With one out of 4 home owners still underwater with their mortgage, Short Sales are one option to avoid foreclosure. However, the banks are weary about Arms length transaction where the buyers have a relationship with the seller and are in position to take advantage of the banks Short Sale approval by purchasing the home at a discount.
Other forms of payments that are not disclosed as part of the HUD 1 Settlement statement and are made outside of escrow, are considered illegal.
One common scenario is when a short sale seller’s senior lender authorizes a payment of to extinguish a junior lien, but the junior lender demands that the buyer or someone else pays an additional $8,000 outside of escrow. An undisclosed payment in a Short Sale Process involves the payment of money or other things of value without the knowledge of an interested party, such as the seller’s short sale lender or buyer’s lender. The undisclosed payment is typically paid outside of escrow in an attempt to escape the purview of interested parties.
Concealing this additional payment from the senior lender may constitute mortgage fraud. Furthermore, omitting from the HUD-1 Statement any charges paid at settlement by either a buyer or seller may violate RESPA rules and could get the Real Estate broker involved in the transaction into serious trouble.
Undisclosed payments may also violate other laws and regulations, and depending on a real estate agent’s participation in the scheme, these civil and criminal claims may be raised against the agent, who may also be subject to a breach of fiduciary duty as well as license revocation or other disciplinary action taken by the Department of Real Estate.
Finally, payments made outside of escrow have other risks and consequences as well since absent the safeguards provided by escrow as a neutral third-party, someone who receives cash could simply pocket the money without performing the service they had promised.
So, our recommendation is that if something you are asked to do by your Real Estate agent or broker that does NOT make sense to you, then you have resources to contact and seek help. One such resource if the Housing and Urban Development office (HUD) that will assign you a counselor to advise you of ALL your options to avoid foreclosure. These counselors can even participate in conference calls with your lenders to make certain that your concerned are addressed with your lender.