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.
If 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.
In 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:
"Bank 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:
“We 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 laws."
"When 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 retribution):
AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…
LENDER: 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."
I 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.