Forgivable Sellers Second?

Question

Is there such a thing as a forgivable sellers second.  I have a home that I am selling for $50,000.  The buyer has low credit but can come up with $5000 down.  The gentleman doing the financing said he can get an 
80-10-10 loan.  The house will appraise for $60,000.  He is telling me I can raise the price of the home to $55,000 so I get what I need  out of the home than I can tear up the sellers second.  The buyer is ok with this, but I need to know if this is legal?  I don't want to do anything wrong, but I would like to move this property.  Any one heard of this?

N/A N/A · Answer

Well, clearly from the original post there was (would be) no intention of ever collecting the debt. It sounds like the goal was to artificially inflate the sale price so that the banks "80% loan" would actually cover closer to 90% of the sale price.

Jim Gordon · Answer

How in the world is it not a gift if there is no intention of collecting it the first place.

Ken Cook · Answer

Yes there is such a thing as a forgivable second. HOWEVER it does consitute mortgage fraud when a SELLER creates and allows a seller second and the BUYER submits the loan application to the LENDER who approves and lends the FIRST believing the SALES PRICE to have been the full CLTV amount and the seller forgives that loan with or without notifying the first lien holder. Now I know there is going to be someone (or several someones) who contradicts me but I am Director of Operations for a LENDER who specializes in high LTV non-owner occupied (investor) loans on 1 to 4 family properties. This is what I do for a living. Here is the bottom line in simple terms: Seller and buyer enter into a sales agreement for 100k. They do this because buyer's credit isn't good enough to qualify for 100% LTV but they can qualify for an 80% LTV if the seller holds a second for 20% LTV equalling 100% LTV. The seller really only wants 80k but they know the buyer can't qualify for 80k at 100% LTV so they conspire to commit FRAUD FOR PROFIT (seller) and FRAUD FOR PROPERTY (buyer) when the submit the second to the lender who approves the loan based on the information at hand. Don't think jail time won't be a possibility because it is - even for a measly 80k loan. EVEN IF THE LENDER IS PAID BACK when the loan is sold on the secondary market and the secondary buyer's examiner finds the fraudulant second and they make the originating lender repurchase the loan who in turn charges back the commission to the broker - people get hurt even if the buyer continues to make their payments on time. USUALLY, however, in the situation described above the likelihood of early payment or even first payment default by the buyer who couldn't qualify for the loan in the first place is high.

Walter Shkolnik · Answer

If you disclose to the lender that you are not planning on collecting on the second, your loan will not be approved. But lenders do allow "seller consessions", which is not a note at all. Some lenders allow up to 6% seller consessions for closing costs - meaning you pay buyers closing costs up to 6% of the sales price.

N/A N/A · Answer

I guess the best thing for me to do is just collect on the second and not worry about it, or sell it.

Ben Carmona · Answer

Great comments Ohio Realtor.

I just wanted to added in that it is all about "disclosure".  If the buyer purposely withhold information from the lender that would have affected their decision making on the loan, they would have defrauded them.

If anyone approached a lender with the request that the seller does not intend to collect on the note, there is no way that they are going to approve that loan.

With lender approval:
The act of creating a 2nd mortgage is not fraud.
The act of purposely not collecting on the 2nd is not fraud.

Without lender approval:
The act of creating a 2nd mortgage is not fraud.
The act of purposely not collecting on the 2nd is absolutely fraud.

Jim Gordon · Answer

Troy did you read the builder bailout loan fraud on federal link that I posted? As for no one benefiting the seller gets to sell the property at a highr price because of the forgivable second. The buyer qualifies for a loan because of the forgivable second. The mortgage broker that is coordinating this gets to make money because he got an impossible loan to go through.

N/A N/A · Answer

:beer:

Very interesting discussion going here, and I am not saying that I lean one way or the other.

BUT

If there is a lender willing to take a first position for 80% of the value of the home and the buyer doens't want to come out of pocket with any cash down...why would it be considered loan fraud for him to secure a 1st at 80%?

It doesn't make any logical sense, and how are you figuring 90%.

What I am really asking here is this:

Investor goes in and purchases for lets say 50% LTV, say 55% after fees.

Sells off to seller with some troubled credit at 80% LTV and agrees to carry the 2nd knowing or intending full well on writing off the 2nd as a loss or liquidating it at a fraction of face value if the buyer doesn't follow through.

The way I am viewing it, it wouold seem that the bank with the 1st is in the primary position to benefit from there not being a 2nd position note as it provides additional revenue to the 1st position holder for thier payments, but it doesn't constitute fraud.  The law appears to read that the buyer can't receive a gift from the seller.  They aren't getting a gift, they are signing a note on a 2nd.  That is a tangible item that has value.  If the investor decides to not collect, intends from the beginning to not collect, or forgives it at a later date, that isnt the business of the banking regulators, it is the business of the investor or institution that holds the note for the note.

If the current owner intends on selling off the 2nd position note or relieving it / forgiving it, how does that "artificially inflate the value" of the home?  The cost is the cost...right?

I am really just trying to get a handle on this and I may be completely wrong, but I don't think it would be loan fraud, because nobody benefits from the transaction financially.

Suggestions?

Jim Gordon · Answer

Easy way to prevent it being called fraud is to fully disclose to the primary lender that the second mortgage is to be forgiven at close. That way they are aware of the situation and can make a judgement call on the loan at that time.

Jim Gordon · Answer

Here are some links

http://www.patsabin.com/fraud.html

http://www.news.wra.org/story.asp?a=197

This one is very good it explains all types of fraud!
http://www.ffiec.gov/exam/3P_Mtg_Fraud_wp_oct04.pdf
It is called the builder buyout scheme in this report.

That should get you started.