Bad Loan Originators Are Coaching Borrowers and Agents to Commit Loan Fraud Everyday
Secret Side Agreements For Repairs Is Mortgage Fraud!
Here’s how it happens…
Buyer contracts with Seller for a $200,000 home with the Seller paying all the closing costs which equates to 3% or $6,000….the current FNMA maximum. During the inspection, a faulty furnace is discovered. Let’s assume for this example it’s a working furnace, so it’s not noted on the appraisal report as a “require repair”. After all the appraiser is not an inspector. The inspector on the other hand did discoverer the problem and the buyer wants the furnace repaired. A reasonable request…and let’s say, this repair will cost $2,000.
Many agents will mistakenly believe they can simply write a “side agreement” which states the seller will cut a $2,000 check to the buyer at closing. They explain “this is done all the time” to get both the seller and buyer to go along…and the side agreement is never shared with the mortgage broker and ultimately with the wholesale lender.
Loan fraud was committed at that moment…a felony not only under Federal law, but also under most State law as well.
And all parties are equally punishable…the agent, the buyer, the seller and the title agent who disbursed the fraudulent payment…if in fact they even knew about the payment.
As a buyer or seller if you’ve been asked to enter into a secret side agreement, you’ve been duped into committing a crime. If you’re an agent who facilitated a transaction like this because your mortgage broker or banker told you too…you got duped as well.
In this example and in real life, agents have learned from bad mortgage originators that since the seller has reached the maximum in legitimate contributions to the deal…the 3% in closing costs..they can’t amend the contract to pass the additional repair cost of $2,000 from seller to buyer as closing costs.
So they go in search of another way. The next option most agents jump to is escrowing for repairs. This is where the lender allows for 1.5 times the repair cost to be escrowed by the title company for the buyer to make the repair after closing. This allows the transaction to close on time and it allows for the seller to fund the escrow account with sale proceeds, not out of his own pocket.
Sounds like a viable solution, right? Wrong!
Changes in recent years to the most popular loan programs now prohibit this practice. Fannie and Freddie conventional loan programs don’t allow “escrows for repairs” under any circumstances. FHA programs only allow it when weather won’t allow the repair prior to closing…like snow on a roof. If the repair is indoors, like our example, no escrow allowed.
So what now…what is the legitimate way to solve the problem?
1. Lower the price from $200,000 to $198,000 keeping all other terms unchanged. A contract amendment reducing the price informs everyone of the true nature of the transaction. It allows the deal to close on time and doesn’t require any money from the seller out of pocket. But for most agents asking the seller for a price reduction is tantamount to killing the deal…so they rarely take this option.
2. Have the seller make the repairs prior to close. Once again with a contract amendment, seller agrees to make repairs prior to closing. Buyer and Lender are given the right reinspection to see repairs were completed. You can see how all parties involved don’t like this option. Often the seller doesn’t have $2,000 to make the repairs. Or, waiting for the repairs is unacceptable to the buyer or seller or both.
So the originator and agent get together to decide what to do…..and Presto…an illegal, hidden, side agreement solves everyone’s problem!
Why is this particular scenario loan fraud?
Primarily because of the hidden nature of what’s really happening in the deal. It’s this withholding of information or the secret nature of the side agreement that makes this the crime of loan fraud.
The Michigan Association of Realtors put it best in a 2002 newsletter,
“But perhaps the most telling “red flag” of all is where the purchase agreement says one thing, and an addendum or side agreement says something else. REALTORS should keep in mind that fraud does not necessarily require the presentation of false information, but can also involve simply withholding relevant information. In fact, the United States Supreme Court has expressly upheld the conviction of a borrower who simply withheld a secret side agreement from its lender. US v Wells, 519 US 482; 117 S Ct 921; 137 LEd2d 107 (1997).
Often times, REALTORS will argue that the transaction cannot be fraudulent because it was structured at the direction of the lender or an employee of the lender. This is simply incorrect. REALTORS should be aware that federal courts have consistently held that a borrower is still guilty of a crime even if the fraud was committed with the knowledge and consent of one of the bank’s loan officers.”…and that would hold true for the Realtor and title agent as well in my opinion.
The Maine Creditor Update which is the newsletter for the Office of Consumer Credit Regulation said in an article from its September 2004 issue:
“Buyers and sellers of residential real estate will sometimes agree to “side deals” in which money changes hands to cover the cost of needed repairs or defects discovered on the property. However, if these adjustments are substantial enough to affect the value of the residences being used as security for loans to the buyers, and if the side deals are not reflected in the HUD-1 closing statement, then all parties to the transactions (including the settlement agents and the real estate agents) should carefully review their participation to determine whether legal or ethical principles are being violated.
In any FHA-insured loan, the buyer, seller and settlement agent each sign statements attesting to the accuracy of the figures being used. Knowledge of a substantial side agreement not reflected in the HUD-1 would almost certainly violate these representations. Maine law does not contain specific provisions prohibiting undocumented side agreements, such as the one enacted in Alabama which states that a real estate agent may lose his or her license for “misrepresenting or failing to disclose…the true terms of a sale of real estate” (Ala. Code, sec. 34-27-36(a)(21). However, parties to Maine transactions should not assume that the absence of a state law here means that such deals are permitted on mortgages headed for the secondary market, especially when the loans will be held or guaranteed by government or quasi-government entities.”
Know this: secret side agreements are always loan fraud….period. I’m here to keep you out of trouble whether you are buyer, seller or agent. I know most of you are doing these types of transactions on a daily basis and didn’t come up the idea all by yourselves. You got the idea from a bad loan officer.
That same bad loan officer could easily be sitting in Leavenworth Federal Penitentiary six months from now, and so could you.
Make sure you get sound advice from experienced mortgage professionals, not guys who just want to make a commission. With 15 years in the mortgage business, I’ve seen the likes of these hucksters originating anything and everything without regard for the law, ethics, or integrity. Safeguard yourself and your clients by only referring to experienced, ethical mortgage professionals.
By the way, the Federal penalties for fraud or misrepresentations committed by anyone involved in a loan transaction that is in any way funded or subsidized by any federally insured financial institution or government agency (such as the FHA, FNMA, etc.). According to 18 U.S.C. ‘ 1014:[w]whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of [a federally-insured institution or agency] . . . upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, or loan, or any change or extension of any of the same, by renewal, deferment of action, or otherwise, or the acceptance, release, or substitution of security therefore, shall be fined not more than one million dollars or imprisoned not more than thirty years, or both. (Emphasis added.)
My advice: Make the repairs before closing or lower the price. Put your choice in an amendment to the contract and submit it to the lender. Problem solved….legally.
Good Luck,
Rob K. Blake
The Mortgage Insider
Author: Rob K. Blake
Published February 5, 2007
Modified January 9, 2008
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thanks again /i will not pay the money .it brings me great comfort to no there still some people in the world still believe in right and wronge.thanks for make a difference
April 22nd, 2008 at 11:55 amwe need more honest people in business.
I would not be concerned about two things at this point…
1) Who actually purchased the house…
&
2) Paying the $2,800.00 regardless of what the signed piece of paper say, do not pay the money.
I think they (whoever trys to collect) will be opening an expensive can of worms.
April 22nd, 2008 at 10:21 ami also wanted to say /i had been dealing with
April 22nd, 2008 at 9:41 ama younger man (buyer) when my lawyer and i recieved the purchase agreement .it was signed by another man .i never met the actual
person that bought moms house.its is beleived that the man i was dealing with and the realtor was the buyer son.
/THIS WAS NOT MY REALTOR /IT WAS THE REALTOR WHO TYPED UP A BLAKE PAPER STATEING I WOULD PAY 2800.00/IT WAS THE REALTOR THAT STATED I HAD TO SIGN FOR MY HOUSE TO CLOSE (2 SECONDS BEFORE I WENT IN THE ROOM WITH THE TITLE PERSON ;she tried to stay in the room ,but she had to leave.The realtor told me to bring
April 22nd, 2008 at 9:34 amthem a check after my sister and i recieved our inhertance,she told me that was the realtors money .i just could not figure oout why I was paying these peoples realtor.
thanks again;you are awesome ;i know it does not make a difference but this was the buyers realtor.This has taken a great burden off my heart .Iam a heart patient and i did not need this stress.i will do as you say .
April 19th, 2008 at 9:23 amGreat advice Rob…for way too long the R/E Agents act as if they make the rules and are immune to the outcome.
This is a crooked R/E Agent. I would be willing to bet that the $2800 will not be paid by anybody other then the R/E Agent or Broker…
Sad thing is this…This poster laid out the entire scenario, and never once did the Lender intervene or advise in this matter(other than to assist in the seller concessions…total legal mind you) , yet the first impulse/thought is that they have fallen prey to a bad lender…unbelievable.
April 19th, 2008 at 9:15 amIt’s not your lender who broke the law…it’s your real estate agent.
Contact her…her managing broker…and then the Ohio Real Estate Commission…in that order if she won’t make it right.
RKB
April 19th, 2008 at 8:57 amThanks Mr Blake ,
April 19th, 2008 at 8:40 ami do have a lawyer ,he also handled moms
probate and the sale of the house.i have not
payed the 2800.00.my lawyer says these people are trying to get money out of me .
i live in the state of ohio and many people
are falling prey to these bad lenders .
fthomas,
Wow. You got yourself a crooked Realtor if what you say happened the way you outlined.
Anytime a real estate agent or broker presents a “side agreement” changing or “hiding” terms of the finance from the lender…loan fraud has been committed.
You need an attorney…and fast!
I hope you have copies of the side agreement the Realtor had you sign at closing.
I hope you didn’t actually pay anyone the $2800 yet…this is a mess.
You also need to contact the Realtor and tell her, you know this “side agreement” was illegal…you didn’t sign it as the executor of the estate, so it’s invalid anyway…and amounts to loan fraud. Tell her she makes it right with the buyer or you’ll go to her managing broker and the Real Estate Commission with the whole story.
If she declines…get a lawyer.
RKB
April 19th, 2008 at 7:47 amI sold my Moms house from probate. The realtor upped the price to 41K. She said I would cover closing and I agreed. But the buyer lost his financing and they switched to Countrywide. CW would not let them use the $4000.00 seller credit for closing cost, only $1200. When the title people came to close, the Realtor asked me to sign a paper she typed saying I would pay them the difference of the closing costs… $2800. I asked her if CW would pay it. She said no. I told her she would pay it, she said it would be illegal (RED FLAG ).
So I signed my name, but not as the executive of the estate. It said nothing about it in the loan agreement, so I didn’t think I owed these people any money. The Realtor told me to bring the check to her as it was the Realtor’s money, not the buyers.
The buyer then shows up at my house threatening me saying I owe him money. They are suing me. Is this legal? I thought something was wrong when she wanted me to sign her paper. Can the buyers sue me?
April 19th, 2008 at 7:20 amDiane,
April 15th, 2007 at 7:28 pmDo you provide your services in NJ?
Well, the professionals in the transaction have an obligation to control inept or unprofessional folks. We can do so by being wholly honest with the consumers who likely have no idea they are being coached to commit fraud. Mosts consumers - buyers and seller - will back away from an idea and look for legal solutions once they understand.
April 14th, 2007 at 11:17 amLet me start by saying that I agree with the Legal and Ethical avenues of addressing this issue.
I would like to lay out a couple of factors and get input as to how to handle…Keep in mind I am seeking professional advice from my peers. I am not acting as judge and jury on any insight given.
Here are some factors we often encounter:
1) The pushy, inept & often unprofessional Real Estate agents?
2)A Seller who cannot/will not understand the lowering of S/P to account for reapirs? And a R/E Agent who cannot/will not explain the logic?
3) A cash strapped buyer &/or seller who cannot complete the repairs prior to closing?
4)Another mortgage company who will gladly do the deal and ultimately afford the R/E Agent the pay-day they are looking for?
Thoughts…
March 10th, 2007 at 8:30 amI agree with Diane. As a former loan underwriter I beleive in documenting any issues in writing. If I get any sense that there is an issue I call the lender/investor for direction and document the solution. We are not legal experts-just mortgage professionals. Lenders have legal department that can handle these situations.
I will advise any of my clients that when they sign any documentation whether it is mortgage or related to the purchase of the property to have a legal represenation and fully understand what they are signing. Lets face it a real estate agent in only concerned with the transaction closing. In my state it only take 8 weeks of 4 hour classes to get real estate salesperson license. They offer no guidance to their clients.
February 22nd, 2007 at 7:13 am(Similiar to inexperienced mortgage brokers!)
I think we are talking about two different categories of repairs - those that are lender required and those that are not. I absolutely agree that lender required repairs must be done before closing or funds set aside in escrow.
The checks written to contractors that I am discussing are repairs that do not impact the collateral. These are nominal items found in the final walk through or radon, etc. Material issues that would impact the value of the property can’t be handled in this way.
In any event, the suggestion is being offered for those people looking for an alternative solution, subject to lender approval.
There is a middle ground between crime and lender required conditions. As long as the lender - not the originator - is the decision maker, buyers and sellers and Realtors can close the deal without concern.
It’s the lender’s perogative to interpret guidelines. We usually close over 100 transactions each month and service every type of lender. Within each loan program, we see lenders all over the place with their interpretations. Some are tough, some lax, and lots in between. I respect a lender underwriter’s perogative to make their own decision.
When a problem comes up we offer suggestions. The lender can take or leave it but under no circumstances do we suggest or tolerate side agreements.
February 10th, 2007 at 2:10 pmDiane,
Since 2004 none of the “A” paper programs, Fannie, Freddie, FHA, VA underwriting guidelines allow for repairs to be made post closing. They go further to expressly forbid it.
So if your “lenders do allow it” they won’t be able to sell those loans in the secondary market or they are actually switching the loan to an “Alt-A program without changing the terms…or you are referring to deals that close pre-2004.
That must have been “back in the day” before AUSs ran everything. The guidelines have changed a lot in just the last few years. Underwriter power is significantly deminished since you were doing it. The computer rules the day now. You’ll notice the articles I cited were from 2002 and 2004.
I’ve been in the mortgage industry for 15 years and I too remember when FHA & VA would allow for repairs by escrowing for 1.5 times the repair estimate. FNMA would allow the same, but only if was “weather related”…ie. snow on house needing a roof repair or freezing temperatures on a concrete repair. And all our underwriter had to do was call and get the exception…from the FHA VA field office.
Nothing is more fluid than underwriting guidelines and too many agents, mortgage brokers and title agents think what was legal yesterday is legal today.
None of the FNMA, FHA, VA programs allow today any repairs to be completed after closing for any reason…period.
Which is what caused the rise in “hidden side agreements” and the need for me to write this post in the first place.
I want all parties to know that a lender can’t waive a FNMA, FHA, VA guideline just to close a deal…nor can the mortgage broker or the title agent.
Hide the true condition of the property to circumvent this and you’ve committed a crime with very severe penalties!
And most of all I want the real estate agents to quit roping all parties including the buyers and the sellers into a conspiracy to commit that crime…however, unwittingly.
Rob K. Blake
February 10th, 2007 at 1:46 pmWell, the “A” lenders I close for do allow it. I was a mortgage underwriter for years and am very sensitive to lender due diligence. Each time I have proposed this method of resolving a repair that is not lender critical, they have approved it. It’s used most often for radon mitigation.
I just think there’s a such cultural acceptance of side arrangements pervading the industry that people don’t even consider alternative above board methods.
As a former underwriter, FHA direct endorsement, VA automatic approval, FNMA and FHLC - I did them all - I undertand the philosophy and risk assessment behind the guidelines. That helps when I am trying to help parties find solutions that ARE legal.
Thanks agina for the forum and I’ll keep listening in.
February 10th, 2007 at 12:47 pmThanks for the comment Diane.
This method only works with lender approval. Same goes for the title company escrowing 1.5 times the repair estimate.
And the “A” paper loan programs don’t allow it!
That why their is a need to hide and a perception that it’s “okay” to write these side agreements on all transactions.
If the FNMA, FHA, VA loan programs allowed for it, there would be no fraud. They don’t, so real estate agents and their “look the other way” mortgage broker and title agent enable them to do something that is illegal, fraudulent, and wrong.
No means no…even in real estate.
Rob K. Blake,
February 10th, 2007 at 12:37 pmThe Mortgage Insider
Rob: Excellent article. We have one other solution to the repair dilemma if the lender agrees. We show the repair on the HUD and cut the check payable to the contractor. We give that check to the buyer to hold until the work is done. This only works if the lender allows it and they don’t care about the repair items - it wasn’t a lender requirement.
We tell the buyer they have to use the check within 120 days or we will re-issue it and mail it directly to the contractor. Under no circumstances can the money go to the buyer.
February 7th, 2007 at 5:43 pmLeave a Comment