Cash Back At Closing, Why It Is Fraud, Why "They" Will Be Looking For You

It used to be a hot topic and with the tight market in some new areas you will see it popping up in more places. Because of my articles on this topic I have had my well being threatened (by a Bee/Wax agent from Corpus Christi), people have called my office and threatened me, I have had the most interested emails you could imagine, yet here I am ... still beating that drum! Dare you read on?

Texas and Florida seem to be the most inundated although I am beginning to see more of this in Georgia. You've seen the ads, they are all over Craigslist.

"Great Home! Water Access! $65k Cash Back At Closing!"

Let's examine two possible scenarios. One has created more threats than the other so let's look at the less of the two evils first. In this scenario the buy closes on the home at, say, 90% of the APPRAISED PRICE using a 100% acquisition loan (would be a primary residence these days) but simultaneously gets a 10% HELOC on the property. This is stupid. It may just barely not be fraud (even though it is so close to fraud you can smell it from here) it's highly unethical and extremely unwise for a plethora of reasons. First, you just represented to the 1st (and possible 2nd) lien holder that you were giving them a 10% equity position in a property for which they completely paid. THE LENDER BOUGHT THE PROPERTY, YOU DID NOT. The loan they offered you was based on that level of risk. When you immediately got that 10% HELOC you just tripled the risk to the first lien holder AND took the CLTV to 100% of the APPRAISED value and 110% of the sales price.

The Next One Is Outright Fraud

In this scenario regardless of the LTV of the acquisition loan (to the sales price or the property value it does not matter) the fraud is or will be obvious to all but the greediest among us. Let's say you purchase an $800,000 home (actual supported value) for $620,000 from a desperate seller. But let's say you don't have enough cash really to purchase and maintain the home so the seller says, "No problem. There is plenty of value there so let's just raise the sales price to $700,000 and I'll give you the $80,000 difference so you can make your mortgage payments, take a vacation, buy a car ... whatever." What you actually just did was commit mortgage fraud by representing to the lender that you were paying $700,000 for the property when in truth you were paying only $620,000. Inversely  if the advertised price was $700k and the seller give you $80k "just to make it work for you" it is still FRAUD by a misrepresentation of the ACTUAL sale price.

To prove my point let's go buy a television at Wally World. I see an ad in the Sunday paper - 55" LCD TV for $1999. Woah! Almost too good to be true! So I put the dog in the truck and to Wally World we head. I go in and see the TV and there it is, sure enough. A 55" LCD TV with a big yellow star on it that says $1999. I say, "Fido likes that one we'll take it!" 

The sales helper takes us and our new purchase vial electric trolley to the check at area at the load out station and I'm ready to pay. I have my American Distress card out and the cashier proudly exclaims, "Okay, sir. That will be $3576."

"What? How can that be? What is there like a $1000 charge for the ride on the electric trolley?" I ask.

"No, sir. Here are your two rebate forms. One you will send to the manufacturer for your $750 rebate and the other goes to Wally World headquarters for a $250 rebate. Your final price is only $1999", answers the smiling, helpful attendant.

But wait, didn't I just pay taxes on $2999? And my American Distress card will be billed $3576. This isn't right at ALL! Why don't you people just advertise the truth??? It's a $2999 purchase and I *can* get $1000 back after I do all the motions.

Now buy that television as a gift for your friend. But instead of you getting the rebate money your friend gets not only the 55" flat screen but also the $1000 cash back! That's a parallel with what happens in those Texas and Florida big cash back scenarios. You get the house the lender paid for but you get the cash back, too! NO IT ISN'T DIFFERENT!

If it is so illegal, why do people keep doing it? Simple, the industry has been, until recently, too busy focusing on other issues. I recently had a real estate broker tell me that they participated in an online presentation where an "FBI agent" said, "Cash back at closing is only illegal when it is not on the HUD1." So, either it wasn't an FBI agent at all or a severely misinformed FBI agent.

NOT TRUE!

First of all, it's rarely on the HUD1 because any real lender is not going to permit cash back at closing. Secondly, as you all now know, there are different levels of lenders. The street level lender like my Novation or some of the names now appearing on ML-Implode listings are not the ultimate lender. When that loan is sold on the secondary market it is sold as a specific loan to value based on the sales price of that property. The SALES price, not the APPRAISED value.

The Real Fraud

The real fraud comes in the fact that there is a misrepresentation of the sales price of the home. Just like the television we purchased at Wally World the actual sales price is the price AFTER any rebates. What America loves to forget and greed causes blinded eyes is this, the LENDER and their INVESTORS are the ones purchasing the home. The BORROWER gets the PRIVILEGE (not the right) to occupy the property subject to a strict set of guidelines. If those guidelines are not met the LIEN HOLDER (the investor who owns the mortgage to that property) has the RIGHT (not the privilege) to redeem that property and any profits generated by that property. Read your mortgage note. 

Copyright(c)2007 Ken Cook. Marietta Georgia home loans - FHA.