CALLING ALL ETHICAL LOAN OFFICERS - HELLO? ANYONE THERE?

Calling All Ethical Loan Officers - Hello?  Anyone There?

Every day I field questions about short sales, foreclosures and real estate investing.  I represent developers, lenders, buyers, sellers, the sharks and the lambs.  All have different work for me and all need different solutions.  Today a call came in that was as they call it - "Over The Top"!  It compels this article on loan officers and how some continue to intentionally contribute to the financial credit mess our industry is experiencing.  The names are fictitious but the scenario unfortunately is something I have heard often.

Here is how it went.

Mr. Smith called because he was referred by another client and he is getting divorced.  He owns his home with his wife and they bought it in 2003.  The purchase price was $350,000 and they used a mortgage to purchase it in the amount of $280,000 - a nice traditional 80% loan to value but with a 10 year amortization.  The current remaining balance of the loan is $185,000.  He has no problem with the current loan payments.  The current market value according to an appraisal that was done as part of the divorce is $450,000.  He does not want to keep the house because he does not need such as large home now that he is single and so he intends to put it up for sale and hope to get $450,000.  That would be $265,000 over the existing mortgage to put in his pocket.

Since Mr. and Mrs. Smith are now getting divorced, as part of the property settlement agreement the husband is getting the house but has to get his (former) wife off the mortgage.  To get his wife off the mortgage he will need to negotiate a removal of her name from the Note (not necessarily a big deal, since he has good credit and lots of equity), or he can refinance for a new mortgage.

Mr. Smith spoke with a loan officer.  The loan officer suggested that instead of selling the house, the loan officer could arrange for an appraisal for $590,000 and then because of Mr. Smith's good credit he would arrange a $530,000 mortgage.  Then (hope your sitting down for this one) he told Mr. Smith to tell the bank he cannot afford the mortgage anymore and short sell the house!  The whole reason for this was for Mr. Smith to pocket $345,000, which is $80,000 more than the value of the house and without the cost or hassle of selling it.  The loan officer had no problem with (1) ruining Mr. Smith's credit, (2) suggesting Mr. Smith commit bank fraud, or (3) pocketing for himself hefty loan fees based on a bogus appraisal and his orchestrated conspiracy to commit bank fraud.

This scenario is frightful and worse yet - I hear about this type of scenario having happened or being planned a few times a month!  Since I am not a lightning rod for these type of stories, I can surmise that it is happening a lot more than the few instances that make it to my ear.

Now please understand - I have nothing against honest, ethical loan officers and mortgage brokers are a great referral source for me.  My son is a mortgage broker and so is my cousin.  But it makes me damn scared and worried for the Mr. Smiths out there and our financial system and for the lack of morality of people that call themselves professionals - and licensed professionals at that - when this type of open and notorious attack on our own well being (i.e. the economy and the financial markets) is occurring right in front of us.

These unethical professionals are guiding unsuspecting and otherwise law abiding citizens to wreck havoc on our own investment funds for their own selfish and self indulgent shortsightedness.  It's instant gratification syndrome - "Never mind the consequences - make me money today and I will worry about the future - in the future!"

I am writing this article for several reasons. 

One reason is to alert the unsuspecting that there are professionals out there that pervert the definition of morality to suit their own pocketbooks.  If a scheme is too easy or too good to be true, it probably is either untrue or illegal.  Consult with an attorney if you have any question!

The other reason is to gather comments from your own stories.  Am I indeed a lightning rod for this scenario or is it happening elsewhere too?