2nd Mortage Fraud?

We are co-guarantors of a construction loan for a builder. The property is in the builders company name. We just found out the builder took out a second mortgage on the home. The bank holding the construction loan would not refi and wanted the note paid in full. Now the bank has a judgement against us to repay the loan. Builder is willing to give us a quit claim deed on property,but if we sell at fair market value me might be in the hole if we have to pay back both mortgages. Can the builder legally take out a 2nd mortgage without us knowing? Is this mortgage fraud?

If the property is in the builders company name, and he is the principal, then yes, he can take out a junior lien and although I am not an attorney, on face value this would not appear to be a fraudulent 2nd mortgage.  I'm a little confused about the judgement that the bank received. Wasn't the note that you guaranteed secured by a deed of trust? Did you have a written agreement with the builder, prior to entering into a co-guarantor relationship? 

To piggyback . . . what state are you in? If you were only co-guarantors, you may not have had to be informed . . . but if your name was on the deed as a full co-borrower, you might have a bone to pick with the second lender. These regulations are often state specific.

If you had an attorney close the loan originally, you may want to give him or her a call for advice.

Thank you both for your comments. We have an attorney working on this but I wanted to d some research on my own. This is the full story: (we are in Ohio)

We signed a contract with a bulider stating that we would be co-guarantors of two construction loans on two new builds which totaled $737,000. We also gave them down pymt money totaling $75,000.00. In return they were to pay us $17,500.00 when the homes sold plus the initial $75,000.00 we gave them. The houses sat and did not sell. We had several offers on both properties but the builder would not lower the price to fair market value or even try to make the deals work,per our constant recommendations (my husband and I are both realtors) to lower the price of the homes because they were priced way too high. The construction loan came due (Jan. 2009)but they extended it per a cognovit note that we signed (our mistake, we did not research exactly what this meant). We then had a couple more offers and the builders still refused to make the deals work - even though the offers were at fair market value, but much lower than what the builders were asking. The builder holds the deed to both properties. So the cognovit note became due end of July 2009. The builder at this point stopped paying the mortgage payments, which we did not know. All of a sudden we receive notice that a judgement was granted to the bank, against us, the co-guarantors and the builder, for the full amount due on both construction loans. Since we have proof of assets to cover the loans they are coming after us. In the meantime I have been on good terms with the bank, talking to them and letting them know we plan on paying the bank back on the two loans. Our attorney is negotiating that we buy the banks position from them. We are working on trying to get other financing in the meantime. The builder is willing to quit claim deed the properties over to us BUT here is the problem: We can take over the properties, be in 1st position (pay off the construction loans to the bank) BUT there is still the outstanding money owed to us that we gave the builder at the beginning of this whole process ($75,000.00 plus the money they were to pay us for co-guaranteeing the loans, $17,000.00) AND the second mortgage they took out on the properties,which totals $85,000.00. PLUS the deliquent taxes they haven't paid...If we assume these properties and we sell them we will have to pay back the 1st mortgage, second mortgage, delinquent taxes (about $11,000.00) and then possibly pay ourselves.We would still lose the money we initially loaned them. The homes should sell for around $440,000.00 each. The builder has told us that the second mortgage is not our responsibility and that they would take it over -to our faces.Now they are telling their attorney they have no money or collateral to cover the second mortgage. BUT while the houses were empty they were using them as model homes and gained several clients that they built homes for and made money from. PLUS they have the $85,000.00 second mortgage which they could not have possibly put into the homes since they were already complete!

This is where the fraud question comes in: The loan officer who wrote up the original construction loan that we were co-guarantors of is the same loan officer who wrote up the second mortgage on the homes. He KNEW that the builder owed us the money from the down pymt ($75,000.00) plus the extra $17,500.00 they promised us for being the co-guarantors of the loans. We do not know if the builder stated this on their loan application as a debt or personal loan obligation against the homes. Since we were the listing realtors we were also in contract for 1% of the sales price of both homes when they sold.   Also, any real estate agent bringing a buyer was to collect 3% of the sales price. We do not know what the bank appraised the properties at but it looks like there is no way they could come out of any deal with equity, unless they sold the homes over fair market value.

Here is my story...tell me what you think!

Thanks.