A "self styled" marketing concept known as PayoutOne is an example "per se" of an "old school" scheme morphed into a quagmire of veiled deceit. The product is wholly hinged on the right of a contract purchaser to access the equity in the house that's under contract. It makes for a great "sound byte" that seems couched within a legitimate loophole. But, that's simply not the case. Nowhere on domestic soil does a contract purchaser have a legal right to spend equity until the property has closed. Worshipers at the cathedral of chicanery known as PayoutOne require sellers to sign promissory notes for funds that are dispersed directly to buyers for the creation of overstated loan profiles. The company claims to make proper disclosure to lenders because its fees are reflected on the seller's side of the HUD-1. That's all well and good, but a properly drafted HUD-1 would show that funds passed hands between sellers and buyers prior to settlement.
The settlement sheet signed by buyers and sellers at every residential transaction contains the following warning: It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment. The vast majority of home loans have a nexus to federally insured funds. Fraud has been committed anytime numbers have been intentionally misrepresented. Federal authorities have jurisdiction the instant the misstated HUD-1 is placed in the care of the U.S. Postal Service or any other carrier service that routinely does business in multiple states.
In other words, "that dog don't hunt."
I've written posts about PayoutOne titled The Architecture of Ambiguity (Active Rain) and A Couple of Thoughts (Title-opoly). Take a couple of minutes to read the perspectives of those who fell prey to the product in the past or the proponents of the product who founder aimlessly in its defense.
The "silent second" mortgage exemplifies a misguided and fraudulent strategy that periodically rears its ugly head. The scheme was employed prolifically in the Baltimore area during the late 1990's and resulted in numerous federal convictions. I've heard that the "silent second" has once again made its way into the mainstream of real estate culture and was finally convinced of the fact by a recent comment to a post aptly named The "Silent Second" Revisited! (Active Rain).
A mortgage professional commented:
"Excellent write-up! I was just solicited by a Realtor who has a couple transactions like this and I am so glad I found your post. Thanks."
While the term "silent second" is used generically to describe a number of fraudulent contrivances, I'm most concerned by a hybrid of the scheme known as the "throw away second." The elaborate plan of action required to bring a "throw away second" to fruition necessitates the cohesive participation of real estate agents, mortgage professionals, appraisers, and title (and escrow) professionals. In other words, it takes a team. As a practical matter, it represents a paradoxical erosion of the ethical protocol of "self-dealing," licensed professionals.
When a 'throw away second" is employed, fraud pervades and consumes every aspect of the transaction. Once a selling price for a home is negotiated, a second contract is secretly drafted for a higher and predetermined amount. The primary lender is deceived into relying on the existence of a second mortgage between buyer and seller for the difference between the actual selling price and the overstated selling price. The "throw away second" is typically recorded, but sellers are asked to sign a release at the closing table. Payments are never made or expected. In addition to the two different contracts of sale, this particular scheme is evidenced by two different settlements sheets and a commission paid on the lower selling price.
Question: Why would fraudsters expend the time and effort to perpetrate such an elaborate form of dishonesty?
Answer: Certain conventional loan guidelines allow for a second mortgage between buyers and sellers as a substitute for a down payment.
In some way, the perverse dilemma at hand was described best by Ann Fulmer, a mortgage fraud expert, when she wrote:
"The majority of fraudsters are industry insiders who leverage their knowledge to take advantage of weaknesses in lenders’ processes and defenses. Thus mortgage fraud does not disappear during the “down” portion of the mortgage cycle, it just morphs to take advantage of current market conditions."
My advice to real estate professionals and consumers alike:
- Avoid any aspect of a transaction that requires secrecy or creativity.
- Avoid any notion that buyers and sellers have a right to side agreements among themselves that aren't disclosed to lenders.
- Don't try to accomplish indirectly that which you can't accomplish directly.
- Reject any notion that real estate fraud is not actively prosecuted by authorities.
The recent implosion of housing and financial markets has presented unparalleled challenges to many who are trying to buy or sell a home. With fraudulent schemes as with all things in life, the old becomes the new. Keep one thought in mind: If the success of a real estate deal requires less than total and honest disclosure to a lender, it's illegal.
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