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Short Sale Fraud Situation in Natomas About to Hit MLS
It is a federal crime to commit short sale fraud.
Talk about the signs of short sale fraud. My mouth fell open when I read the email from a short sale agent in southern California who proposed we work together on a Wells Fargo short sale in Natomas. He obviously found my name online because I am a well known Sacramento Realtor who also has closed more short sales over the past 10 years than any other single agent in town. I am sharing this story with my readers as a public service. I hope none of you ever get involved in a situation like this, whether you are a buyer, a seller or a Sacramento real estate agent.
What’s more astounding is after I pointed out at least 6 possible infractions, the agent still clung fast to his plan. He offered to split the commission with me, but the money is immaterial. I value my real estate license and my integrity.
This guy’s plan, let’s call him Moe, is to first underprice the property by about $100,000. He thinks he can do it because he’s been talking with Wells Fargo about this short sale supposedly for a year and pushing for that much lower sales price. It’s possible his clients have filed for bankruptcy as there seems to be a lawyer involved in this suspected short sale fraud. Not to mention, a year is too long to negotiate with Wells Fargo. Something else is up.
At first glance you might say the superficial price doesn’t matter because the property will be for sale on the open market and the highest offer will prevail, especially in a seller’s market like our present market in Sacramento; but the way Moe wants to structure this, that will not happen. Moe claims he has successfully closed lots of short sales over the past 8 years by doing what I imagine authorities would call committing mortgage fraud, short sale fraud, and / or violating the Code of Ethics.
Besides underpricing the property, Moe intends to cut out buyer’s agents from the sales equation by offering a ridiculously low commission in MLS to buyers’ agents. He was very clear in his mail about focusing solely on dual agency. Moe calls it “maximizing our work and sales commissions.” I call it price fixing, bulldozing the Sherman Act, and violating Articles 1, 2 and 3 of the Realtor Code of Ethics, but let’s not quibble. On top of this, he wants to charge the buyer $10,000 for negotiating the short sale, a service I offer FOR FREE to all of my sellers as part of my commission and fiduciary duty.
I considered simply paying Moe a referral fee and handling everything myself, to ensure the short sale was conducted in accordance with real estate law and the Code of Ethics. After reflection though, I have passed. Because there is really no way to enter into a relationship with Moe and keep my hands clean. Some of that icky shit would rub off somewhere. That’s not an association any Realtor needs. Nobody needs to get mixed up in short sale fraud for any reason. Oh, there’s never a dull moment in Sacramento real estate.
There Are Enough Crooks in Sacramento Short Sales
We have enough crooks in Sacramento short sales that we, ourselves, don’t need to add to the mix, whether we are a seller, a buyer or a real estate agent. I tell my short sale sellers that they need to keep their noses clean. Don’t do anything that the lender can later construe to be mortgage fraud. Because if a seller is dishonest, the bank can reverse the release of liability for that short sale and pursue a seller for the remaining balance, which is the whole reason to do a short sale in the first place. To get that release of liability.
I realize that sellers are upset with their banks, and they hate the fact they’ve been strung along for years paying on rotten loans that they can’t afford but that is no reason not to level with the bank during a short sale. Sellers also tend to worry that if they don’t make up some facts to color their financial situation the bank won’t approve the short sale. What they don’t realize is the banks typically prefer a short sale to a loan modification.
If you’ve been in the middle of a loan modification or attempting to obtain a loan modification and been turned down, you’re probably a prime candidate for a short sale. Especially if your bank is one of those institutions established for the sole purpose of picking up worthless mortgages. The bank might expect you to short sale.
Sometimes sellers want to say, for example, that they live in the property so they can apply for a $3,000 relocation incentive. If they don’t live in the property but instead live elsewhere, that could be mortgage fraud if they lie about it. Collecting $3,000 under false pretenses could cause a bank to withdraw the release of liability on that short sale after it closes. The bank could also demand the return of the $3,000, and then prosecute the perpetrator for a million dollars-plus. Mortgage fraud is a federal crime.
California Civil Code 580e (effective 2011) gave sellers the protection and the release of liability in a short sale, but it also takes it away if the seller commits mortgage fraud. If you’re contemplating such an act, you might want to ask yourself if the consequences are worth the risk. It’s not a harmless act of omission. The bank will track your credit card purchases, examine where your credit card statements are delivered and check to see if cable TV is still in your name. Don’t move in furniture because the BPO agent will open the refrigerator and check to see if the washer and dryer are connected.
You either live in the property or you don’t. Don’t mess around.
How the Short Sale Arm’s Length Can Backfire on a Seller
Some Sacramento short sale sellers could be headed for a big surprise down the road after signing an arm’s length. I know this because I’ve talked with a Sacramento short sale agent here and there who see nothing wrong with letting the parties to a short sale make agreements outside of the closing. They can agree to all sorts of things that are against the law and without the bank’s knowledge, but a common happenstance is over possession. Sellers sometimes have a hard time moving so they want to rent back, but most of the short sale arm’s length agreements prevent a rent back. Therein lies the problem.
Now, you can ask the bank for an extension but a short sale extension is not always possible. Especially if the bank has already issued an extension. A bank is not always eager nor willing to issue a second extension. I’ve had banks say they would close the file and start the short sale over. In some instances, that solution would be OK with a seller because not every seller is in a rush to move — especially if the seller isn’t making a mortgage payment. Free rent doesn’t come along every day.
I can tell my sellers we are closing on a certain day but that doesn’t necessarily mean they understand that they have to move out. Doing a short sale is an overwhelming process for many people. Each is different and can be convoluted, so it’s sometimes difficult to predict what a seller may or may not understand. But one thing is for certain. If a seller violates an arm’s length agreement and works out some kind of rent-back with the buyer, it might seem innocent but it can cost the seller big-time. If the parties agree to a lease back, for example, and the arm’s length prohibits such a lease back, it’s possible the bank could rescind the deficiency waiver.
There is a little clause in CA Civil Code 580e that says the deficiency waiver does not apply in the event of mortgage fraud. If a seller intentionally defrauds the bank, the bank might demand that all of that forgiven debt be repaid. Apart from the ethical implications, there could be legal ramifications and consequences to violating the arm’s length. My advice is just don’t do it. Don’t go through the headache and heartache of a short sale just to end up with the deficiency back in your lap.
It’s in a seller’s best interest to plan to move out on or before closing in a short sale. The agents don’t set the closing date, the banks do. And right now, because of the expiration of the mortgage debt relief act, many approval letters are coming in with fewer than 30 days to close. Everybody and their uncles are trying to hit that December 31 closing date.
