By Eric Wolff, North County Times, Escondido, Calif.

Nov. 2--A new twist on mortgage fraud is making already difficult short sales darn near impossible, say local real estate agents.

In a typical short sale, homeowners must persuade their lenders to let them sell a house for less than they owe, a complication that by itself can delay a deal for months. And in the boom market of the mid-Oughts, many property owners took on second loans, whether they were home equity lines of credit, down-payment loans, or simple second mortgages.

Both lenders must approve a short sale, but second lenders often get the least money in the deal under the terms of a typical mortgage contract.

In recent months, second lenders have begun to demand extra money in a side deal to get them to approve the short sale. And some don't want the seller to tell their first lender anything about it, real estate agents say -- a condition that may constitute mortgage fraud by violating state and federal disclosure requirements.

The problem may get worse as short sales become more common. Market research firm Campbell Communications reports that short sales made up 20 percent of all sales in California last summer, and the figure is growing.

Several major lenders contacted for this story declined to comment. But a Wells Fargo executive who often deals with short sales said he was not aware of any side deals at his company.

"I don't have any knowledge of that," said Jeff Johnson, head of Wells Fargo Home Equity Servicing Fulfillment. "That would be in complete conflict with our approach. I feel very bad, if this is an experience that folks are having."

Yet, real estate agent Patrick Delaney said he represented a buyer in Temecula when the second lender demanded a separate payment. The selling agent had mentioned the possibility of "conditions" in the listing, but without details. Delaney submitted what he thought was a reasonable bid.

"She said the mortgage insurer on the second lien wanted $20,000 given in escrow," he said. "And we couldn't tell the first lien holder. They wouldn't even show the buyer our offer without it."

Delaney and his buyer not only declined, they even put their refusal in their offer, and they lost the deal.

In a foreclosure, the first lender has first dibs on the home, leaving the second lender with nothing when the property is worth less than the loans. In a short sale, both lenders must approve the sale, so the first lender generally will offer the second a small payment, commonly in the $1,000 to $5,000 range.

But Delaney is hardly the only agent with a story of a second lender looking for a way to get more cash.

"It's the scam of the moment," said Robert Sunderland, a real estate attorney with offices in Santa Rosa and Rancho Bernardo. "This tends to be more of a Southern California dynamic. It started down here in San Diego."

Second lenders asking for money aren't doing anything inherently illegal, Sunderland said. They can ask, and even get paid, but the first lender has to approve. The trouble comes when they don't tell the first lender.

"If you apply for a short sale, it's the opposite of applying for a loan," Sunderland said. "You say, 'I have no money, I have no assets.' If you get an extra $50,000, it should go to the first lien holder."

A spokesman for the California Department of Real Estate, Bill Koenig, said violations like this could result in suspension of a real estate license, and possibly a referral to the local district attorney for prosecution.

Jim Browne, a real estate broker for Windermere Real Estate in Escondido, requires his agents to get written letters from first lenders approving extra payments, or else walk away. But he's seeing "a lot of creativity" among lenders trying to extract money from buyers.

"I've seen one instance where the buyer was actually purchasing high-end patio furniture for an amount that was in excess of what the short sale was," he said.

Sometimes the real problem isn't from lenders; it's from collections agents who have bought the debt from the original lenders.

"They're in essence holding the transaction hostage," said Lisa Neugebauer of Rancon Real Estate in Temecula. "Making you figure out ways of paying them, or reducing your commission, or sharing your commission, giving them a quarter for a percent, a 20 percent finder's fee. Nine times out of 10, it's outside escrow."

These kinds of practices are fundamentally unethical and possibly illegal, Sunderland and Neugebauer agreed. Real estate agent Delaney submitted a complaint to the California Department of Real Estate over his botched transaction.

But these second-lender demands often go unreported.

"It happens a lot," Neugebauer said. "But if you want to get it closed, and the seller wants to sell and the buyer wants to buy, what are you going to do?"

Call staff writer Eric Wolff at 760-740-5412.

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