More Illegality From The Big Banks: This Time Short Sale Fraud

Tyler Durden's picture

As many readers have pointed out, CNBC's Diana Olick is out with some pretty damning news of a new form of pervasive homeowner fraud, this time conducted in complicity of the very banks that yesterday were swearing up and down the FCIC hearings that they hear, see and speak no evil. Maybe such hearings should become a weekly spectacle as they now represent the only expression of Main Street's excess and growing anger, yet pushed far enough and the imminent revolt will surely become a reality. A few more incidents like this, uncovered by America's unbought journalists, may be all the straws needed to break a few CEO's backs. At least the bankers will have a few hundred billion in bonuses and some Textron private jets to help with their head start to non-extradition treaty countries.

Back to Ms. Olick's article:

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

they don't, and there's no short sale, the home goes to foreclosure and
the first lien holder gets the house because second liens are
subordinated debt to the primary loan.

short, the second lien holder gets nothing. In order to get the second
lien holder to drop the lien, the first lien holder generally
negotiates some partial payment to the second lien holder. The second
lien holder doesn't have to agree, but more and more are doing so.

As Diana points out, there is nothing illegal with this set up. Where there is illegality, however, is in the following situation:

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."

Most agents wouldn't go on the record with me, for fear of retribution
by the banks with whom they have to work every day. But one agent,
Kayte Gentry, of Keller Williams Integrity First Realty, was brave
enough to blow the whistle.

"I think it's wrong, and I think somebody needs to hold them
accountable, and every time I lose a house in foreclosure because of
this, it hurts my client," says Gentry matter-of-factly. "Aside from
being illegal and a violation of RESPA, it's immoral and truly it's
just sad for the client that it's hurting."

The next time Jamie Dimon is discussing his record quarterly earnings, maybe he can distinguish between how much of his profit was legal and illegal: at this point it is all becoming a blur:

"The big banks that have recently made this
request, specifically payments outside of the closing statement have
been Citi Mortgage and JP Morgan Chase."

JP Morgan Chase simply answered, "No Comment," when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written statement:

of America enforces a policy that all disbursements are documented on
the settlement statement for short sales. When we are servicing a first
mortgage with a second lien held by another investor, if the second
lien holder asks for off-HUD payments, we will not approve the
transaction (if we have knowledge of it). It is also against Bank of
America’s policy to accept off-HUD payments on its second liens."

Citi 's reply was a bit more complicated:

work very hard to help distressed homeowners find solutions for their
financial challenges. In our attempt to amicably resolve the debt, we
will generally negotiate a reduced settlement with the homeowner in
order to release a second lien. Unlike some lenders who refuse to
reduce the payoffs on second liens, we choose to reduce the payoff
amounts in some situations to assist the borrower. We do not provide
instructions to settlement agents on how to fill out the settlement
statement or any other closing documents, and we certainly do not
require settlement agents or any other parties to violate applicable

we confront the lenders and tell them that this request is illegal and
a violation of RESPA, they tell us it's been cleared through legal and
they don't care. Do it anyway," charges Gentry.

And the smoking gun that apparently nobody in the regulatory enforcement arm of the entire U.S. of A. seems to care about:

I personally heard a recording of a phone
conversation between a short sale real estate agent and a second lien
lender, during which the second lien lender clearly asked for cash
outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the
recording was given to me by Brandt who got it from the agent. The
agent would provide no information on the lender, for fear of

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

You're not going to lose your license - we have plenty of realtors who
do this, who actually understand how this whole process goes - and they
realize that OK, if I want to get this done, this will take place."

contacted the Treasury Department, HUD, FINCEN (Financial Crimes
Enforcement Network) and the Federal Trade Commission, and none of
their representatives could tell me of any active investigation into
this. The folks at HUD said they'd be very interested to see my story.

The problem with vigilante justice is that if the proper channels that are supposed to maintain legality and order in transactions of this nature fail, then people will, sooner or later, decide to take matters into their own hands. The amount of criminality from Wall Street was at least marginal, and involved very complex financial products: if you tried explaining it to Joe Sixpack, they would drift off by the second sentence. However, crimes of this nature are much simpler, and easier to fathom by just about all 300 million Americans who are certainly not big fans of Wall Street.

At this point the financial oligarchy is really playing with fire. For their own sake, we hope they take control of some of this rampant illegal activity that has seemingly gripped every aspect of our lives, with the very blessing of the TBTF, who only exist courtesy of taxpayer generosity. And if the SEC, Treasury Dept, HUD, FINCEN, FTC, and whoever else merely pretends to uphold the law, are unable to do anything about increasingly more glaring crimes conducted by the "select few", the time before Main Street finally arises and decides to provide its own version of vigilante justice, will not be too far off.

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bugs_'s picture

This could be it.  Fraud by the bank.  Tax fraud by

the second lien holder.

rangerider's picture

Kayte Gentry is absolutely correct in my experience .....

the second lienholder of abt $100k may block a short sale many months .....

while holding out for a few k$ more, where they would get nothing in a F/C .....

and some second L/H demand full payment before signing off .... 



Careless Whisper's picture

Bankruptcy Court. This is yet another reason why Bankruptcy Courts should permit cram downs of mortgages on owner occupied homes similar to all other real estate assets.

Fat Bob's picture

Cram downs also breach legalities. Why don't we all just get together and rob the banks? Who's in? I'm tired of this sh!t mess already, we had a big chance to have a genuine cleanse of the system, and now all we are left with is garbage. Plain and simple.

seventree's picture

IRS? Very possibly. It would be instructive to know how these money orders were reported as income.

If they were reported accurately that would be admission of an illegal act. Reported falsely or not at all is tax fraud. And since Switzerland's surrender, and with other havens under attack, it is getting harder to simply hide significant amounts of cash.

This is how Al Capone and many since have been brought down. It isn't necessary to trace the source of unreported cash, or to prove that a crime was commited, only that it was not reported -- and again if it was not obtained legally there is no way to do that.

This is a situation where the IRS's legendary appetite for revenue could be an advantage. Once aroused they are hard to stop.

ReallySparky's picture

That is just jacked up.  This piece will be just like what happened with the Mortgage Broker whistle blowing, the FBI and HUD will take months or years to prosocute this deal.  The fastest thing the Gov could do would be to do simple public service announcements on TeeVee, perhaps the reporter on this story could get her network to do it gratious, that would surely make them look good in the eyes of the common man.  This crap is probably sprung on the realtors and buyers right before the closing, everybody packed up, realtor already spent the commission, title company work completed, and they have everybody by the ya-ya's.  Public service announcements best way to educate Joe Sixpack.

Anonymous's picture

I expect the authorities to go after the person who made the recording for violating wiretap laws before they go after the banks.

Mad Max's picture

Cynical and probably accurate.

MarketTruth's picture

Bank Run Bitches!!!

Bank Run Bitches!!!

Bank Run Bitches!!!

Harbourcity's picture

Hell, the US government lies, cheats and steals - why not the populace??!?


berated's picture

I think this is one of many critical points emerging from this whole mess (as if there weren't enough already). How much more rampant will individual fraud become (we've kinda always assumed it was there from the finanicial institutions) as increasingly more folks assume everyone else is trying to lie, cheat and steal? People will begin to rationalize their own fraud because "they just *know* everyone else does it." In fact, we should expect to see previously honest people commit fraud preemptively before they lose to the other guy--because that's becoming the new norm.



SWRichmond's picture

There is a simple fact in play now: the last honest man will be prey to everyone else, and everyone knows it.  When taken in combination with that ever-popular "It is insanity to continue to do the same thing while expecting different results", it requires no imagination at all to see what's happening and what's next.

john_connor's picture

Just send the evidence to Darrell Issa and Alan Grayson.  Something will get done.

MarketTruth's picture

Grayson says nice things... and have hope, yet see little change. When he forces a full Fed Audit, or at least an audit of the gold, THEN i shall be a believer. Until then, all talk and no HARD ACTION due to Grayson.

Art Vandelay's picture

Re: the penultimate paragraph - that's not the "problem" of vigilante justice, it's the "beauty" of vigilante justice. The "problem" of vigilante justice is that it's just about all we have left.

pros's picture


The banks and the U.S. government they control view private citizens as dupes to be manipulated and fleeced...I regret to say that it goes all the way to Obama (I voted for him, btw).



Rainman's picture

No wonder short sales are a time consuming nightmare. The seconds want a piece out of the firsts and there's under the table footsie going on to boot.

It will take forever to clean up this friggin' mess.

Anonymous's picture

The banking corporations are not responsible nor legally liable, they will say. It's just some bad eggs working for them. This defense would certainly win on appeal if needs be, to the Supreme Court if necessary, in 6 years. Now the authorities might go after the bad eggs who would claim they were acting on behalf of the corporations wishes and should not be held liable. An argument that would certainly win on appeal if necessary if the appellants were important executives not some gal working in a branch in Des Moines, to the Supreme Court if needed, in 6 years or so.

Everyone has a choice to make in life. Work for and with corporations or be just a citizen and a chump. And stop bitching about it if you made the wrong choice. There are not going to be any pitchfork mobs at JPM or GS. The pitchfork mobs are already working for the corporations as August showed.

dhengineer's picture

Sure, they could fall back on the typical "rogue trader" story, and blame it on a few people, but they would still have to curtail the activity, one way or another.  If it continued despite spending a bundle fighting the guilty verdicts up to the Supreme Court, they would be seen as dirty as ever, and new charges would be brought against them as more and more instances were uncovered later.  Either way, this "income" stream will be curtailed or choked off.

Ripped Chunk's picture

"Then they began to feed on each other"  

Gordon_Gekko's picture

Good. I hope they kill each other and die off.

deadhead's picture

Okay, Secretary of HUD, Shaun Donovan, we are calling you out on this one...let's get cracking on this along with  IG Kenneth Donohue and I would suggest Mr. Holder, our Attorney General, get very, very closely involved with this one.

Folks, I've seen these guys bust a small time mortgage banker for giving away athletic event tickets (yes, that is a violation of RESPA) and they never hesitated to be all over the title insurance companies.  Let's see if these cats got the stones to go after the big boys.

By the way, let's not pin it on some low level pinhead, somebody up the food chain has to be able to authorize the acceptance of money to make these kind of transactions happen.

ghostfaceinvestah's picture

Donovan is too busy adding up the losses on the FHA portfolio, see pages 11-13, good stuff.

deadhead's picture

didn't Stevens say recently that FHA is okey dokey and no taxpayer bailout will be needed?

The only question I have on FHA is if the Obama admin can stave it off until after the mid terms...I'm sure they will be able to accomplish that.

Thanks Ghost.


dhengineer's picture

The best way is to pin it on some low-level plebe, and then lean on him (or her) to roll the next level up.  Threaten the little guys, offer significant plea bargains, and watch the snitching accelerate.  In any of these banking organizations, there may be 50 guys in the executive suite, but thousands down on the street level.  Threaten some low-level manager with 10 years in Attica, and you'd be surprized at the amount of information that will be forthcoming.  If and when that happens, the executive bathrooms will be awash with gourmet-level puke as the big boys realize that the grim reaper is getting closer and closer, and they can feel the breeze from the scythe...

Anonymous's picture

what are the size of these off-the-record payments, anyway?

and what exactly is the purpose of hiding them from the primary lender? is the second lien holder hoping to collect two separate partial payments?

Anonymous's picture

Quite often if the primary is settling for less than what they are owed, it's not ok with them that the 2nd gets paid what they're owed, or anything near it, or sometimes anything at all.

That's why they're being hidden from the primary. If the primary lender finds out about these side deals, they'll have a cow and just kill the whole deal.

I would like to know also about what kind of payments are being demanded.

deadhead's picture

I have 2 items to mention to ZHers:

1. Diana Olick is probably the only journalist at CNBC who consistently writes objectively and is not part of the cheerleading gang (Rick Santelli being the other notable person).  She is an Emmy award winning journalist. 

2. I think it is very important that we give a huge "thank you" to Kayte Gentry, of Keller Williams Integrity First Realty for having the courage and fortitude to come out publicly and say this.  I suspect Kayte will catch alot of shit from some corners and Kayte should be invited to contact ZH at any time to report on any crap that she gets because at least ZH has the stones to call out those that might give Kayte a hard time. 

Thanks for bringing this out on ZH Tyler.


Anonymous's picture

"Deadhead" - thank you for the kind words - it was a difficult decision to make since I run a fairly large short sale business in AZ and obviously worry about retribution from the lenders. We have the evidence necessary should anyone question our disclosure.

To address an earlier question, we've seen these requests as low as $500.00 and as large as $10,000.

I'll be sure to let you know if the "storm" comes!

Kayte Gentry
Gentry & Associate
Keller Williams Integrity First

WaterWings's picture

Be sure to tell Ron and crew to keep your eyes peeled for suspicious visitors that might be considering retaliation.

Thanks for stepping forward.

deadhead's picture

I'm delighted that you responded Kayte and commend you again for your courage.  I know that it is not an easy thing to speak out but you have done the right thing.

I urge you to share whatever you have with the authorities, even sending the info directly to Shaun Donovan at HUD or Atty General Holder.  Make sure you contact your congress person as a means of protecting yourself and being on the record.

If you need support, I would strongly encourage you to contact Tyler Durden or Marla Singer at Zero Hedge (tips at zerohedge dot com) as this blog is very widely read and the only way to keep the bad guys at bay is to expose them. 

I hope any ZHers in Arizona would consider sending their business to Kayte as her courage and fortitude deserve our support. 

Please keep us informed of your progress and be strong knowing that you have done the correct thing.  The truth ultimately wins out.

Amish FinEng's picture

Reading the various posting here I see you have a deep admiration for twisted hypocrites.

You must be an ex-banker.

Countrywide or IndyMac exec? Musician based in Santa Monica? Do you have any magical indicator for sale?

How close am I?

deadhead's picture

I simply don't understand where you are trying to go with this Amish.

I've no admiration for hypocrites.  I prefer the truth.


WaterWings's picture

Yeah, definitely try ZH first. The new posturing for increased "accountability" isn't a good thing. "Sorry lady, State Secret."

MeTarzanUjane's picture

Funny how the smart people here overlook how complicit Realtors are in Real Estate bubbles and crashes.

The questionable value-add partners who themselves slither like snakes.

Oh, look at me. I have Integrity. I am different. Laughable.

Where was the voice of our little princess do-good'er when the bubble was inflating. Shouting out objections about crooked property appraisers, and boiler room mortgage processors?

It is the job of a Realtor to inflate real estate values.

This article displays a hypocritical effort. Realtors eat, sleep, and dream about bubbles. How to start them, inflate them, and re-inflate them.

The Queen of Queen Creek. Starting @ 1:30 - 2:00
"Unbelievable". Yea right. You knew what you were doing. You knew it was unsustainable and would eventually hurt people. Yet you continued.

This is an attempt by the snakes to manipulate the mobsters. FAIL.

Keller Williams is as much a part of the problem as ZH is part of the solution.

Waterfallsparkles's picture

Banks probably trying to grab a few extra thousand out of the Realtors pockets.  Everyone wants to spend the Realtors Dollars.

Like they work for free.

JohnKing's picture

How do they bookkeep these payments? Donation?

dark pools of soros's picture

hookers and blow..  it never gets to the books

deadhead's picture

By the way, let's not pin it on some low level pinhead, somebody up the food chain has to be able to authorize the acceptance of money to make these kind of transactions happen.

my answer from above in terms of bank employee involvement.  your question as to how it is booked needs to be answered.

Gordon_Gekko's picture

I would not be surprised if Ben Bernanke himself gave some sort of under-the-table approval for such activities.

Waterfallsparkles's picture

And yes, Realtor rebates are illegal.

Gordon_Gekko's picture

Will the moral police now please come out of their holes and tell me that I need to be a good boy and pay all my debts to the big banks? HAHAHAHHAHAAAHAHAHAAA!!!!




Gordon_Gekko's picture

Yeah man, I actually went one step further and converted all of my cash into Gold - I just keep barely enough for daily expenses - that's it, plus it saves me from wasting money on worthless things I don't really need. All my spare cash goes into Gold/Silver. I have become an FRN exterminator - whenever I see some, they get converted in Gold - LOL! Can't convert those worthless pieces of shit into real money soon enough. At this point I don't even trust the currency, what to say of the banking system. Let's just say if the bank is in the US, I don't trust it.

Anonymous's picture

Ok, gold & silver, but where do you stash them?
Or is it only paper gold and silver?

I would not want to store a large amount at home, and don't think u-haul storage is the place for it either :)

Missing_Link's picture

I like that idea, Gordon.  One question, though:

What do I do when they destroy my credit rating?

Gordon_Gekko's picture

Make sure you suck out as much credit as possible before you default - much like the US Govt. is doing to the sovereign credit of We the People of the USA. Think of it as getting your money back which the US Govt. FORCIBLY took from you and gave to the bankers.

Or you can choose to bend over.

Missing_Link's picture

Hmmm   ...  OK.

I will do that when I'm 100% convinced the collapse of the entire nation is right around the corner with 100% certainty.  Anything short of that, and a credit rating of 0 will prevent me from ever buying a house or a car again in the future.

Don't get me wrong  ...  I support your cause, but until I can be certain of both the existence and timing of a complete economic meltdown that will render credit scores irrelevant, a credit rating of 0 would be rather inconvenient.

Dburn's picture

Make FICO irrelevant. That company has way too much power and lenders are way too dependent on it. FICO's whole business is dependent on people who think having a high credit score is worth paying 30% on credit cards and having a dry savings account for emergencies. The banks are dependent on FICO to keep the finger in the face of debtors by forcing them to ask the same question you asked; what about your credit score?" FICO will lower the "curve" once enough people do it voluntarily or are forcibly deleveraged by life circumstances. That's the only way they survive. Banks competing over 50 people with 800 scores? That won't work. FICO knows it too. Each day FICO gets a little less relevant every time people default. The whole exercise is to make them irrelevant as well as the banks.

Besides, Banks are only lending to people who don't need the money. So who cares what the FICO score is. Right now your sub-prime under 720 from what I heard. Get off the crack of credit. It'll reduce stress and you'll live longer. Credit is not a safety net if there is no income to support it.