien holder(I still don't know a year later) on a long island property where a builder gave out "first" mortgages like Bugsy Siegal. His partner lawyer forged my brother's signature on the deed. Meanwhile the subcontractor who installed the kitchen ripped out the entire kitchen (unseen) because he didn't get paid.
He didn't file a lien to come in 4th or 5th or whatever.
He technically "frauded" ME. Yes? I also can't blame him in a non legal sense. Considering the paper mess this is,I unlikely will be able to blame him in a legal sense either.

sideliner -- your loose use of the term fraud should be checked. Just because somebody called it fraud -- does not mean it is the case. I hear it tossed about all the time. It is not appropriately used.

"Is it anymore fraud when an owner who uses non payment of a mortgage to negotiate better terms?"

That is an example of refusing to make good on contractual obligations, not fraud. Look up the elements of fraud if this is confusing. Failing to make good on contractual obligations gives rise to remedies on the part of the contract counterparty, in this case the lender. The counterparty can choose to negotiate or enforce. The enforcement is what is known as foreclosure. Fraud is a totally different thing.

Yes I understand what fraud means and turning this into a semantic argument is silly.

Bottom line is a secondary lien holder is using it's only leverage to a PARTIAL recovery of it's loss and I can't blame them.
Not unlike lawsuits that settle, greatly determined on the cost to litigate.
The system sucks and should suck for everyone EQUALLY.
I'm all for a change in the legal system, show me where and how to vote on it.

"Just because somebody called it fraud -- does not mean it is the case. I hear it tossed about all the time. It is not appropriately used."

Simply asserting, as you have done, that the term it is not appropriately used does not mean that is the case either.

The reporter has made two specific assertions:
(1) that payments to the various parties must be disclosed on the HUD form documenting the transfer of a home;
(2) that failure to declare payments constitutes fraud
Which of these do you dispute? The first should be a simple question - the disclosure is required or it isn't. If the reporter is 180 degrees off on this, then yes, I have placed detrimental relaince on her research. The second is a legal question and depends on the facts. Was the misrepresentation knowing? Was it done with intent? Was the omission material (the first lien lender who is getting less because the second lien is siphoning it off probably thinks so!)? Are people relying on the accurac of the disclosure? Was someone harmed (again, ask the first lien)? etc. Where is the reporter wrong?

Sideline -- you may be right. However -- it may be that the "parties" definition may or may not continue once the settlement payment is made. (ie - no longer a party once the debt is waived for settlement payment).

truthskr10 - a forged signature -- especially by an atty is a crime. Pursue that with the DA.

manhattanfox
Well aware, it's beyond a mess, you have no idea.
Shocking...isn't it? We never give that possiblity a second thought(forgery) as a license to practice law is an attorney's life blood. And every attorney you personally know turns blue at the thought of doing anything to jeopardize losing that piece of paper.
I think they are in jail already and broke, doesn't get me my money back or speed up the paper mess.

And before someone suggests going to the attorney's malpractice insurance, already tried. (wasn't acting on my behalf)

terrible

Manhattan Fox. Since when does the second lien holder have the righ to screw the 1st lien holder? This is definitely a monkey wrench in the capital structure of a mortgage since clearly the second lien holder gets wiped out if the loan goes to foreclosure. It sounds bad to the extent that you have the second lien holder using infuence to get the reporting hidden.

Manhattan Fox, I do see your point, I'd like to see more on this.

"And before someone suggests going to the attorney's malpractice insurance, already tried" Hopefully the guy has been disbarred. Doesn't get you any money but at least it gets him off the street.

"Since when does the second lien holder have the righ to screw the 1st lien holder?"

As a practical matter, since the first lien agreed to lend into a deal with a second mortgage.

The second lien has every right to withhold consent unless some intercreditor agreement requires it to vote with the first lien or given the first lien power of attorney or some similar mechanism. The first lien should assume going in that if the sh*t hits the fan the second lien will try to maximize its hold-up value and get paid something to go away quietly. This is similar to the equity getting a token stake in a reorganized business as an inducement not to hold up a bankruptcy reorganization. All I was saying above is that whatever the deal is, it has to be disclosed.

And riversider your point "Since when does the second lien holder have the righ to screw the 1st lien holder?" is fair too.
There is just a lot of gray on this without contracts and the language to read. I'm sure the CNBC reporter hasn't read it either, ;) but it is a sexy headline.

sidelinesitter
less than a minute ago
ignore this person
"And before someone suggests going to the attorney's malpractice insurance, already tried" Hopefully the guy has been disbarred. Doesn't get you any money but at least it gets him off the street.

yup(no longer practicing law) and yup (no money, off street)

Many have/are gotten/getting hurt. There are forms of Madoff type victims. Everyone is just trying to recover what they can.

As a practical matter, since the first lien agreed to lend into a deal with a second mortgage.
The second lien has every right to withhold consent unless some intercreditor agreement requires it to vote with the first lien or given the first lien power of attorney or some similar mechanism. The first lien should assume going in that if the sh*t hits the fan the second lien will try to maximize its hold-up value and get paid something to go away quietly. This is similar to the equity getting a token stake in a reorganized business as an inducement not to hold up a bankruptcy reorganization. All I was saying above is that whatever the deal is, it has to be disclosed.

What if the second lien was taken out AFTER the first lien? No this is wrong. If a second lien holder can screw the first lien holder regardless of when the second lien became a debt, then the first lien holder should have the legal right to block the second lien from occuring. Not all second liens were used to fund the purchase. Some are just HELOCS and some were silent seconds not disclosed to the first lender.

And apologies to sidelinesitter.
Now rereading EVERYTHING as you wrote " I sometimes wonder if anyone actually reads the thread" is apropos.
Or should say "reads the article," as my mindset was on the initial post of the thread.

"What if the second lien was taken out AFTER the first lien?"

I don't know much about residential mortgage documents so my answer is more based on how corporate loans or bonds would work (and if the mortgage world is simply different, then someone who is more knowledgeable will correct me. NB: those who aren't actually knowledgeable but have a guess about how it works or a view about how it "should" work, pls keep those theories to yourselves). That said, my answer is that if the first mortgage allows additional secured debt without its approval and without the junior debt agreeing to subordinate itself to the senior in exercise of remedies, then see my previous comment about the first lien agreeing to lend into a deal with a second mortgage. The following three first lien decisions are functionally equivalent:
(1) lending into a purchase with a simulaneous second
(2) lending into a purchase with only a first but with no restriction on subsequent seconds/HELOCs
(3) lending into a purchase with restrictions on subsequent seconds/HELOCs but then approving the second/HELOC when subsequently asked
In each case, the first lien signed up for the program and should not be surprised that the second will act in its own interest.

Silent seconds either fall into (2) above or, if not prohibited by the first mortage but taken out anyway, take us back toward the fraud discussion as well as into a discussion of the validity of the second lien.

leverage is leverage.

if the second lien holder has not teeth -- the first lien can tell them to go pound sand.

If first lien holders need to worry about the borrower obtaining a second mortgage at some point as a risk, it will drive up mrotgage rates for everyone. The first lien holder should not be taking a loss simultaneous to a second lien holder receiving funds. Going back to the corporate analogy do junior debt holders receive money when senior debt holders haven't received 100 cents on the dollar? In my mind senior debt holders have first claim.

By protecting the first lien holder first and the second lien holder second, we accomplish low primary mortgage rates and reduce the incentive for borrowers to leverage up the wazoo.

"The first lien holder should not be taking a loss simultaneous to a second lien holder receiving funds"
"In my mind senior debt holders have first claim."

All true. And then there is the real world where paying somebody a token amount to go away is easier than litigating. I'm not saying it's right or wrong, just that it is.

"Going back to the corporate analogy do junior debt holders receive money when senior debt holders haven't received 100 cents on the dollar?"

In a textbook, no. In practice, it is common for junior debt or even equity to get some consideration to get them to go along with a restructuring, bankruptcy reorg plan or whatever.

"Is it anymore fraud when an owner who uses non payment of a mortgage to negotiate better terms?"

=========

fraud? i still cannot believe that 2nd lien holders getting something is considered fraud. homeowners inflating their income to get a bigger mtg and then under reporting income to get a bigger handout is just fine,... you know, as long as it's "middle class fraud".

if we prosecute every single homebuyer that lied on their applications (both to get a mtg and then to get a workout), how many new jails do we need to build?

fraud? i still cannot believe that 2nd lien holders getting something is considered fraud. homeowners inflating their income to get a bigger mtg and then under reporting income to get a bigger handout is just fine,... you know, as long as it's "middle class fraud".

if we prosecute every single homebuyer that lied on their applications (both to get a mtg and then to get a workout), how many new jails do we need to build?

Suddenly the coop getting in the middle approving any/every refi application doesn't sound so crazy!

http://www.businessweek.com/news/2010-01-19/treasury-delay-on-home-equity-debt-imperils-housing-update1-.html

The issue of the second liens has to be escalated,” said Richard Neiman, New York’s banking superintendent and a member of the Troubled Asset Relief Program’s Congressional oversight panel. The government should consider forcing banks to participate and to recognize the “true value” of second liens, he said.

Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.

Continued....

Nuisance Value’

Holders of home equity loans often hold up loan workouts to extract money from deals when their junior liens are technically worthless, said Dave Walker, chief credit officer of PennyMac Mortgage Investment Trust, a Calabasas, California-based company managing $2.85 billion in distressed mortgage debt.

“The typical focus of a second lien investor is to extract a ‘nuisance value’ out of the second lien rather than rehabilitate the loan,” Walker said. “If the second lien is entirely underwater, they have little or no potential recovery through liquidation of the property and their interest is wiped out at foreclosure. However, they can often demand a small payment -- $1,000 to $3,000 -- to release their lien.”

Yes -- even in corporate debt priority in chapter 11/7; the other constituencies (2nd lien/equity) -- are often given some payout without the 1sts being paid in full as part of a settlement discussion.

Here's a nice recorded phone call & transcript: http://www.jeremybrandt.com/short-sale-fraud-recording/

Gee, that sounds like fraud to me.

Tina
(Brooklyn broker)