Fraud Is Alive, Well And Flourishing In The Real Estate Industries


Diana Olick had two important posts this week (here and here) that didn’t get nearly the attention they deserve. Both exposed fraudulent schemes to hide payments to second lien holders in short sales.

Essentially, Olick exposed what would appear to be a growing practice of not disclosing payments to second lien holders on the HUD Settlement Statement. Instead the subordinate lenders are demanding cash payments outside of escrow. The real kicker is that the subordinate lenders perpetrating this scam aren’t some penny ante actors but appear to be the big banks.

During the bubble, the real estate and mortgage industries came to resemble nothing so much as the Italian Mafia. Fraud, misrepresentation and a general disregard for law and regulation were the order of the day and probably contributed more to the excesses than generally acknowledged. There was a period of PR in which the FBI and other enforcement agencies were said to be geared up to bring the evil doers to justice. As usual, once the chest beating was done with there was little in the way of tangible discovery and prosecution of actual crimes. The lesson that business as usual can continue has obviously not been lost on the real estate industries.

The fact that Olick’s posts appear to have made hardly a ripple is an apt comment on the ability or, perhaps more correctly, the willingness  of government to police the business.  It remains a Wild West environment in which regulation exists to provide an illusion of control to the consumer while market participants feel free to make up the rules as they deem necessary in the furtherance of their commercial endeavors.

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