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The Silent Second: Unfettered Sleaze

By
Real Estate Agent with Integrity Real Estate

Silent seconds (mortgages) are seemingly gaining popularity to accommodate an exaggerated need to make "deals work."  I wrote a post last week, The Cult of the Morally Deficient, in response to a loan originator's comment that he had recently confronted silent seconds in a number of proposed transactions.  The comment was made to a post, The "Silent Second" Revisited!, that appeared on Active Rain nearly a year ago.  It continues to receive random remarks that are nothing short of startling and disturbing.

Just days ago, a middle aged, first time homeowner presented a scenario that I won't soon forget. 
Having participated in an illegal second mortgage scheme, she faces a distinct risk of losing her home to foreclosure. 

Read on, there's more ... 

There are two distinct varieties of fraudulent, seller-held seconds at work in residential markets: an actual loan is made and repayment intended in the first case while a completely fabricated loan is represented to the lender in the second.  The second case is of particular concern to me due to the inordinate amount of planning needed to bring the fraud to its fruition.  Real estate insiders are unable to feign a lack of involvement and knowledge due to the intricate machinations of the scheme.

"I believe I have been the victim of fraud as a buyer," the reader wrote, " The seller, realtor, and mortgage broker all told me this was a perfectly legal practice."   If we are to take the woman at face value: she thought that she was doing nothing wrong and expected the seller to release the second mortgage immediately after closing.  The plot thickens.

Rather than releasing the second mortgage as agreed, the seller has made demands of the woman for payments that are apparently not sustainable for her.  The situation has affected her emotionally and has her worrying simultaneously about foreclosure and potential criminal charges.  I have no readily available advice.  A bankruptcy court, generally speaking, is the only court with the authority to nullify an equity in real property.  The introduction of a patently criminal agreement would raise questions of every ilk and type.

 As professionals, we need to recognize that others are highly dependent upon our knowledge and most importantly our judgment.  We have a duty to act in a manner that subverts our personal interests to the interests of those whom we serve.  In the case of a "throw away" second mortgage where repayment isn't anticipated, the players go to great lengths to create the illusion of a loan from seller to buyer equal to 20% of the property's selling price.  The buyers are then able to obtain conventional financing for the remainder.  In reality, the scheme enables the buyers to finance 100%, sometimes more, of the agreed upon price.  The moving parts associated with this particular type of fraud are daunting in number.   They include: 2 separate contracts, 2 separate HUD-1's, an intentionally inflated appraisal, a title commitment containing material misrepresentations, etc.

We need to remember always: consumers don't know as much as we do and rely heavily upon us for guidance and protection in a real sense.
  It's funny, but I thought of my maternal grandparents while writing this post.  It's probably because my 83 year old mother fell yesterday and remains in a hospital tonight.  That happens to be a photo of my mother's parents on the day they were wed.  They later immigrated from Poland to Baltimore and eventually realized the dream of homeownership.  I think of how easily it might have been to take advantage of them while they were writing a contract for a home or applying for a mortgage.  They were extremely simple people who managed to raise five children on the scant wages earned by transient workers.  I am just two generations removed from this courageous couple.

My grandparents, like the woman who now faces foreclosure due to an illegal second gone bad, deserved representation that was honest and anything other than self-dealing.   There's no place for creativity in matters of homeownership where the hopes, dreams, and emotional well-being of consumers are at stake.  The integrity of the woman who inspired this post was clearly and inappropriately compromised.  There's no question about it.  Prospective buyers are always eager and sometimes confused.  But, make no mistake: the trust of a consumer isn't something that's subject to abuse for the purpose of earning a commission or a fee.  This woman could either afford a particular house or she couldn't.  The fact that she desired a house that was beyond her means didn't give highly paid professionals the right to misguide her.  She certainly didn't devise such a complex fraudulent plan-of-action on her own.  Professionals with fiduciary obligations were responsible for its initiation and facilitation. 

Don't you agree?

Comments (18)

Laurie Mindnich
Centennial, CO
Ed, I was of the belief, initially, that people were aware of what was going on, and chose to hear what they wanted to hear.  Recently, we spoke with a woman whose payments jumped from 2100/mo to 4000/mo.  She BARELY SPEAKS ENGLISH, and has no idea why she has to pay this increase, so wants to sell the house and get out from under it.  The lender told her that he will refinance her IF she makes the 4000./mo payments for a year.  No longer will I assume that people chose not to hear as much as I will assume that people were often told what they wanted to hear- and perhaps the conversation stopped at, "You can refinance next year at a fixed rate."  Woe to those that didn't, and now can't.
Nov 18, 2007 09:59 AM
Neal Bloom
Brokered by eXp Realty LLC - Weston, FL
Realtor CRS-Weston FL Real Estate
Nice job Ed...sounds quite familiar but I can't tell you if it was disclosed to the buyer...sorry to hear about your mom..I hope she gets better really soon.
Nov 18, 2007 09:59 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Laurie

The involvement of consumers in mortgage fraud is an intricate and almost mysterious thing.  Even when consumers know, they shouldn't be exposed to the fraud in the first place.  I'm sorry to hear about the people you describe and agree that they were told what they needed to hear. 

Nov 18, 2007 10:03 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Neal

Thanks for asking about my mom.  It looks like she'll be home in time for Thanksgiving.  She gave us a real scare this time. 

Nov 18, 2007 10:05 AM
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Ed, I agree, obviously. We need to remember always: consumers don't know as much as we do and rely heavily upon us for guidance and protection in a real sense.

You said it twice and that is the message loud and clear from your post.

Hope mom is improving and home for the holidays.

Nov 18, 2007 10:10 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Missy

I think it's so important to keep the word "dependency" in mind when working with consumers.  I'm confident that my mom will be fine.  Thank you! 

Nov 18, 2007 10:15 AM
Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos
Ed,  Very well presented post.  Your point about consumers not fully understanding what they are getting is right on the mark !
Nov 18, 2007 10:24 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Bill

It was a little hard to articulate my views for this post.  I'm not saying that consumers aren't culpable, I'm saying that they shouldn't hear about fraudulent options in the first place. 

Nov 18, 2007 10:33 AM
Bob Carney
Taylor-Made Deep Creek Vacations & Sales - Mc Henry, MD
Licensed MD/PA Real Estate Agent

Ed, the problem is the consumer doesn't know more than we do...and then leveraging that shortcoming.  We wonder why this industry gets such a bad name. 

We should always be the Trusted adviser.  Even when it doesn't benefit us. 

Hope your mom has Turkey at home.   

Nov 18, 2007 12:22 PM
Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

Ed it's palpable - the sadness some of these people feel. I agree with Laurie too, while some people go blindly forward in an unrealistic obsession to buy a home, many I am finding are just not aware. For the last year I find myself continually asking people to check their comfort levels, even when they are approved for more mortgage. And I hope I never meet any of these lenders you speak of in person, you might have to bail me out or provide a file and a cake.

I too hope your Mom is home for Thanksgiving!

Nov 18, 2007 12:45 PM
Tom Burris
NMLS# 335055 - Baton Rouge, LA
Texas/Louisiana Mortgage Pro - 13 YRS Experience

I think that lenders who accept seller seconds are the sleaze.... they propogate the sleaze by accepting this transaction.

If I had a dollar for every time an account rep for a lender asked me if the client could obtain a 'seller second' then I wouldn't need to be working any more.

 

Nov 18, 2007 12:56 PM
Randy L. Prothero
eXp Realty - Hollister, MO
Missouri REALTOR, (808) 384-5645
All involved in the fraud should be prosecuted and made examples of.
Nov 18, 2007 05:36 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Bob

The little cheat here and the slightly inflated appraisal there have spawned a culture of expectations that now has a voracious appetite.  The cycle has no beginning or ending.  

It looks good for Thanksgiving.  Thanks!

Nov 18, 2007 09:01 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Carole

I hear often from consumers who are blatantly guilty of having committed fraud at some level and are now losing their homes.  My message is unpopular in real estate circles.  Of course the consumers are guilty, but the fraud was initiated and orchestrated by professionals who wanted only to earn commissions and fees. 

Let me know where you're incarcerated should it happen.  I know people : )

Thanks for mentioning my mom. 

Nov 18, 2007 09:08 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Tom

No question, the system has been compromised to the point where loan programs encourage fraud.   I wish that I had a dollar for every "silent second" deal that I turned down during the late 1990's.

Nov 18, 2007 09:13 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Randy

You and I are on the same page.  All involved in the fraud should be visibly arrested, with the media present, with highly publicized convictions.  The public display would scare the hell out of people.  Unfortunately, the system doesn't work that way.  More often than not, the kingpins testify against everyone else and essentially walk. 

Nov 18, 2007 09:25 PM
Fran Gatti
RE/MAX Integrity - Medford, OR
Managing Principal Broker - RE/MAX Integrity

How horrible.  The offenders need to be found out and dealt with in the harshest way.  They should not be allowed to ruin any more lives. 

I have never heard of this type of deal and can't imagine any of the agents I deal with even thinking of such a thing, thank goodness.

Nov 19, 2007 02:08 PM
Lizette Fitzpatrick
Lizette Realty - Richmond KY - Lexington, KY
Lizette Realty, Lexington KY MLS - Kentucky Homes
Hi Ed....sorry to hear about your Mom. I hope she mends quickly. I haven't come across one of these deals. I feel sorry for the buyers that bought into it. Have a nice Thanksgiving!
Nov 19, 2007 02:43 PM