The Undocumented Side Agreement Scam :: Financial Scams

The Undocumented Side Agreement Scam

This scam is an old scam, sometimes called an “out of escrow” scam, and sometimes used to inflate assets before buying a home. Some analysts say undocumeted side agreements led to the subprime mortgage crisis.

Consider a modest home selling for $50,000 and a potential buyer with little or no money in the bank. An undocumented side agreement might allow for the potential buyer to guarantee the title to his boat as security for a $5000 loan, where the check would be deposited in the potential home buyers bank account to make the mortgage application look good.

This scam works for the lenders because it really isn’t undocumented. If the mortgage broker sees the money in the account before the mortgage application is started the broker is none the wiser.

The side agreement is usually due in 60 days and sometimes up to six months. In other words our example borrower would lose his boat or otherwise payoff the note in 60 days. He should have closed on the home purchase by then.

This becomes a scam in one of three ways:
• The mortgage broker is the person who told the borrower to put the money in the bank account to make the application look good
• The mortgage broker sends the borrower to a company like HFC or Beneficial, usually to a friend
• The potential borrowers uses cash as a deposit and loses the money

The scam works because the transaction does not show on a credit report or is not recorded in time for it to show up

Sometimes the scammers list a side loan as a commercial loan instead of residential or unsecured.

In most cases the potential borrower is told the loan can be paid off with proceeds at closing or refinanced after closing. Usually it does not happen.

If the side agreement is large enough the borrower can immediately owe more than the house is worth. This scam is seen more often in business.