On November 26, 2006, the Orlando Sentinel published an article entitled "Hear this loud and clear: A "silent mortgage" is fraud."  The article was written by syndicated columnist Robert Bruss, Inman News.   The term "silent mortgage", synonymous with "silent second", is one that I hadn't heard for nearly a decade.   Feeling admittedly "startled", the observation of a lending industry veteran shared long ago came to mind: Fraudulent schemes from the past have a way of resurfacing when the housing market slows.  The term "silent second" was used often among industry insiders to describe a popular scheme to defraud lenders during the 1990's.  With this being said, consumers need to know enough about "silent seconds" to avoid them and the accompanying criminal consequences.

The website for the Federal Bureau of Investigation offers this definition of the "silent second":  The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.  It's important to note that the buyer actually intends to repay the debt to the seller.  As harmless as this scenario might appear, it's riddled with deeper underpinnings of fraudulent activity including the misrepresentation of the borrower's financial profile to the lender.  A common fallacy to avoid at all costs is one dependent on the right of buyers and sellers to have "side" agreements that are not disclosed to lenders.

There's another scheme involving second mortgages and multiple layers of criminal planning that's worth mentioning.  The scheme, known as the "throw away second," works like this.  Once a selling price for a home is agreed upon, a second contract is fraudulently drafted for a higher (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.  Why?  Some conventional loan programs allow a buyer to borrow a percentage of the selling price from the seller as a substitute for a deposit.  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 (2) different contracts of sale, this particular scheme is evidenced by two (2) different settlements sheets and a commission paid on the lower selling price.

Quite obviously, the crimes described above could not exist without the assistance of realtors, title agents, loan brokers and appraisers.  Once a scheme to defraud a lender is revealed, buyers and sellers face a distinct risk of prosecution in spite of a contradictory misconception held by many.  The following federal case illustrates an example of a consumer being implicated along with an industry insider.  On May 9, 2006, a 31 year old mortgage broker from Centerville, Ohio pled guilty in a federal court to one count of money laundering as part of a mortgage fraud scheme.  The scheme involved the mortgage broker and the seller of a home that the mortgage broker was purchasing as a personal residence.  The two conspired to deceive a lender by misrepresenting seller's monies as the buyer's down payment.  Both individuals were indicted by a federal grand jury.  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; it's that simple!

My advice to consumers and industry insiders alike:

•        Avoid any aspect of a real estate transaction that's described by the word "silent";

•        Avoid any transaction where an "actual" second mortgage is not disclosed to a lender;

•        Avoid any transaction where a "fabricated" second mortgage is disclosed to a lender;

•        Avoid any transaction that requires two (2) differing settlement sheet and/or contracts of sale;

•        Reject any notion that real estate fraud is not actively prosecuted by authorities.

The recent implosion of the housing market has created a difficult situation for many trying to sell a home.  Rumors abound of innovative and creative inducements being offered to prospective buyers.  The temptations to participate in seemingly benign schemes that make a house more affordable to buyers may be overwhelming.  Keep one thought in mind though, any time the success of real estate deal requires less than total and honest disclosure to a lender; it's illegal.