ouch…true, but ouch.
Wow,
I’m going to have to disagree with those of you who think this is fraud and here’s why:
First, let’s keep in mind that a seller second is just that… a seller second. They are in no connection (in this case)with the first lien holder… and when the owner chooses to pay this off, it is up to them not the 1rst lien holder.
Second, to make an agreement with a buyer to allow the terms of a seller second to expire after a period of time whether it is one day, 6 months or a year is a seperate agreement and is considered to be between the buyer and seller… a contract which is known to be considered “legal” by any terms does not have to be conveyed to the lender of the first lien holder unless requested or stipulated… in which case, I would find another loan officer and lender…
I have closed many a deals where the seller and buyer have agreed on a “forgivable” seller second and the 1rst lien holder/lender never asked to see there seperate contract, because it was not an issue.
Of course, the title company needs to record the agreement for there purposes… but the first lien holder doesn’t or shouldn’t even really care.
The legality of the issue lies in the contracts… not whether the lender will allow a forgivable seller second or not… The lender does not make laws… and should not be advising loan fraud as such… They are in the business to approve loans… that’s it… Underwriters are underwiters, Account Executives are Account Executives and Attorneys are Attorneys… Be clear on who knows what in this business.
Now, If the lender feels that you need to have a solid contract between the seller and the buyer and that you have to keep the note on the second for “x” amount of days, then call me… I’d like to ask why this particular lender has made a law on how long should carry a second note with an entirely different entity… This does not make sense… a prep-pay penalty on the second when they don’t even carry the second?
Wouldn't that note sale be considered something the lender should be made aware of? I can't imagine most lenders being ok with it.So Ben, If this 2nd had been paid off say six months down the road, Is it the responsibility of the owner to call the first lien holder and ask them if this is ok?
My question is what happens to the other 20% that I forgave and am I taxed on it or do I write it off ?write it off. you didn't profit from this.. Your net profit is what counts to a cpa.
If the second is recorded with the title company, then this is not fraud…
Does the first lien holder like this type of purchase… Well probably not… but that’s business… and if I needed to sell a property to someone and they needed help getting into it… a forgivable seller second would be a nice way to go.
Please tell us what banks you have discussed this issue with. Was your conversations with an account executive or their compliance department?Ben, it doesn't matter... With all of the posts you ahve here, I would expect a greater depth of knowledge from you. Your inexperience shines.
Lscalder is correct.
You may have been able to get away with what you were doing but the investors on this board are smarter than you presume. Do you really think that you will be able to mislead them into thinking it's ok to "rip it up"?Ben, what are you saying here? Are you suggesting that it is illegal to a make an agreement between the buyer and seller without confirming it with the first lien holder? How long have you been in this business?
If the bank does not care, then there should be no problem disclosing to them what the intentions of both are. So the conversation would go something like this. "Hello Ms. Underwriter. I'd like to originate a loan where in the seller will hold a note for 20%. After the sale takes place the seller will disregard the note." "OK, sure Mr. Loan Officer. We'll let you create this 2nd loan for the purposes of getting your client in with no money down."Is it likely this is going to happen? Maybe a 1% possability.
Is it loan fraud if you failed to disclose the info upfront? Absolutely.
Wrong. You’re not going to have a conversation with your underwriter… You’re are going to have a sales contract that is structured for a seller second… and then you’re going to have a seperate contract between the buyer and the seller agreeing on their terms, which does not have to be disclosed to the lender.
Again, a buyer named “Jim” wants to borrow money to pay for a home. He borrows money from a guy named “Tom” and borrows the rest from a guy named “Scott”. If Scott and Jim go off and decide to payoff the note one day after the recorded agreement, do you think they by law should go ask “Tom” if they can do this? No. Tom doesn’t have a contract with “Jim” and “Scott”. :banghead:
If what you are saying is fraud here, then we would see pre-payment penalties on seller seconds… which don’t exist.
This type of deal happens all the time and is not fraud if the contracts are structured correctly.
Business Law 101. Contract Law.
Nice post Jason!
This is something I wanted to take a little more time with in responding to as the readers on this board are entitled to hear different opinions. So what I’ve done was contacted a few mortgage fraud experts and showed them the correspondence from this thread. These were individuals found by simply Googling “mortgage fraud”. In addition to them I brought this up with Fannie Mae and the FBI. The FBI didn’t have much to comment on and directed me to speak to somebody at the state level. I’m not sure who that would be as this topic isn’t related to one state in particular.
There is a quote though on one site in which the FBI assistant director talks about the ommission of material needed by underwriters and lenders to fund, purchase, or insure a loan.
Fannie Mae (who set guidelines for most A paper lenders) noted that a throw away second was absoultely illegal.
Here was the reply from one of the experts.
[i]I wouldn’t reply to this. I find that arguing with folks who are stuck on their opinions (especially these types of opinions) is usually a lot like hitting one’s head repeatedly against a brick wall. It doesn’t change anything and after a while it gives you a headache.
As for a substantive reply to you – if you’re asking for one – discounted buyback seconds are no different than forgiven seconds. The issue has to do with the intent – the same reason that forgiven seconds will get you in trouble.
If a seller takes back a second and intends at that time that the borrower pays him but later decides that to forgive it, there is nothing wrong (of course, it might be difficult to prove that this was a later decision!) When the seller and borrower go into the transaction knowing that the second will be forgiven, it really isn’t a second at all. It’s just a sham to get the lender to accept the transaction.
So, in this case, it’s just another fiction that someone has created in order to get around the problem of forgiven seconds. Now they are fabricating a second with the intent that the borrower not pay it off. This is no different than the forgiven second. They’ve just created another lie around the whole transaction. While your ‘adversary’ is correct that lenders can’t (and don’t) control the future dealings of the parties, this isn’t a future dealing that is being discussed. It’s a present condition that exists at the time of funding as is known to all the parties. In other words, they are just lying to the lender.
You’re right – if this is so above board, why not just tell the lender? Why not give the lender a copy of the discount agreement? It’s because the lender wouldn’t fund the transaction!!! Any time you’re in a position when you’re making up facts or documents in order to get around a lender’s requirements, you’re treading on slippery ground. If the transaction is above board, disclose it. If it isn’t, don’t do it.
I wouldn’t bet my freedom on this guy’s argument![/i]
Investors need to use discernment in all situations. If you’re unsure of advice then consult with an attorney.
Wow! I wish that I had nothing better to do than contact the FBI, Fannie Mae, CIA, etc. :
So you don’t make time to research new products, concepts, or laws for your clients and business growth?
How then do you ever stay on top of this ever changing industry?
Ben,
Very nice write-up. I believe that those of us in the actual business of originating mortgages all know that throw away seconds are fraud, and won’t fly with any lender. I have noticed that in this line of business there are a lot of people involved in the transactions that believe “if they don’t catch you, you weren’t doing anything wrong”, and that tends to lead to a negative image for mortgage originators. If we are not careful people are going to start grouping us together with realtors and car salesman. LOL.
Ben is right when he said that the issue comes down to “intent”. If you intend to ‘trick’ the lender into giving you a larger loan than they would if the seller financing was not an issue this would be considered fraud. But, it should be noted that there is no clear case law on this subject.
The way I see it if the law is looking at your “intent” and you have an uneasy feeling about what you are doing don’t do it…more than likely it’s fraud.
Sometimes there is a very fine line between creative and fraudlent and the prudent investor with the best of intentions will decide to err on the side of caution.
wow,
you must have alot of time on your hand to call the FBI, state department and who ever else you have to call. When i state that you can throw away the seller carry second note i didnot mean for people to throw it away it depends on how the loan is structure and the seller and buyer have to agree on the terms.the bank doesnot care about an agreement between the seller and buyer. Finally someone agreed with me the fbi cannot do anything if the seller and buyer donot tell the bank the only rhing you will tell the bank is that the seller is doing a 20% the bank will not ask no more information because it has nothing to do with the bank. if the buyer doesnot pay the note the bank doenot care as long as they get their payment each month.
i know i have mispelled words but when ever i am typing i am also holding my 1 month old in my hand so i am typing with my left hand he is in my hand right now. so for those of you who are making fun i want to see you holding a one month old while typing and feeding. I work from home so i originate loan from my home office. i am a new mom 24/7 no breaks and a loan officer at the same time with no rest so i i should me resting knowing i had a c-section but bills have to be paidbeening a new mom and work from home is difficult. Who ever made jokes i am not mad i am only 22yrs old own my own home have 2 business. Brokerage firm and Home Inspection so have i alot to do during the day my eyes are always close i need rest but i am sorry for mispelling works trust me for my age and my accomplishment i am not stupid far from it. My husband does the home Inspection and i do loans.
Lscalder,
Time blocking is a very important part of any professional’s business.
Not only blocking appointments, but also setting time aside to learn, prepare, and network can help you grow tremendously.
So yes, I do have time because I choose to. My business year is planned out in November and December of the previous year. These occassions are already factored into monthly and daily activities.
Thank Jesus that I have a terrific processing staff that takes wonderful care of my files. There’s no need to micromanage them and usually no need to switch lenders because something didn’t fit. In my opinion that’s what most brokers miss. Not saying that I’ve never missed something, but my time is not spent running around trying to save loans.
I rather spend it ocassionaly researching things upfront, doing consultations, and marketing.
I commend you for your efforts and do wish you success and prosperity.
first of all before i had my son I was marketing as well ihad everything planned out I also have a good loan processor who do a good job you have to remember that i am a new mom witha 1month old who takes up most of my time but i stll close loans i also help with the home inspection business i schedule appointments you only do one thing so you have a lot of time to do other things. I would love to see you taking care of a one month old while running two business plus on top of that i have other properties in other states but i have good tenants so i donot do much with the properties. So you can say what ever you want to about me I work 3 times harder than you do per day so you can take your little comment and shove it. I have loans to close
Lsadler,
Maybe you interpreted by comment as a shot at you. So you know, it was not. I took your remark as “having a lot of time on my hands” as condesceding. The comment was intended for you to understand how one could manage to do these things.
Everyone has responsibilities and events outside of their business life.
I think if you read it again you’ll see that it was not about you at all.
Again, Best of Luck to ya.
Ben,
you seem clouded.
you found the answer in your own quote:
If a seller takes back a second and intends at that time that the borrower pays him but later decides that to forgive it, there is nothing wrong
by the way,
didn’t you get a kickback when you bought that house from J.P.?
Jason,
That was my whole point. Intent.
If there’s no intent to throw away or discount the note then I see nothing wrong.
It’s when the seller, buyer, and/or broker start getting together to discuss how the deal can get done. If the seller and buyer come up with the idea an never tell the broker, then there’s nothing the broker can disclose or be held accountable for. Not that it makes it ok though.
But if the broker has knowledge of it, there’s intent.
Let me know when you find a lender that demands to see the seller second contract…
and
Let me know when you find a lender that places a pre-pay penalty on the seller second…
…your “whole point” seemed to have changed throughout this thread…
you should be closing loans, not investigating an agreement between a seller and a buyer…
if the lenders you are using are turning you into an FBI detective, then maybe you should switch careers…
we are in the business of closing loans, not questioning the buyer to death…
your idea of fraud being one of intent seems to me that you never closed a loan that was structured this way, and therefore you jump on this wagon of fraud…
the fact is, you don’t really know where the fine line of fraud is…
The point never changed Jason.
Initially, since a few seemed to think “forgivable 2nds” are ok, my reply was to the fact that the broker was made award of it. It should be their professional responsibility to make the lender aware. Obviously there is intent there as outline in your response back at that time.
Never did I say that a broker had to ask specifically if this was going on or ask 1,000 questions. Although it may not be a bad idea if you suspected it was happening.
Do you not think looking out for the best interest of your clients and lenders is a wise way to do business?
You’re right, I don’t do a lot of loans with seller 2nds because the conforming market does not really fit with that niche. However, I do have enough common sense to make comments intended for investors who have been coached into believing this is ok.
I’m not going to lead my clients down that path. You can be the go to guy for forgivable seller 2nds and probably won’t have much competion from loan officers trying to work those loans.
PS… I find it funny that you can’t express your opions all in one reply. Most every post or comment you make gets edited later so you can reword or reexpress your thoughts. That must mean you dwell on what you’ve already stated. Actually, you were a pretty quiet and shy indiviual before. What is it here on the internet that changes you into somebody who would prefer to hurt others on this board? Many of your comments to myself and others on this board are pretty malicous. Would your tone and comments change if we were face to face? Simply put, when you left this town, you were a completely different person.
I thank the Lord everyday that my walk with Jesus has changed the person I once was. I’m able to forgive becuase I am forgived. Several years ago this conversation wouldn’t have even been an option for you. I appologize here and now if I did do something to offend you.
Ben,
Don’t patronize me. You don’t know me and you never did.
You paint yourself to be a Saint here… but you never answered my question about the kickback you received from J.P. when you bought your house… Did you forget to address this question? or did you choose to skip over it?
Don’t paint yourself a new picture of me in your efforts to clarify your cookie cutter box of fraud…
The fact stands, that your world is flat. You’re completely missing the point of the original question. You are a loan officer acting as a broker, but you’re comments lead to believe that your some type of investigative bank police with a clean record… Do you have a clean record?
Do not mud sling with me, as you are not the authority on fraud… by far… and clearly you have no position of understanding when it comes to making a purchase transaction work…
The fact herein, proves that some loans are structured beyond your comprehension…
Just because you don’t understand how these loans are structured, doesn’t make it fraud, and doesn’t give you the right to generalize with no real underlining research…
You're right, I don't do a lot of loans with seller 2nds because the conforming market does not really fit with that niche.what? Now you are saying you do most of your loans in the conforming market? Then why are you advertising in so many threads Hard Money? Last time I checked, Hard Money is not conforming...
My apologies if you feel I’m too hard on you… Saint Ben…
Simply put, I’m entertained in the fact that you don’t have any idea of what you are talking about… but a vague clue about what may or may not be fraud…
I thank the Lord everyday that my walk with Jesus has changed the person I once was.
Is this really the place for this? Do you really think, that people on this forum are going to buy this? does this show me that you’re a man from the christian banks? Please…
Nothing here is intended to be personal… Why are you taking it so?
I’ll reiterate a couple of the other points that you refuse to address: I’ll put it in bold this time.
Let me know when you find a lender that demands to see the seller second contract…
and
Let me know when you find a lender that places a pre-pay penalty on the seller second…
This should be a clue to you on why it isn’t fraud…
My aggressiveness comes out of these posts, when I see a vagueness become law such as yours…
Close some loans, then argue your points.
Jason,
This will be my last comment to you on this board so again I applogize if there was something in our past in which I hurt you.
I chose not answer your past question because it’s libel. But at the same time I don’t think your trying to compromise my integrity to hurt my business should be dismissed. A family decided to live with me until their new home was completed. There’s nothing wrong with charging them.
Maybe you’re right yet again in the fact that I didn’t really know you. And that was probaly a character flaw of mine at that point in my life. But you sure seem to be different.
Yes, I do think this is the place to bring up our Saviour. As my faith grows so does my boldness in expressing His will. I wish I could put into words what a different reality I’ve come to. Yes, I do believe there are past records in which He died for me. Everyone falls short but all that except Him have been forgiven. Does this mean I’m a saint? No, but the person I once was is gone. I know actions speak louder than words, so it would be hard for you to see being in CA.
As far as what the readers should know about the lenders you asked about. I agree with you again on your questions. Not likely the lender is going to make requirements for those.
As far as the hard money loans, yeah, I do help a lot of clients find the right lender for their rehabs. Equally so, conforming loans are needed for their buyers or cashing out based upon the new value immediately after finishing it.
So again, just so everyone is clear. I do not have experience with forgivable seller 2nds and do not claim to. I can only pass along to you what I’ve read and discussed with other professionals as you should.