Lender guilty of "double contracting?" - Posted by Dan Simpson

import · November 15, 2000, 4:40pm

Posted by Brian on November 16, 2000 at 22:17:46:

JohnBoy,
Thanks for the response. I have taken your advice to heart. It was extremely informative. I have read alot of the posts since I have been new to the site (4 days) and noticed you have alot of great comments. I was wondering how you got started in real estate investment, and how your first deal happened?

I recently bought the CS course and have listened to it several times over and am still overwhelmed with the information. Where to begin… My head is spinning. This site has opened even more doors, thanks to people like you.

import · November 15, 2000, 4:40pm

Lender guilty of “double contracting?” - Posted by Dan Simpson

Posted by Dan Simpson on November 15, 2000 at 17:40:10:

Today my realtor (and no I dont like working with realtors, but the property in question is listed with one) was here and I was telling him about the lender that was going to lend me 85% of appraised value on a bank repo house I am interested in. After talking to the lender, he came up with the conclusion that the lender was using an illegal “double contracting” concept, and that he could lose his license if he were to be involved with this lender and its scheme. The way he explained it to me, “double contracting” is when the lender conspires with the seller (with me, the buyer, going along with it) to sell me a property based on a first mortgage of 85% (in this case -could be 80%, 90% etc.) of the appraisal and a second mortgage of 15% which is “forgiven” by the seller. So on this house I was interested in, the appraisal came in at 93k. The lender says they can get me a loan of 85% ($79,050) of this and all I have to do is pay their excessive junk fees which masquerades as their closing costs (around $3500, which i wont pay). Well, the other 15% of the appraisal value is then deeded and “forgiven” by the seller with a “letter of forgiveness”.
I guess the loser is the lender that ultimately ends up with the loan on the property. They are getting a 79,050 loan on a 93k property, with no knowledge of any 2nd or any “letters of forgiveness”.
Personably, I dont see why anyone should care,if it is a good deal for all parties. I understand the realtors position in being involved in something illegal. But what experiences have you guys had with this type of situation and what is the best way for me to handle it? BTW the seller in this case of the above mentioned property is a distant bank. Hard for me to believe that they would go along with the lender on this one…

import · November 17, 2000, 12:35am

I have a question… - Posted by KevinTX

Posted by KevinTX on November 17, 2000 at 01:35:51:

If the house is an REO and the seller is a bank who knows all the rules and regs than why would they deliberately fraud another lending institution? it seems like they would be just as much at fault as the buyer.

Also, is the agreement to forgive the 2nd a verbal agreement? If so what protection would the buyer have if the seller decided after the closing that times were tough and not to forgive the 2nd, or sold the note? Sounds like the buyer would be S.O.L.

KevinTX

import · November 15, 2000, 6:14pm

Good Advice From Piper and JB - Posted by phil fernandez

Posted by phil fernandez on November 15, 2000 at 19:14:34:

Dan,

Be careful here. I see a mortgage broker that wants to make his fee. You will be left to defend yourself in court with the bank.

Anything that you can come up with that the bank is not aware of would raise abig and I mean big red flag.

You have been given advice from two of the most knowledgeable creative real estate investors around, JPiper and JohnBoy. I’d listen to what they said.

import · November 15, 2000, 5:38pm

Other Problems… - Posted by JPiper

Posted by JPiper on November 15, 2000 at 18:38:37:

You may have met one of the dumber mortgage brokers around. Attempting to buy an REO property with a phoney second at a phoney purchase price is not going to be accepted by the seller (the distant bank).

Further, this loan is probably an owner-occupied type loan, not an non-owner occupied loan. One more element of loan fraud (assuming you don’t plan to live in it, which as I recall you don’t).

And finally of course the whole double contracting scheme is loan fraud.

Find another mortgage broker…this guy is an accident waiting to happen.

JPiper

import · November 15, 2000, 5:20pm

Lender guilty of - Posted by JohnBoy

Posted by JohnBoy on November 15, 2000 at 18:20:46:

If the lender has NO knowledge of a second being held by the seller, then WHY is there even going to be a second if the seller is going to forgive it anyway???

Usually it’s the lender will finance 85% LTV of the purchase price or the appraisal, which ever is lower, and they will allow the seller to carry back a second for the other 15%. This means they HAVE knowledge of the seller carrying back a second.

It’s when the lender is told the seller will carry a second and your “intent” is to have the seller forgive the second after closing WITHOUT the lender knowing about it is where the problem is. That is LOAN FRAUD! You are basically LYING to the lender about the second when their really won’t be a second since you and the seller are in agreement to have it forgiven after closing and NOT letting the lender know about.

But if the lender doesn’t even KNOW the seller is going to carry a second and they are telling you they will loan you 85% LTV without needing a down payment or a seller carry back for the difference, then you don’t even NEED to write up a second with the seller. Just have the lender loan the 85% LTV of the appraised value or the purchase price! My guess is the lender will NOT do a loan that way without the buyer putting something down or requiring the seller at least carry back a second for the difference. My guess here is that this lender THINKS and has been TOLD the seller is going to carry back a second for the other 15%. What the lender HASN’T been told is that the seller intends on forgiving the second after closing, meaning the seller really doesn’t intend on carrying a second. If this is correct, then this would be LOAN FRAUD!

Did you TELL the lender the selling intends on forgiving the second? If you TOLD them this is part of the deal and they say that’s ok and they don’t have a problem with it, then you would be alright. My guess is the lender would NOT do the loan if they KNEW about it. Are you dealing with the lender directly or are you going through a mortgage broker who is telling you this is ok to do? If this is a mortgage broker you’re using, GET A NEW BROKER! He’s LYING to you and only cares about making his fees off you. He won’t be the one to get in trouble if the lender was to ever find out about! YOU ARE! It’s YOU that will be signing all the loan papers, NOT the broker. It’s YOU who will be doing future deals from prision!

import · November 15, 2000, 8:00pm

Re: Other Problems…J.P. please expand on reply - Posted by AWwmi

Posted by AWwmi on November 15, 2000 at 21:00:20:

Please be patient that I’m new. If I understand this problem correctly, the fraud is intended as such. Basically, the scheme is to hoodwink the lending institution into thinking a buyer will be purchasing the property at an artificially inflated amount. Thus the lender,although using a FIXED percentage LTV rate, will ultimately end up giving more funds for the purchase.Example: actual cost of property is $85,000 therefore, the loan should be 85%of 85,000 or $72,250. However, if seller/buyer are in cahoots, they could set the selling price at ,lets say, $100,000. In doing so the lender would then be giving 85% of 100,000 or $85,000. Meanwhile, back at the ranch the buyer/seller seal the deal with spit and a handshake. The original deal was for $85,ooo but in order for the buyer to get 100% funding, the buyer/seller smoked the mirrors giving the illusion the selling price was going to be $100,000 (wink, spit,wink) instead of the actual $85,000. Am I getting the general no no of this problem? The excess artificial inflated price is then “forgiven” by seller. Aww, thats what friends are for…keep shining, keep smiling… and therefore, the only property that will concern seller/buyer is cell block C…?

import · November 15, 2000, 9:05pm

Re: Lender guilty of - Posted by Brian

Posted by Brian on November 15, 2000 at 22:05:40:

I am a newbie, very new to this site and realestate investing. I had a question related to this topic of “shady” mortgage brokers. In trying to find out what money could be lent to me for buying investment property, I got in touch with a mortgage broker who is a friend of the family. I explained to him my interest in investing in real estate and was wondering what kind of money I could borrow and what rates would be. He, knowing my personal situation, said “the problem for you is not borrowing it is the fact that you willnot be living in the property you are buying.” He went on to say that he could overcome this for me by telling the prospective lender that I have the “intention” to live in the property, and that if I rented it to someone, I would simply state that I had the orignal intention to live in this property but someone came along and offered me rent over and above my mortgage payments, and therefore I could not refuse. Is this legal? Sorry about the long question.

PS. Though I am new, the information you guys are sharing is incredible and very generous.

Thanks in advance.

import · November 15, 2000, 8:40pm

This may be what is happening… - Posted by Dan Simpson

Posted by Dan Simpson on November 15, 2000 at 21:40:48:

JohnBoy,
I am going in to talk to the lender tomorrow to find out exactly what they are trying to pull. The deal is, the seller is a bank in a far distant state, with whom I have had NO contact with. But I am here to say that the only people that could be talking to the seller is the lender. What I think is happening is that the underlying lender of any loan that the mortgage broker should make to me is unaware of the situation at hand. They could be telling the underlying lender that the SALES PRICE is 93k, and that they are lending me 85% of that (79,050) and that the seller (the distant bank) is “forgiving” the remaining amount. Or maybe they are flat out telling the underlying lender that the seller is doing a second with me even though they are not. They may not even need the sellers cooperation to pull this off with the underlying lender. They could just simply tell them that I either paid them 15% down or that there was a second involved. Most likely maybe they are telling the underlying lender that I paid them 15% down. I have a feeling that the underlying lender wont read much into it once they see that the appraisal is for 93k and that I have good credit and they have a loan at only 85% LTV.
BUT THIS IS NOT TO SAY THAT I AM GOING TO DO SOMETHING ILLEGAL! IF THIS IS ILLEGAL, THEN ITS “SAYONARA” TO THE UNSCRUPULOUS MORTGAGE BROKER!
Dan

import · November 15, 2000, 10:02pm

Re: Lender guilty of - Posted by JohnBoy

Posted by JohnBoy on November 15, 2000 at 23:02:15:

The main issue is what your intent is. If your intent is to just tell the lender you intend on living in the property while knowing you really don’t intend to, then your lying to the lender by deceiving them to make a loan.

There may be a case where someone was planning to live in a new home they wanted to buy. They buy the home with the intent to live in the property. They assumed by the time they close on the purchase that they would have sold their current home they occupy. After closing on the new home, they still haven’t sold the old home. Since the old home hasn’t sold and since they can’t afford to pay two mortgage payments, they decide to try and rent out one of the homes. With being in a financial bind having to make two mortgage payments, they decide to rent which ever home they can get a renter willing to take first. They find a renter that wants the newer home they just purchased, so they go ahead and rent that home out until they can sell the older home. Their original INTENT was to occupy the new property. Since unforeseen circumstances with being unsuccessful in selling their first home has caused them financial problems, they ended up having to rent out the new home they just purchased. They intended to truely occupy the property. Under the circumstances it would be hard for the lender to prove they never intended to live in the property.

In your case, you know going into the deal that you don’t have any intentions of occupying the property. Your argument is that someone just happened along that wanted to just rent the property from you and made you an offer you just couldn’t refuse! Personally, I think you have a weak case with that and you could end up with the lender calling your loan due or possibly claim you frauded them by lying on your loan application and by signing papers that you claimed you were going to occupy the property. Also, most mortgages have a clause in them stating you can not rent out the property for one year or they could call the loan due.

Can you get away with it? Maybe. Do people do it all the time? Some do. Do they ever get caught? Some do, some don’t. The question is, is it worth it and are you willing to assume the risk of being one of the ones that don’t get caught?

If the lender was to find out, you can be sure your friend the mortgage broker is going to deny knowing anything about this. YOU are the one that has to sign everything, not your broker friend.

Quite frankly, your broker friend is WRONG! The problem isn’t with whether you will occupy the property or not. The problem is your BROKER FRIEND! It’s obvious he doesn’t have any relationships with the RIGHT lenders to accomplish what you’re trying to do. There are lenders out their that will finance the borrower without them putting any of their own money down. They will allow the seller to carry back a second in lieu of the borrower putting anything down. There are a lot of lenders that will do 5% down for non-owner occ. This of course will all depend on the borrower, how strong they are, what their credit is like, etc.

How many times do you think you can get away with doing this and just continue to tell the lender, “You won’t believe this, but this guy just happened along and wanted to rent my new property that I’m supposed to live in and just happened to offer me such a good price on rent he would pay, so I couldn’t pass it up, sorry!”?

The biggest issue here is, what your morals are, your conscious, how well you can sleep at nights and if it’s worth worring about everyday whether the lender will ever find out about it. It’s sounds obvious your broker friend isn’t much of a friend to put you at risk over this just so he can make a quick buck off it!

import · November 15, 2000, 10:17pm

Re: This may be what is happening… - Posted by JohnBoy

Posted by JohnBoy on November 15, 2000 at 23:17:54:

I’d be curious as to how the mortgage broker intends on getting around all this with the HUD-1 statement. This will show whether you put any money down or not. Most lenders require verification of funds also. If the distant lender is willing to agree to hold a small second I doubt they will just forgive it after closing. They will want you to pay on it. Usually the lender requires to see a copy of the settlement sheet before they fund the loan. If the distant lender isn’t involved with this, which I doubt they would be, then it sounds like your broker may be planning on submitting a phony settlement statement to the lender to get it funded. If the closing is going to be at a title company then they would have to be involved with this also since the lender will be looking to them to oversee the closing and fax them a copy of the settlement sheet prior to wiring the funds.

I’m not quite sure on how your broker is attempting to pull this off. He might not even know what he’s doing which would all come crashing down at the closing, or he may know what he’s doing which sounds like he could be involved with committing some serious fraud.

If you figure out what and how they plan on closing this deal let us know. I’d be curious as to what he’s attempting to do with this.