Realtor Alert – Short Sale Fraud

Posted on by Phil Querin

Introduction. Recently there have been some anecdotal reports that real estate licensees, presumably with the knowledge and consent of sellers and buyers, have engaged in some practices that could be regarded, at best, as “sketchy.”

Here is the issue:

In some short sale transactions, there have been apparent instances of brokers not submitting repair addenda to the lender/servicer whose consent is being sought. This would most likely arise in situations where sellers – who may not contribute funds to the transaction without their lenders’ consent – enter into a side agreement with buyers to make certain nonessential[1] repairs. This side agreement, usually memorialized on an addendum to the Sale Agreement, is concealed from the seller’s lender. In some cases, this omission may also include the mortgage lender who is funding the buyer’s purchase of the short sale property.

Discussion.  What follows is a list of reasons[2] why this practice should be avoided:

1.     Listed below are direct quotes from the written conditions imposed by several lenders in their short sale consents:

  • The purchase contract may not be amended without Wells Fargo Bank, N.A. prior written approval.
  • Approved seller concession to buyer’s closing costs (Itemization of concessions):
  • The final estimated HUD-1 must comply with the approval terms noted above and must contain complete buyer and seller information including a forwarding address for the seller. In addition, the Settlement Agent must provide the fully executed HUD Closing Worksheet, for FHA loans.
  • Bank of America, N.A. reserves the right to revoke and/or modify the terms and conditions of this short sale approval in the event that (1 any information provided and used as a basis for our approval changes and/or 2) if we discover any evidence of fraud and/or misrepresentation by any parties involved in the transaction.
  • Any change to the terms and representations in the Agreement must be approved by us in writing. We are under no obligation to approve such changes.
  • There are no agreements, understandings or contracts relating to the current sale or subsequent sale of the Property that have not been disclosed to the Lender.
  • A signatory who makes a negligent or intentional misrepresentation agrees to indemnify the Lender for any and all loss resulting for the misrepresentation including, but not limited to the repayment of the amount of the reduced payoff of the Property.
  • Each signatory understands that a misrepresentation may subject the party making the misrepresentation to civil and/or criminal liability.
  • I/we fully understand that it is a federal crime punishable by fine or imprisonment or both to knowingly and willfully make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1001, et seq.

2.     Set forth below is the applicable provision of 18 United States Code § 1001:

Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—

(1)   falsifies, conceals, or covers up by any trick, scheme, or device a material fact;

(2)   makes any materially false, fictitious, or fraudulent statement or representation; or

(3)   makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry;

shall be fined under this title, imprisoned not more than 5 years or, if the offense involves international or domestic terrorism (as defined in section 2331), imprisoned not more than 8 years, or both.

3.     Oregon’s Licensing laws [ORS 696.805(2) and 696.810(2)] provide as follows:

696.805 Real estate licensee as seller’s agent; obligations.

(2) A seller’s agent owes the seller, other principals and the principals’ agents involved in a real estate transaction the following affirmative duties:

(a)   To deal honestly and in good faith;

(b) To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase; and

(c)  To disclose material facts known by the seller’s agent and not apparent or readily ascertainable to a party.

 696.805 Real estate licensee as buyer’s agent; obligations.

(2) A buyer’s agent owes the buyer, other principals and the principals’ agents involved in a real estate transaction the following affirmative duties:

(a)    To deal honestly and in good faith;

(b) To present all written offers, written notices and other written communications to and from the parties in a timely manner without regard to whether the property is subject to a contract for sale or the buyer is already a party to a contract to purchase; and

(c)  To disclose material facts known by the buyer’s agent and not apparent or readily ascertainable to a party.

4.     Sections One and Two of the National Association of REALTORS’® Code of Ethics provide as follows: 

Article One states:

“When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS(r) of their obligation to treat all parties honestly.”

Article Two states:

“REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction.”

Conclusion. On several different levels, the failure to inform lenders of material information could be construed as loan fraud.  While it is true that the seller’s lender  is not a direct “party” in the sense of being the seller, there is no question but that it is the decision-maker and [in legal parlance] the third-party beneficiary of the transaction, since it is their loan that is being “shorted.”

Secondly, the sellers’ lenders issue a written consent the short sale transaction that contains clear contractual conditions.  This document is signed by the parties and in some instances the agents are also asked to sign.  The lenders rely upon this document when issuing their consent to the short sale.

Third, the definition of “loan fraud” in 18 USC § 1001, is sufficiently broad as to include the broker’s involvement as a crime, even if they do not actually sign the lender’s consent to short sale form.  

Lastly, on ethical and licensing levels, the withholding of material information from lenders who are asked to voluntarily waive recovery of the balance of their loan can likely be regarded as violations.

[Perhaps the fastest way to find out why Chase is called “Chase” is to conceal from their bank a repair addendum in a short sale! PCQ]



[1] I say “non-essential” because if the home was in need of repairs critical to the safety or habitability of the home, the cost would more likely be absorbed by the lender in order to sell the property.  A good example would be a home with visible black mold [Stachybotrys chartarum (Stachybotrys atra)], which is a known health hazard. A non-essential repair might be installing new carpeting.

[2] I have intentionally omitted a RESPA discussion, since it is not absolutely clear that this conduct would, in all cases, constitute a violation. Much depends on the nature and amount of the concession.  However, it is safe to say that a failure to disclose the concession on a HUD-1 may constitute a violation.

Posted in Broker Risk Management, Legislation - Federal, Legislation - Oregon, Lenders, Market Conditions, Miscellany, Real Estate/Distressed, Realtors, Short Sales | Tagged , , , , ,
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