Buyer to "contribute" towards paying off second lender, out of escrow

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Permalink Reply by Terry L. Osburn on January 15, 2010 at 6:31pm

Actually this has been happening more and fraud has been committed in many of the cases as it is not shown on the HUD.

REMEMBER the first lender dictates the total amount that the 2nd can receive.........Now if all is amicable and it is presented as such on the HUD , no issue from what I understand. Buyer would obviously need to agree and should be told this upfront at time of offer submittal that they may need to contribute.

However if the first dictates total amount 2nd can receive is $10,400 and the 2nd comes back and states they want $15000 and tells you to write out a check after the fact for the difference and the buyer pays the difference or whomever does not really matter, they are asking you to commit fraud... The very thing that has caused so many issues in the past with monies passed after the fact.

If it is a known up front, part of the HUD statement, then from what I can muster is ok. From what I have seen and been told though, these requests are NOT on the HUD statement and the First lender is unaware that the buyer is paying money to the 2nd after the fact. Therein lies a major problem........

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Permalink Reply by Kent Dills on January 15, 2010 at 6:40pm

Pacita, I've got one going right now with Aurora as the 1st and Greentree as the second. Aurora will only allow Greentree to receive $2,600 (half of what was offered on estimated HUD1). I tried to get Greentree 10% of the $52,000 they were owed. Oh well. Seller is busted and can't contribute and Realtors are taking a discount since it's not an FHA/HUD, or Fannie/Freddie backed loan.
So the $2,600 difference is coming from the buyer and it will be put on the HUD1. Aurora negotiator even said in her email (we don't care where the $2,600 comes from - buyer, seller, Realtors, etc.) It's perfectly legal, ethical, moral, etc. and is what it's taking to GET THE DEAL DONE! :-)

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Permalink Reply by Bryant Tutas on January 15, 2010 at 7:15pm

They was a a blurb about this in our Florida REALTOR magazine this month. Lenders asking for money outside of closing. This is not a good trend and as REALTORS(R) we need to make sure our customer/clients our getting legal advice about this. In my opinion this is fraud. The only reason it's not on the HUD is to hide it from the 1st.

What the 2nd should do is just have the seller sign a note.

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Permalink Reply by Guy Lofts CRS on January 15, 2010 at 10:59pm

You are in very grey territory, I agree with the other advice.
Make sure it is on the HUD. The logic is that is there is extra $$ then the first lein holder wll want it.

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Permalink Reply by Tracy Howard on January 16, 2010 at 6:51am

IMHO, this is fraud, plain and simple, and should NEVER happen. If a second m'ee is allowed to do this on one deal, then what's to stop that m'ee from doing it on all its deals? The 2nd m'ee may argue that they are "as entitled" to their "share of the pie" as the 1st m'ee is.

In my state, the 2nd has the opportunity to foreclose on its lien the same way the 1st does. But, of course, the 2nd will have to pay off the 1st position in order to do that (which can be negotiated, but rarely is approved by the 1st). They don't want to pay that price, so instead they ask us as Realtors to hold the bag for them by committing fraud and putting ourselves at risk.

The 1st (as the foreclosing lender) is driving the bus. The 2nd has remedies if they care to use them. In my daily reading of real estate news, I see more and more licensees getting in trouble for this kind of stuff. Just say "no" and go on to the next deal. I know it's hard to walk away from that commission check, but would you rather have no license (and therefore no more commission checks) in your future. It's not worth it to me!

My 2 cents.

Tracy Howard
Keller Williams Realty Downtown
Denver, CO

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Permalink Reply by Pattilynn Guilford on January 16, 2010 at 7:49am

Every cent that the 2nd is getting has to be on the HUD and not after the closing. HELOCs are a strange animal and you must get your seller to understand that essentially its a line of credit, consumer debt and the rules applying are different.

Some banks are negotiating the HELOCs well before approval of a short sale, even if the payments are current,
like Regions. This is what needs to happen. If the HELOC can be negotiated down and the seller can make "a significant payment on the principle" to clear title, then there is only the first involved to short. This is the simplest way to remove the lien prior to submitting a contract.

So the first two questions to ask your sellers these days - Do you have a Heloc and how much do you owe?

But in my opinion - having the buyer pay towards a sellers debt is asking for trouble in the future. When we start seeing ads pop up in two years - "Did you get stiffed in a short sale? If so, then call our law offices for help."

Yes, this business is a tough one and we have to always be thinking about our liability and what the future may hold.

Word up - HUD just hired 300 investigators to investigate fraud.



Tracy Howard said:

IMHO, this is fraud, plain and simple, and should NEVER happen. If a second m'ee is allowed to do this on one deal, then what's to stop that m'ee from doing it on all its deals? The 2nd m'ee may argue that they are "as entitled" to their "share of the pie" as the 1st m'ee is.

In my state, the 2nd has the opportunity to foreclose on its lien the same way the 1st does. But, of course, the 2nd will have to pay off the 1st position in order to do that (which can be negotiated, but rarely is approved by the 1st). They don't want to pay that price, so instead they ask us as Realtors to hold the bag for them by committing fraud and putting ourselves at risk.

The 1st (as the foreclosing lender) is driving the bus. The 2nd has remedies if they care to use them. In my daily reading of real estate news, I see more and more licensees getting in trouble for this kind of stuff. Just say "no" and go on to the next deal. I know it's hard to walk away from that commission check, but would you rather have no license (and therefore no more commission checks) in your future. It's not worth it to me!

My 2 cents.

Tracy Howard
Keller Williams Realty Downtown
Denver, CO

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Permalink Reply by Tracy Howard on January 16, 2010 at 8:33am

Great reply, Pattilynn. We just had a $40,000 fine for a similar circumstance, and permanent revocation of the license (a broker in business for many years who should certainly have known better). The short answer should be, "If it's outside the HUD, then it's fraud to the parties." Don't do it.

I don't see this as a gray area at all -- it's right there in black and white: The HUD must reflect the entire transaction, down to the penny.

As Kent said, you can still get deals done and keep it on the HUD, if ALL parties are in agreement. It takes a little more negotiating, and a lot of patience, but it can be done. We as listing agents must do everything we can to keep the iffy deals clean. I don't want to hear from some lawyer in two or three years saying that I allowed it to be done outside the closing and therefore I am responsible.

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Permalink Reply by Terry L. Osburn on January 16, 2010 at 11:05am

http://www.cnbc.com/id/15837671/

Pacita check out this link.....How timely for this question........

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Permalink Reply by Pacita C Dimacali on January 16, 2010 at 12:08pm

On the first escrow, I did have the distribution of funds to the two lenders spelled out in the addendum and in the HUD. So that was not a problem.

The second one was the same lender (Wells Fargo) and the distribution was per the short sale negotiator who handled both loans.

So the key here is to make sure that the first lender agrees to this arrangement and that this is reflected on the HUD. This is what we're facing now: to get the lenders to cooperate.

Most recent case ---
First lender loan balance is $480K
Second lender loan balance is $100K
Offer is for $525K
First lender offered to pay off second for $15K (out of $525k offer, first loan is satisfied, but there are selling expenses to contend with).
But second lender wants $40K
Buyer will offer $25K to pay off second.

So as long as this arrangement is approved by the first and it is reflected on the HUD, this is fine, right?

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Permalink Reply by Pacita C Dimacali on January 16, 2010 at 12:23pm

Terry,

Thanks.....I'm working towards getting the first lender to agree fo have the second buyer help pay off secon lender. After doing the HUD statement based on this arrangement, first lender would be in the negative for "only" $13K.

So hopefully this will be approved. It's the last resort. Either it's going to be a foreclosure or a bankruptcy, neither of which is a good outcome for all concerned.

Terry L. Osburn said:

http://www.cnbc.com/id/15837671/

Pacita check out this link.....How timely for this question........

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Permalink Reply by Pacita C Dimacali on January 16, 2010 at 12:28pm

Tracy ----

When in doubt, ask the experts.

And as you say, black and white, on the HUD. No exceptions.

Thanks.

Tracy Howard said:

Great reply, Pattilynn. We just had a $40,000 fine for a similar circumstance, and permanent revocation of the license (a broker in business for many years who should certainly have known better). The short answer should be, "If it's outside the HUD, then it's fraud to the parties." Don't do it.

I don't see this as a gray area at all -- it's right there in black and white: The HUD must reflect the entire transaction, down to the penny.

As Kent said, you can still get deals done and keep it on the HUD, if ALL parties are in agreement. It takes a little more negotiating, and a lot of patience, but it can be done. We as listing agents must do everything we can to keep the iffy deals clean. I don't want to hear from some lawyer in two or three years saying that I allowed it to be done outside the closing and therefore I am responsible.

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Permalink Reply by Tracy Howard on January 16, 2010 at 5:15pm

Good luck, Pacita, I hope it all works out for you. Just don't sign the HUD if all the funds aren't reflected on there -- who's paying them and what they're being used for. K?

BTW, I'm not an expert, but I have a lawyer who is. He would kill me if I tried to let a 2nd m'ee make a deal outside a closing with the buyer (or, more likely, he would visit me in jail and ask me how I could have let this happen - what goes on the HUD is the listing agent's responsibility). The buyer is not responsible for the seller's debts, but this kind of stuff can get those lines of responsibility all out of whack.

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