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The "Silent Second" Revisited!

Real Estate Agent with Integrity Real Estate

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.

Kaye Thomas
Real Estate West - Manhattan Beach, CA
e-PRO, Manhattan Beach CA

Jeff Belonger wrote:


One thing that was slightly mentioned in this post, but wasn't separated in distinction was.....  what about the buyer buying a house, having the seller do a seller held second....  it's recorded legally and all... but then releases the 2nd mortgage about 2 months after settlement. Is this fraud? Does it only become fraud if known prior and not after the settlement, that the seller decides to forgive this note?  This is a different situation and topic and I wanted to see if you know anything about this. thanks

Anything you do that is different from what you state to the lender is fraud.. in this case the buyer  is actually receiving a credit,  which is probably considered cash byr IRS, without knowledge of lender. 

Dec 26, 2006 11:08 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Ed, I just became aware of this post, and I am glad that I read it because it clarified a couple of things form me. I have bookmarked for future reference.  Thank you for a very well written and clear post.

Dec 29, 2006 03:49 AM
Cindy Espinoza

I'm a notary signing agent and was contacted this morning by a broker wanting me to witness a new Deed of Trust (mortgage) and note, pick up a "silent second" note, have a deed release signed, and overnight these items to the broker.  Broker got my contact information from a title company that had used my services, and I asked why broker wasn't using the title company.  Seller didn't want to use a title company, provide closing instructions etc since this involved private financing, I was told.  Broker also represented that the title company had refused to take this transaction.  I was asked to invoice seller directly, which is another peculiarity of the proposed arrangement and conveniently links my name to the seller.  Oddly, the broker didn't identify himself or his mortgage firm.  Broker represented that the lender knew of the silent second and that the amount was figured into the debt to income ratio, which was irrelevant to me since the broker's role is to shop the transaction to lenders, but is not an employee or agent of the lender and so broker therefore lacks authority to speak for the lender.

Feeling quite uncomfortable by this time, I declined to participate in a highly unusual transaction that involved a type of transaction frequently associated with mortgage fraud.  I was quite distressed that the proposed transaction had been panned by a title company, so that there were no title and escrow protections or fiduciary controls to protect the parties.

Accordingly, I refused to provide my services and risk becoming a party to mortgage fraud.

May 07, 2007 06:49 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


Thank you for reaching out to me the way that you did.  I will never turn you in to authorities or divulge your identity.  I will, however, encourage you to make the correct decision for you which will ultimately prove to be the best decision overall.  I've read your description of the transaction and still do not comprehend all of the nuances.  It makes no difference.

The reality: If the deal makes you uncomfortable theres something wrong with it.   Follow your instincts and do not fear the bad guy.  He or she cannot hurt you.  Do whatever you have to do to sleep at night even if it means finding another job.

Send me an email if you want to discuss this matter further. 

May 07, 2007 10:28 AM
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI
Godd reading. There are so many ways to get screwed!
May 27, 2007 04:16 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


Thanks for stopping by. 

May 27, 2007 09:24 PM
"The Lovely Wife" The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL


Is this your very first post?

You haven't deleted any have you?

Jun 05, 2007 12:25 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


This was my very first post.  I took off a couple of days during the holidays last year and decided to experiment.  None have been deleted. 

Jun 05, 2007 12:35 PM
Jo-Anne Smith
Oakville, ON

Interesting post , Ed.  It's been awhile since I took my Mortgage Financing course and I don't think we even covered much of the stuff you talked about here.

I did know a REALTOR who used to lend the downpayment to the buyer of one of her properties and the buyer would not disclose this to the lender. Instead he/she/they pretended the money came from a family gift somewhere. This realtor sold a lot of low priced properties to low income people this way.  Not quite the same as a silent second, but somewhat similar, I guess. Only thing is I do not believe the loan was registered against the property.


Jul 24, 2007 12:55 PM
Tony Gallegos
Cognicorp Mortgage Banking Advisory - Marietta, GA
Ed - Glad I found this post. It is both very imformative and is going to be put on my Cicerone's Faves next week. key information to put out!
Jul 24, 2007 04:52 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


Interesting that you've said that.  I've encountered many such situations where a private source will finance down payments at the request of a  select group of real estate agents.  Usually, the private sousrc is a person retired from another field and now working as a real estate agent.  It's every bit as illegal as the silent second and possibly more prevalent.

Jul 24, 2007 10:22 PM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


Thank you.  I always thrilled to be included in Cicerone's Faves. 

Jul 24, 2007 10:29 PM
Neal Bloom
Brokered by eXp Realty LLC - Weston, FL
Realtor CRS-Weston FL Real Estate


I included this in my last post as a feature for Frist Blogs.

Sep 22, 2007 11:46 PM
Evan Hodge

Excellent write-up!  I was just solicited by a realtor who has a couple transactions like this and I am so glad I found your post.  Thanks.



Nov 09, 2007 08:40 AM

I believe I have been the victim of fraud as a buyer.  The seller, realtor, and mortgage broker all told me this was a perfectly legal practice, and the seller would disolve the silent mortgage shortly after closure.  Now the seller is threatening me with law suits for default on this 2nd mortgage, which would result in foreclosure down the road.  Am I going to lose my home if I seek help?  Am I facing criminal charges?  I am a first time buyer @ the age of 53, and I am heart sick from all of this.  It's beginning to effect my work, and my health.

 I love my home, and never want to leave it.  But I can't live this way any longer!

Please help me.

Nov 14, 2007 09:18 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate


There are a number of questions that I need to ask before making suggestions.  I don't know how to contact you. My email address is edr@rybconsulting.com.   

I don't think that you're necessarily going to lose your home and I always think that it's a good idea to seek professional advice.   Please contact me and I'll do whatever I can to help you. 

Nov 14, 2007 09:27 PM

I have another scenario:  I refinanced some time ago.  As a result, I had both a first and second with the same lender (PMC BanCorp).  Later, my first was sold by PMC to CitiMortgage.  PMC kept my second, but referred to it as a 'silent' second in later conversations.  Now I'm worried!  My original documents (both the first and second deed of trust) show PMC as the lender/beneficiary.  Is there a legal issue for me here?  I provided PMC with all my information up-front at the time I refied. I disclosed everything to them and wasn't aware of any issues.  The value of my home has decreased significantly (worth less than I owe on my first) and I was going to see about getting the second wiped out.  I just want to know what I'm headed for!  Any advice will be appreciated.

Aug 20, 2010 12:49 PM

Its not fraud if the primary lender knows about it, and maybe even uses it to help a buyer get into a home.

May 25, 2011 07:08 AM
Debbie Walsh
SHAHAR Management - Middletown, NY
Hudson Valley NY Real Estate 845.283-3036

Ed - great post!  Kudos to you...I was taking my RE education for the new year and they referenced your article in the education course.  Congrats!

Jan 09, 2018 08:49 AM
Ed Rybczynski
Integrity Real Estate - Havre de Grace, MD
Your Source for Local Real Estate

Wow!  Thanks for letting me know.  I had no idea that anyone was still paying attention to my old posts.  I would be curious to know who the instructor was?

Jan 09, 2018 09:07 AM