Why would anyone give a "fake" second mortgage? Here's how the scam works. Let's say the seller wants $100,000 for their house. The buyer does not have a down payment, and does not want to pay mortgage insurance. The buyer, seller, and sometimes the real estate agent, loan officer, and title company all conspire to increase the purchase price to $120,000 with the seller "financing" $20,000. The $20,000 seller financing is shown on the settlement statement. There is an actual note and mortgage signed by the buyer at closing evidencing the $20,000 debt. In extreme cases, the title company will even record the mortgage (though most do not).
So far, this is completely legitimate. What happens next though, is that the mortgage is immediately released, and the note cancelled. I have actually heard tell of the president of a big title company in our area who actually makes a big show of tearing up the note at closing.
As soon as that is done, it becomes a $20,000 gift from the seller to the buyer. And it becomes mortgage and RESPA fraud. The end lender is led to believe that the purchase price is actually $120,000, and that the buyer will be making payments to the seller on the $20,000. The truth is that the house is only worth $100,000 and the buyer has absolutely no investment in the property. Not really any different that under the table kickbacks, except that they put it on the table first.