Posted by Karl Denninger
During the bubble we had banks that knew (because the FBI had warned them in 2004, there were stories in the media in 2006, and in 2007 HUD published a study) that virtually ALL stated and reduced-documentation loans were fraudulent.
They wrote ’em and securitized ’em anyway and I have not been able to find ONE prospectus from that period in which the above fact was disclosed to buyers of that securitized debt. Not one.
This was a major contributor to the bubble and subsequent bust. Indeed, without it the “home price appreciation” that occurred could not have, as there were insufficient numbers of people with incomes to support the prices being asked. The bubble would not have happened and neither would have the bust without this active fraudulent activity up and down the line. If the actual character of the loans in these securitized instrument had been disclosed to buyers these securities would have been absolutely unmarketable and the bubble would have instantly stopped inflating.
But we know for a fact that these disclosures were not made, this debt was sold, and literally hundreds of billions of dollars of losses were taken by investors who believed that the loans in these securitized instruments were “good” when they were not. There have been ZERO investigations or prosecutions thus far related to this practice.
Now when stuck homeowners are trying to execute a short sale we have allegations that the banks are illegally trying to get something for their second liens (HELOCs and “silent seconds”) which in fact are worth NOTHING in a short sale for less than the outstanding first mortgage balance.
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.”
This is blatantly illegal. It is a violation of RESPA, the law that specifies that all compensation that changes hands on a real estate transaction irrespective of form must be disclosed on the HUD-1.