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?
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