New Lending Scam... Be careful!

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Hey everyone, 

I recently ran into a scenario that I believe to be mortgage fraud (i.e. you go to federal prison for this one) and I wanted to warn others of lenders that offer this scenario...

A borrower came to me asking what programs we offer and how they were different than other lenders; fair question I thought. I asked, what program he was currently using from his current lender to see if I had something similar. Here's what he told me...

1. The lender was giving him a simple and straight forward 65% LTV of ARV loan towards the purchase rehab of the property.

2. The lender was also was providing an additional (separate) hard money loan for 15% of ARV. This additional loan does not fund. These funds are all held in escrow for the duration of the loan.

3. They built this structure because they were looking to BRRRR the property and that the borrower wanted to pull as much cash out as possible at the refi.

Fast forward to payoff/refi...

When the borrower refi's with a local bank, it appears to the new lender that there is an 80% loan against the subject property. Banks are much more lenient on refi's than original purchases and they tend not to dig in as deeply on the property or the situation. So, the new lender approves the loan and pays off the 2 loans for the full 80%.

From the payoff proceeds received on the 15% loan, the original lender deducts his transaction fees from the loan and pays out the overage to the borrower. There are two very big things wrong with this scenario...

1. They are doing this to simulate a cash out refi without the new lender knowing that that's what they are doing (can you say falsifying and misleading?). Most banks won't do cash out refi's at 80%. Most stop at 75%. This ploy to get paid off for 80% is tricking the banks to over leverage themselves in the deal.

2. The second loan is a bogus non-existent loan. It requires zero cash to create because there are no funds needed for funding the second loan. The payoff on the backend supplies the funds necessary to pay the fees to the original lender and for the borrower to get his cash out.

Lying, falsifying or misleading a lender can easily be considered to be mortgage fraud; especially if that lender is a federally insured bank or credit union. While the feds probably wouldn't prosecute the borrower (assuming they turn on the lender - and I'm sure they will), it's hard to argue that he wasn't an accomplice in the fraud; he could explain the loan in detail, so he clearly knew what was going on. He may not have understood that it is likely to be highly illegal, but he still knew.

As an active investor and lender, I love a good creative deal. But, if you ever run into a lender that has some "extremely creative" ways to get deals done, be very very afraid...

If it seems to good to be true, it probably is.

they call those silent seconds.. builders did this alot in down markets.. take a second back so show first lender that there was equity above their loan then the builder never gets paid on the second.. wink wink.

if this is a federally or state chartered first lender then yes i would be very worried as borrower or broker.. if its all private money not so much