Distressed homeowners need to be aware of loan modification fraud and short sale fraud.
Homeowners that are trying to avoid Foreclosure need to be aware of two major types of fraud that are being marketed to distressed homeowners, namely loan modification fraud and short sale fraud.
In the loan modification fraud, a homeowner is told that for an upfront fee a loan modification program will be started on there behalf. A legitimate loan modification program is a program where is typically a program agreed upon between the homeowner and the lending institution holding their mortgage. It is designed to help the homeowner keep their house. Statistically, loan modification have had a low approval rate from lending institutions, in other words very few of them have been granted. There is never an upfront fee charged for the program.
With the loan modification fraud, a homeowner is asked for an upfront fee in order to start the program. In the best scenario, the homeowner's case is entered into a loan modification program, but the work is not done by the agency that charged the upfront fee, it is done through non-profit organizations or loan modification assistance programs that do not charge anything, and the homeowner could have just as easily contacted directly, and would not have had to pay for the service. At worst, money is collected an nothing happens.
The second fraud, the short sale fraud comes in two flavors. The first short sale fraud scenario involves a home going into foreclosure that has a first and a second mortgage against it. This fraud is perpetrated by the bank holding the second mortgage.
What is required for a successful short sale when a house has two (or more) liens on it, is that all subordinate liens must also approve the short sale, usually receiving a small percentage of what was initially borrowed. No approval means no short sale. In order to get approval, a partial payment is negotiated with the second lien holder (who realizes that receiving something is better than receiving nothing). The second lien holder is not required to accept the settlement, but they often do. This scenario is perfectly legally, and documented in the closing documents on the HUD statement.
What has not been legal and has started to happen is that unscrupulous second lien holders have allegedly been requesting money on the side from the real estate agent or the buyers in the short sale, in cashiers check, prior to the closing and not documented on the HUD statement (the latter is your red flag). That prevents the first lien holder from seeing it, which if they were aware of it, would kill the short sale.
The second short sale fraud scenario involves unscrupulous real estate agents that will withhold (not present) offers to the homeowner going through the short sale, but instead present there own, lower offer through an LLC or third party. Once this lower offer is accepted by the bank and the short sale is completed, the property (now technically owned by the LLC or third party) is sold to the buyer that made the higher offer. This usually happpens within a few weeks of the short sale having closed. The “extra” money is then pocketed by the LLC or third party (in addition to commissions paid by the bank for the short sale transaction).
Homeowners need to be aware of this. Here's a few things you can do to protect yourself:
- First, never pay an upfront fee. That's a huge red flag. A real estate agent gets paid a commission, from the bank, at the closing. The homeowner does not pay. A legitimate non-profit will not charge the homeowner.
- If you're listing your home as a short sale, check your state's real estate or regulatory web site for information on the real estate agent you're considering hiring (Search for Colorado real estate licensees here). Have there been any complaints filed against this agent? Has the agent gone through any disciplinary action?
- Work with a qualified, licensed real estate agent with a successful short sale record. If in doubt consult your state's regulatory department (use this link in Colorado) or consult a qualified lawyer (a lawyer that specializes in real estate law).