Short Sales & the “new” Mortgage Fraud

see-no-evilShort Sales continue to be problematic for all concerned. So much so that “right” seems to be the minority “opinion”. At least I think I’m “right”…but apparently so does everyone else with a completely opposite opinion.

So you tell me…Am I RIGHT or am I RIGHT?

The pretty simple short of it is: IF you sell your house short…you have to MOVE OUT! While many do not dispute this, I recently commented on this question of a Broker in Florida on this issue. I appear to be the ONLY person in almost 200 comments, most all from agents, who thinks the agent is supposed to check that the seller has moved out on the day of closing, or the day all parties agree that the seller was supposed to move out.

Crazy. Just Crazy!

As my friend in Philly once said to me,

“Ardell, everyone does “the right thing”. We just don’t all agree on what “the right thing” is.

In the post the question is “What is the Penalty for Breaking an Arm’s Length Transaction Notice?”BUT he seems to think his problem is that he drove by months later and the “former owners” waved at him from the front lawn. He thinks he just “found out” the sellers didn’t move out, when in fact he should have been “in charge” of knowing whether or not they DID move out in the first place! I mean…seriously…do agents not accept responsibility for ANYTHING anymore??? …and…wait for it…this guy TEACHES a class on Short Sales. Jillayne’s gonna LOVE that one.

The Buyer, Seller and BOTH AGENTS signed this:

arm's length

No ambiguity there. Seller is NOT to remain in the property…PERIOD! But apparently “see no evil” is the excuse! Didn’t bother to notice that the seller hadn’t moved out on the day of closing? It’s pretty obvious the agent DID know the seller wasn’t going to move out that day…but “thought” that was a short term thing. BUT didn’t write a short term occupancy agreement to cover that and send it to all parties to sign, and the lienholder, PRIOR to closing!

But…no one except me thinks the agent was supposed to check that the seller in fact…MOVED OUT! Crazy. Just Crazy.

Examples of other responses:

“Well you certainly did not do anything wrong and you have little to worry about. the buyer and seller have to worry unless they can prove that the idea of the sellers regain occupancy came AFTER close of escrow..and the longer after the close, the better.”

A general consensus is all is well as long as they did not “intend” to stay as tenants at the time they signed the Arms Length Agreement and LATER decided not to move out. Even the attorney who responded says it is about “intent” when they signed the Arms Length Agreement, and not whether or not the seller actually moved out!

My response was long and very clear that the agent needs to LOOK IN THE HOUSE on the day of closing and make sure the seller is GONE! If not…I list the steps that need to be followed BEFORE the property closes. YES…STOP the closing!

“You are likely at fault for not providing the necessary paperwork for all to sign at closing to address the property not being vacant on the day of closing. The standard is not what you did know. It is what you should have known. If the contract had no post occupancy terms for the lienholder to review and know about before closing, it is because you did not cause them to be there.

So it depends on whether or not they broke an agreement AFTER closing, that you wrote before or at closing. If the contract stated possession day as closing day, then you were aware, or should have been aware, that the possession was not transferring on day of closing in accordance with the contract terms. You should have seen/witnessed a vacant property before closing OR written up a post possession agreement if it were not vacant.

If on the day of closing you knew it was not empty (and you should have even if you didn’t) and the loose agreement between buyer and seller was an extra day or more of occupancy, then you should have written up that agreement with an end date. You should then have sent that agreement to all parties, including the lienholder and the buyer’s lender. If the buyer bought it as owner occupied vs an investor loan, there is potentially lender fraud on two counts, but you can probably get concurrent terms of sentence on that. ๐Ÿ™‚

Was the insurance policy at closing for an owner, or a landlord policy? Did it have a vacant property rider? Or was the policy done as an occupied property with a tenant in place? Pretty easy for investigators to note if the buyer’s insurance policy did not note a landlord policy with a vacant property rider, meaning the buyer, buyer’s lender and buyer’s insurance company thought it would be vacant at closing vs occupied.

If the agreement had no post occupancy provision (and since you don’t mention one I’ll assume it did not), then it was your obligation to view the property as vacant prior to closing and prior to giving the buyer the keys to the house.

There is no excuse for your not knowing the property wasn’t vacant and writing up a post possession agreement once you knew it was not vacant immediately prior to closing.

Let’s say you DID write up a 3 day post possession or a 10 day post possession or even a 30 day post possession agreement, and that document was signed by buyer and seller as part of the contract and sent to all parties and lenders/lienholders. If the parties subsequently extended or ignored that agreement, then you “may” not be liable, depending on how that post posession was worded.

But if the property was not vacant prior to closing and you did not write that up in a post possession agreement, then you are liable for not having done so.

To which several replied:

“See no evil…hear no evil…speak no evil. i would leave well enough alone.”

Forget “crazy”…this answer is INSANE!:

“There is a legal way to get around these laws because this is the United States and people are free to do as they please.”

Lots of nails in this coffin…where are the agent’s brokers? Don’t they read this stuff?

“Shrewd buyer. Approach the sellers “AFTER” the short sale. Sellers are innocent, and you have an “Avoid Jail Free” card.”

“It appears that no one has done anything wrong…”

“Sounds like an issue for the two lenders involved, not the RE agents.”

“I’m sure the bank is too busy with all the other foreclosures and short sales to really be trying to document all the new tenants in homes that have closed. I’m sure you’ll be fine…”

And a direct response from the agent in the transaction who wrote the blog post:

“ARDELL. I completely disgree that I have an obligation to check whether or not the property is vacant at time of closing.”

Recently my friend Kevin Tomlinson said this about The “new” Mortgage Fraud:

“An example of a non-arms-length transaction would be where a seller โ€œshort sells

This entry was posted in Ethics, Industry Talk, Mortgage Fraud, Short Sales by ARDELL. Bookmark the permalink.


ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

62 thoughts on “Short Sales & the “new” Mortgage Fraud

  1. Thanks for responding Kev! I agree, especially on East Coast where they “table fund” and don’t have an “escrow”.

    Do you “record” at or after closing there? Here “closing” is when the property is recorded in the new owner’s name at the County. But when I was in Florida, the closing was right after the loan funded and recording was weeks later.

    Still, I can’t imagine not knowing whether or not my seller clients moved out. Pretty odd if you ask me.

    • …and then you have an attorney saying it’s OK!

      “If I put on my contract lawyer hat here for a moment… As far as I can tell, that section you’ve got in your post can be read as “at the time of signing”. So, if your buyer and seller had no agreement when pen hit paper, you’re fine.

      So they can say to themselves “I’m gonna move out” while signing…and then decide to stay in the house when they put the pen down???

  2. The problem with Lender Fraud is…well…no one seems to “get” what that is. Crazy…just crazy.

    They think it’s about win/lose vs right/wrong. No Victims no Villains…just Winners and Losers.

  3. There was a property in the Miami area that was listed for sale for $30K in 2001. I offered $25K, but lost the bid to some one else. The property had been on the market for a while, over a month.

    I followed the property and in 2006 it was sold for $175K. The last I checked it was a short sale for $65K.

    What “bank” or “lender” would allow a property to go up in price from $30K to $175K in less than a decade? Who would write that kind of loan, no matter what the ability to pay was?

    The answer is all banks, and lenders did exactly that. Banks, and lenders allowed mortgages to be written far in excess of property values so they could sell those mortgages to the financial markets.

    Why isn’t any one outraged about that? Why do people focus on people who got ripped off, realize that they got ripped offed, and are trying to do something about that?

    Why is every one giving the banks a free pass?

    As an aside, you haven’t made any case for fraud here. It’s not the agents business to check the property. Banks, especially in Florida where the biggest run up in pricing occurred, are trying to get agents on the hook to do a whole bunch of work for no compensation. If the bank is concerned about the property being vacant they should hire some people to do that. The banks can well afford it, the agent is barely getting by.

  4. And yet to me David, it’s clear as a bell that if you sign a legal form stating the seller is not going to “remain” in the property, to the best of your knowledge, you owe it to your own sense of character and ethics to expand your knowledge by poking your head into your own listing! You have to go to take the lockbox off anyway. No added work at all.

    In fact I think an agent would have to go way out of their way to NOT know if the seller moved out or not.

    But, as I said in the post, no AGENTS seem to agree with me that doing the right thing is the right thing to do. Makes me more sad than angry.

  5. It’s because you don’t do short sales. The lock box is usually long gone. During the extended closing period the seller, many sellers ask if the lock box can be removed. The sellers are usually hoping a miracle will happen. In many cases some one approaches them repeatedly offering a miracle. They just don’t have a sense of reality.

    My wife booked us a trip to Miami in March. From what I understand the market there is crazy.

    From my own personal experience I can see how an agent wouldn’t be seeing a client after closing a short sale. They might meet at escrow to go over the documents, but beyond that it’s not like a champagne visit kind of thing.

    I’ll even go further to say that an investor may be involved as a buyer. If the investor wants to keep the sellers as renters I don’t have a problem with that. I’m all for whatever works for my client. I don’t see myself as the banks police person.

  6. Ardell, here in the NWMLS, our listing agreement form 1A, says that we won’t assist in a distressed home conveyance. You are likely familiar with the paragraph 4 in question. I think what has happened in this situation is a direct violation of this statement. FL may be a little different but the paperwork they all signed around seems to have the same intent as our paragraph 4. So, yes, I think the agent is completely responsible for ensuring the clients have moved out or they have violated their own contract and open themselves up to bigger issues.

  7. Here’s the rub: What if…just what if this situation blew up because of the writer’s post and it was deemed that he was in violation of something:

    Do you know how expensive attorney’s fees are. The agent could prevail, or not–but it would be an easy $30k to fight it.

    Further….the blog post would be a like a depostion.

    That whole situation scares me. I would be afraid. Very afraid.

  8. I once had the lienholder agree to sell it short to the owner instead of foreclosing. It’s rare, but better to be honest and ask them than to be deceitful. It was an awesome surprise when the lienholder agreed. The family was so very happy and it was right before Christmas. Like a gift from Santa Claus. The owners were some nice people from our Church and my youngest daughter looked up at me at age 4 or so and said “See Mommy, there IS a Santa Claus!” In fact we got the news from the owners the night of the Christmas Pageant. I still have the picture of my daughter as a little Choir Angel around here some where on that night.

    What an awesome memory.

  9. Just catching up with this post. If there’s no clear statement in the NAR Code that tells us exactly what to do in this case, Realtors could go back to article 1
    Duty of honesty to all parties prevails.

    The question is, how far does one go? Some Realtors would go as far as Ardell. Other Realtors would close the transaction and make a decision that there is no further duty to check to see if the sellers moved out if all parties (buyer seller, agents) signed the form. So in another Realtor’s mind, there is no intent to be dishonest in a decision NOT to check occupancy after closing.

    The cool thing about ethics (well I suppose it’s frustrating for some) is that there can be a range of right answers. This is okay provided the person acting can give good reasons for his/her actions that support the values and principles in the code.

  10. After I made my original post, I was about to post some thoughts very similar to what Jillayne posted when she beat me to it.

    But you do have to be blind not to notice that a few days before your clients are to move out they haven’t rented a new place, haven’t been packing, haven’t been doing any of the hundreds of things needed to move. So, what do you do now?

    It certainly is the easiest thing to do to turn a blind eye to a seller not moving out and any agreement they may have made that violates the distressed home conveyance clauses. No agent wants to have a conversation with their client telling them they can’t rent back their house. Likewise, this is a tough market, agents are looking for any income they can find and torpedoing a deal is the LAST thing they want to do.

    I think what separates many agents is that the top, diligent, ethical agents have had this conversation up front and set the expectations long before it could even develop into a possible problem. When they miss having the conversation up front they will do the right thing and have the difficult conversation even when it is hard. I would much rather build my business ethically and lose a few deals along the way than make every deal work at the expense of my integrity.

  11. “No agent wants to have a conversation with their client telling them they canโ€™t rent back their house.”

    I don’t understand how an agent can sign the Arms Length Agreement without asking the client that question. But I agree many are likely saying “don’t tell me” thinking that suffices. I don’t agree that avoiding the topic covers the agent’s butt, and am surprised how hard it is in places where I have raised this issue to get most to agree with that.

    In fact I think there should be an addendum added signed by both the buyer and the seller stating that the buyer will not rent the property to the seller before the agents sign the Arms Length Agreement and as a condition of signing it.

  12. Let me say again that you don’t do short sales.

    Fraud is a very hard thing to prove, but it does have to be proved in order for it to be fraud.

    There again if you are the listing agent you should be working in the best interest of your seller. Let me just throw out some what ifs, because in the past thirty years of my working with short sales, because this is nothing new, I’ve seen a lot.

    What if another lender approaches your seller with a loan package meant to work as a wrap around with a cash out in seven years? What if the sellers never intended to move and were going to sue the lender? What if the sellers believed that God was going to protect them? don’t laugh, I have seriously had that conversation.

    Where is your moral high ground now that millions of people, literally tens of millions, or more, are paying on mortgages that far exceed any reasonable value in today’s market place, let alone the future. How do you see this mess working itself out?

    The banks, sure they have the agents running around for a reduced commission playing some insipid game of maybe they will release a property if enough hoops get jumped through. What about all those people who bought those short sales? Now that property values are falling again how about those people who paid 20% below peak pricing? They are the next round of short sales, and foreclosures.

    As Ray says, you have to walk a mile in the shoes to know, but I know that people are doing what they think is right. I also know a paper from a bank ain’t right at all.

    • LOL! Are you telling me I’ve never done a short sale, David? I have two in escrow right now. What are you talking about? Both the agent for the buyer and the agent for the seller sign that agreement. Between the two of them, someone should be able to figure out if the buyer is renting it to the seller after closing! Or worse…letting the seller stay for free in exchange for the deeply discounted purchase price. That’s happening as well.

      No…the majority of buyers of short sales are not under water. A short sale should not sell at “fair market value” at 20% down from peak. You know from reading here that Truliaboy put 5% down and just did a refi at 80% LTV and got rid of his PMI based on a higher appraisal. A good short sale is at least 30% to 37% down from market peak and we are at 20% to 25% down from market peak. The market would have to go down another 15% or so for them to be at break even and more than that for them to go underwater. The owner had already moved to Alaska and the buyer was buying it to live in it and I visited him at the house when he was doing his refi…so I know he lives there ๐Ÿ™‚

      Anyway if you think it’s OK for the seller to stay in the house, that’s OK. Just DON’T sign a paper saying he ISN’T and you’re fine. What you can’t do is sign a paper saying the seller is not remaining in the home, and then help the seller remain in the home. I do think that the seller can stay if the lienholder agrees and has a copy of the post occupancy agreement. But if the lienholder approval is BASED on the seller not staying…then you don’t HAVE lienholder approval if you know the seller is staying.

      Why is this so hard for agents to understand? If you sign something saying there are NO agreements written or VERBAL for the seller to stay…then he has to leave.

      What you seem to be saying is if an owner owes 300,000 and can get his friend to buy the house for $150,000 as a straw buyer, then he can pay “the friend’s mortgage” and stay in the house and cut his payments in half. That’s what some people are doing. That is why the banks are cracking down on transactions being “arms length” and making sure the owners are not doing that.

      Chris said:

      “Likewise, this is a tough market, agents are looking for any income they can find and torpedoing a deal is the LAST thing they want to do.”

      So OK…I get it. In 3 different places 95% of agents and even Jillayne seem to think this “new” Mortgage Fraud is honky dory or at minimum, not the agents’ concern. But that doesn’t make it NOT mortgage fraud. It’s the same as an investor buying 5-7 homes as “owner occupants” back in 2004 and 2005 and 2006 because agents made more money that way. That was the old “Lender Fraud” and now we have the new “Lender Fraud”.

      But when the shit hits the fan this time, let’s not act like agents had no blame as everyone did last time. Everyone blamed it on the lenders. Now we are proving that agents ARE willing to commit Lender Fraud to make a sale. How sad is that???

      Based on this thread and conversations on the same topic in other places, I think they should just ban short sales altogether. Foreclose, seller leaves, bank puts vacant house on market. Stop the short sales or do them honestly. If the lienholders want a clean “arms length” transaction…they should foreclose. Period.

    • David said: “Fraud is a very hard thing to prove, but it does have to be proved in order for it to be fraud. ”

      Indeed it is hard to prove, but I will disagree with the rest of that. Your approach of, if they didn’t catch me it didn’t happen, is surprising to me. No, it is still fraud, it still happened, you just didn’t get caught or punished. I don’t have the NAR code of ethics memorized but I am pretty sure there is something in it that states we have to not commit fraud. It’s not whether we are afraid of getting caught that should be our motivation. It’s actually doing the right thing that should be our motivation.

      Signing a document saying one thing and then turning your back on it and ignoring it and is not right. Maybe the courts can’t or won’t prove it’s fraud but it’s not right.

  13. Either one of you, prove the fraud.

    Yes, any one who purchased a short sale in the past four years is under water. Just because one person reaffirmed a debt to a bank doesn’t give the property value. We can see how much value banks give property every day.

    You said it yourself you have two short sales in escrow today. Those property have lost value, and will continue to lose value.

    Now you are saying that the listing agents job was to go to the seller and make them move.

    I’d like to see the law that says some one has to move out of their property, and the Real Estate agent has the authority to make them move. I’d like to see the law that says that after closing the agent is required to inform the bank that the seller didn’t move. That’s kind of a slippery slope.

    Let me give you another what if. What if the seller had every intent to buy back the property after the short sale no matter what the price?

    Show me the law. Quoting bank procedure isn’t doing anything for me. You are claiming fraud. Show me the law that says the Real Estate agent works for the bank, or even in the banks best interest.

    Sorry, as the listing agent I work for the seller. I sign arms length, the seller signs, and the buyer signs, and buyers agent signs? Is the listing agent really supposed to police the seller? Didn’t the seller sign?

    Sorry, this is an asked, and answered. Prove the fraud.

  14. As to the last part, no one should short sale a property. No one should buy a short sale.

    The real estate market has yet to decline, globally.

    If you are a seller you should talk with a Real Estate attorney, and probably a bankruptcy attorney before considering a short sale.

  15. David,

    I sincerely appreciate your honesty on this one and you are clearly not alone and likely in the majority opinion. If anything I have proven to myself that I am clearly in the minority on this. I was stunned at Jillayne’s response given how tough she is on LOs and Loan Mod practitioners. Oh well, you learn something new every day. ๐Ÿ™‚

    When I saw lots of agents working with buyers doing multiple “owner occupied” loan transactions, I really thought they were not aware of the ramifications. So everyone blamed the lenders last time and now they will blame the buyers and sellers. I guess as long as there is someone else to blame, no one gives a RA.

    Interesting thread. I think you all for your comments.

  16. Real estate is just an organized crime ring, now. I have money to buy a house but I won’t, because I don’t feel there is anyone in the business I can trust.

    I’m sure ethical people exist in the industry, but how do you weed them out?

    I had an agent for a very well known company attempt to steer me into a deal that was not financially best for me, and she along with the bank and title agency discouraged me from reading my paperwork prior to the closing. I read it anyway.

    When I refused to sign due to discrepancies and blank spaces in the paperwork, I was told I’d be sued. They tried to intimidate me into signing BS papers by telling me I had no contingency clause to back out. As a first time buyer, how would i even have known to include that?

    I was more informed than most first time buyers, thank God, because what a booby-trapped bs bunch of crap. What i did understand in what I read was that for whatever reason, they wanted me to default so they could take the house back as quickly as possible with no notification (yes, that was in there-“waive your rights.)

    Regulation IS needed, and, also, there should be better communication between states. If you research it, you will see that real estate scammers go from state to state. There should be a law that if you lose your license in one state, it should apply to all states.

  17. In a market like South Florida (especially Miami) there are so many foreclosures that there is a program called “Cash for Keys”. Those that help out with the government sponsored program have the duty to ensure that the former residents vacate the property upon receiving their check in exchange for the houses keys. If that doesnt happen than the authorities are called in to ensure that they vacate. Of course we always have our realtors do the proper diligence as servicing clients should always be top priority.

Leave a Reply