2006-03-31 10:25
BankRate.com has an interesting article about the challenges and pitfalls associated with flipping properties. Check it out by clicking here.

As I wrote in an article published by RealtyTimes.com back on the 31st of January, the day HUD released FR 4615, the “Prohibition of Property Flipping” rule, “flip” became a four-letter word. Utter the F word at a real estate conference or seminar, and you’re liable to be spending your lunch break at a cozy table for one. After all, “flipping” real estate–as defined by HUD–is unethical and illegal.

Flipping the right way, however, is a perfectly legitimate strategy for making serious money in real estate. You buy a property below market value, fix it up, and sell it for more than you invested in it. Do it well, and you can earn a handsome profit. Make a serious blunder, and you suffer a serious loss, and that’s what the BizRate.com article suggests.

The fix-it-and-flip-it approach has a positive effect on the real estate market. When done correctly, flipping increases property values, improves neighborhoods, and provides quality housing for those who need it most. It’s the American way–capitalism at work.

Wondering how a typical mortgage fraud scheme works? Here ya go:

A former New Jersey real estate investor was sentenced this week to serve 21 months in federal prison for his role in a mortgage fraud scam. In making his ruling, U.S. District Court Judge Joseph Greenaway, Jr. also ordered Barry Fauntleroy, 40, to pay $524,000 in restitution for inducing the Department of Housing & Urban Development (HUD) to insure mortgage loans for unqualified buyers, enabling he and his co-defendants to earn huge profits on the sale of run-down properties.

According to a press release issued by the U.S. Attorney for the District of New Jersey, Fauntleroy was president of EON Institute Inc., a NJ-based real estate holding company. On June 2, 2005, an indictment was handed down alleging that from June 1999 through July 2001, Fauntleroy conspired with a mortgage company president and an attorney to prepare falsified loan applications and supporting documents that were then submitted to the Federal Housing Administration (FHA) to receive HUD-secured loans

One of Fauntleroy’s partners in the scheme was 54-year-old Devon Bowie of Malverne, N.Y., who served as president of a company that was authorized to make HUD-insured mortgage loans, and which did so illegally to aid in the scheme. Bowie was sentenced last Friday to a 12-month prison term, and was ordered to pay $500,000 in restitution, which he apparently has agreed to pay in full within the next 25 days.

Another of Fauntleroy’s co-conspirators, 52-year-old attorney Peter Port of Roslyn, N.Y., was also sentenced in the case. Port, who served as the title agent on many of the properties involved in Fauntleroy’s schemes, pleaded guilty to one count of providing false statements for the purpose of producing false documents used in the scheme. The judge in the case sentenced Port to five months in federal prison and ordered him to pay $510,000, which Port paid in full at sentencing.

At his plea hearing, Fauntleroy admitted that he, along with his co-conspirators, fraudulently induced HUD to insure certain mortgage loans made to unqualified borrowers, which enabled Fauntleroy, Bowie and Port to earn huge profits from the sales of properties financed by the fraudulent loans.

In pleading guilty, Fauntleroy acknowledged that as part of the scheme, he and others solicited and recruited people with relatively low incomes to buy homes in Essex County, NJ, and elsewhere with the promise that the borrowers could secure the homes with little or no money down. According to court documents, Fauntleroy then located dilapidated properties that were available for sale. He then showed the borrowers the properties, represented to the borrowers that he owned the properties and that he would significantly renovate them and sell them at fair market value.

Fauntleroy arranged for the borrowers to purchase the properties by assisting them in obtaining HUD loans through Bowie’s company (Neighborhood Mortgage). Fauntleroy admitted that, in support of the HUD loan applications, he and Bowie and Port created and submitted false and fictitious bank statements, leases, IRS Forms W-2, verifications of past mortgage payments, pay stubs, attorney escrow letters, gift letters, verification of employment, real property appraisals and deposit checks.

Fauntleroy then purchased the properties at a reduced price, at times using the proceeds from HUD-insured loans obtained by the borrower, and re-sold the properties to the borrowers at the market, or contract, price, having done little or no work to renovate or otherwise improve the properties.

For anyone who might be interested, here’s an update to the piece I wrote back on the 20th of March about the husband and wife who recently turned to me for help with a real estate fraud-related issue.

From The Daily Tribune:

The couple who unwittingly sold their house in a mortgage fraud scam finally got some good news. LaSalle Bank has offered to pay Brenda and Terry Edwards $33,000 for a check cashed in their name with forged signatures.

“We don’t know if we’ll take the money. We might just set it aside for now because we want the house back,” said Ralph Roberts, a mortgage fraud expert who is helping the pair through the court system.

The Edwards’s thought they were signing documents to repay a $10,000 home equity loan when an unscrupulous lender slipped in a purchase agreement. The husband and wife ended up selling their Hilldale Drive bungalow to a third party who was part of the scam called equity stripping.

The “straw buyer,” who got paid off by the lender, didn’t keep up his mortgage payments and the Edwards’ house went into foreclosure and was sold at auction last year. The buyer then sought a termination of tenancy order against the Edwards’s in 44th District Court. The couple has until Tuesday to leave the house they paid off in 1997 or face eviction unless an injunction they requested late last week in Oakland County Circuit Court is granted.

Roberts said he hopes the injunction will prevent an eviction while the fraud case is investigated. “The Edwards’s have gotten some good news. It’s not great news but it’s working that way,” Roberts said.

It’s really nice to see a reporter (in this case, Catherine Kavanaugh) and her newspaper (The Daily Tribune) following up on a story as impacting as the Edward’s. In fact, since the original article first appeared back on the 19th of March, the Edward’s, Catherine Kavanaugh, and I have all received numerous phone calls and inquires from concerned neighbors wondering what they can do to help the Edward’s and protect themselves from similar scams. Everyone surrounding this case seems to clearly understand that real estate and mortgage fraud is a deadly killer, and everyone wants to help.

I think it was the British writer Jane Austen who said, “Every man is surrounded by a neighborhood of voluntary spies.” When it comes to spotting, stopping, and recovering from real estate fraud, that’s actually a very good thing!

Chalk one up for the good guys. Rachel Dollar over at MortgageFraudBlog.com reports that the better half of real estate fraud’s very own ‘Bonnie & Clyde’ team has been captured. According to Rachel:

Rebecca Hauck, the alleged co-conspirator of Matthew Cox, was arrested by federal authorities in Texas last week. Cox remains a fugitive. In connection with her arrest, Georgia authorities unsealed a 42 count indictment charging Cox and Hauck with conspiracy to defraud the United States, wire fraud, bank fraud, frauds and swindles, transportation of stolen property, money laundering and fraud with identification documents.

Cox and Hauck are alleged to have perpetrated a mortgage fraud scheme in Tampa, Florida in 2003. Cox and Hauck disappeared and showed up in Atlanta, Georgia where they are alleged to have again engaged in a mortgage fraud scheme and disappeared before being caught. Last year, Cox was almost caught in South Carolina but managed to elude authorities and disappear after obtaining over $1M in mortgage loans from his South Carolina operations. Prior to embarking on the alleged mortgage fraud spree, Cox is rumored to have written a 317 page novel entitled The Associates which details the fraud scheme in which he is alleged to have later engaged.

Click here for the rest of Rachel’s write-up.

In the meantime, if you see the fella pictured below, call your local law enforcement officials immediately. His name is Matthew Cox, and his known aliases include Maxwell Price, David R. Freeman, Gerald Scott Cugno, Michael S Shanahan, Michael J. Eckert, Gary L. Sullivan and David White.

If you spend as much time as I do researching, investigating, and reporting fraudulent real estate and mortgage transactions, you too might be a little nonchalant with respect to the two items I’m about to blog about. If, however, you’re new to the world of real estate and mortgage fraud detection, and you were wondering just how bad the problem has become, these two items should certainly knock your socks off:

BUSINESS SCHOOL PROFESSOR ARRESTED AND CHARGED WITH REAL ESTATE FRAUD: A business school professor at the University of Southern California’s Marshall School of Business was arrested last week for running a real estate fraud scheme that authorities say bilked $1,500,000 from investors, many of whom were the professor’s own students. You heard me correctly… someone entrusted with teaching graduate-level students a course called “Applications of Real Estate Finance to Problems of Development” was actually committing real estate fraud himself. According to the FBI, 36-year-old Barry Landreth was arrested last Friday (March 24th) on charges related to operating a scheme in which investors were defrauded when Landreth lured them with claims of large returns on real estate investments. According to a criminal complaint filed in U.S. District Court in the Central District of California, Landreth operated Webster Realty Investors and fraudulently represented to victims that he was in a position to invest in the development of real estate projects. Specifically, Landreth fraudulently represented that he was developing commercial properties in Las Vegas, Nevada, and Chicago, Illinois. In some instances, Landreth represented that the projects would return 190 percent of their initial investment within 30 to 45 days. The FBI also alleges that neither Landreth nor Webster Realty had any financial interest in the commercial properties represented. The FBI says Landreth obtained millions of dollars in investor funds based on his fraudulent representations, In short, Landreth operated what is commonly referred to as a Ponzi scheme, whereby early investors were paid with the investments of later investors in order to create the illusion of actual development deals and profitability. The complaint alleges that neither Landreth nor Webster Realty generated any profits or returns on the purported real estate development projects.

PRESIDENT OF THE OHIO ASSOCIATION OF MORTGAGE BROKERS EMPLOYS A FELON CONVICTED OF REAL ESTATE FRAUD: According to an article in yesterday’s Columbus Dispatch, Michael L. Matalka, president of the Ohio Association of Mortgage Brokers, is lobbying to change Ohio’s laws regarding the licensing of appraisers and mortgage brokers. While Matalka supports efforts to prohibit the appraisal of real estate for a mortgage loan without state certification or licensure, and also supports a national criminal background check on all applicants for a real estate appraiser certificate or license, a mortgage broker certificate of registration, or a loan officer license, oddly enough, one of Matalka’s own employees–at a company he runs called Manhattin Mortgage Group–is a convicted felon. The Columbus Dispatch’s Geoff Dutton reports that Manhattan Mortgage Group’s controller–Angela R. Robinson–pleaded guilty in 2002 to a federal felony charge of conspiracy to commit bank fraud for her central role in a property-flipping and kickback scheme in Columbus, duping banks out of hundreds of thousands of dollars. Click here for Geoff Dutton’s article.

I meant to blog about this earlier in the week but something else took precedent. I read a news story the other day about a California woman who was arrested this week for providing false information to lenders about the employment status of loan applicants. According to CBS News 5 in San Jose, 32-year-old Melissa Duran-Casaus is in custody on $20,000 bail.

Prosecutors tell News 5 that Duran-Casaus worked for a local insurance broker and would give false information to lenders about the employment status of loan applicants who were claiming to work at the brokerage (none of the applicants ever worked at the brokerage, according to court documents obtained by the television station). According to Rachel Dollar over at MortgageFraudBlog.com, court documents also allege that Duran-Casaus was working in cooperation with a local REALTOR®. Apparently, the REALTOR® would coach Duran-Casaus on what to tell lenders when they called to verify employment and annual earnings data which they had received from the Realtor’s affiliated loan applicants.

Wow; I mean, WOW!! This young woman now sits in a jail cell because she falsified employment verification information. Let that be a wake-up call to EVERYONE! Even if you think you’re just ‘helping out a friend’ by providing false or trumped-up info about their employment status, you are breaking the law.

Appropriately, Duran-Casaus is now charged with conspiracy and grand theft, and she faces a possible sentence of more than seven years in prison if convicted of all charges. That’s a tall price to pay for answering a phone and saying “Yes, so-and-so works here and they earn X number of dollars per month” to a lender attempting to verify employment!

Mark your calendars for July 9, 2007. That’s when a U.S. District Judge in Harrisburg, Pennsylvania, will hear opening arguments in a case alleging real estate fraud involving Chase Manhattan Mortgage Corp. and a Pennsylvania developer and an appraiser. According to yesterday’s The Morning Call newspaper (which covers the state’s Lehigh Valley region), a federal lawsuit alleging a conspiracy between a Pocono’s developer and one of the nation’s largest mortgage companies to defraud more than 100 home buyers has finally been scheduled for trial.

From The Morning Call:

Tannersville developer Gene Percudani, Chase Manhattan Mortgage Corp., Stroudsburg appraiser Dominick Stranieri and several others engaged in widespread fraud by selling homes at inflated prices through several of Percudani’s companies, including Raintree Homes, Why Rent? and Chapel Creek Mortgage.

Among those expected to be subpoenaed, said Weiss [sic: a New York attorney representing the plaintiffs] are mortgage companies Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., and the state Department of Banking…

Many of the buyers were minorities from New York and New Jersey, the suit said. But the buyers alleged the homes cost far more than advertised, and their real value was tens of thousands below the inflated purchase price. Unable to sell the homes or refinance their mortgages, many of the plaintiffs were forced into bankruptcy and foreclosure while others suffered financial hardships.

Weiss alleged that Chase Manhattan Mortgage, which bought the mortgages from Percudani’s Chapel Creek Mortgage company, knew of the fraud but continued to buy the mortgages anyway… Chase agreed in 2002 to ”write down” as many as 200 mortgages originated by Percudani’s company by as much as $50,000 each after independent appraisers hired by Chase determined the homes were sold for far above their value…

Chase, which has denied any wrongdoing, claims it was duped and has sued Percudani. …”

It seems that no one, not even one of the largest and most well respected financial institutions in the country, is able to avoid the fraudulent wave of activity that’s sweeping across the real estate landscape. A company as large and as sophisticated as Chase Manhattan Mortgage Corp. (now a part of JPMorgan Chase & Co.) should have been able to spot fraudulent real estate transactions from a mile away, one would think! Oh well, 15 months from now I suppose it’ll all get worked out. In the meantime–sad but true–a lot of unwanted speculation will be cast towards JPMorgan Chase & Co.

St. Louis Post-Dispatch business columnist David Nicklaus has an interesting editorial in this morning’s paper. Commenting on predatory-lending and the federal government’s attempt to further regulate the subprime lending market, Nicklaus writes:

“…given that states are finding ways to crack down on abuses without cutting off the flow of credit, maybe Washington should stay out of this fight.“

When Nicklaus’ suggests that “Washington” stay out of this fight, he’s referring to the numerous attempts by the United States Congress to further regulate predatory lending, which I hope we all recognize accounts for borrowers losing billions and billions of dollars annually due to predatory mortgages, payday loans, and other lending abuses like overdraft loans, excessive credit card debt, and tax refund loans.

Click here for Nicklaus’ entire column. As usual, it’s well written and informative, but this time around he’s only half right, and here’s why:

Personally, I am in favor of laws and regulations that put the interests of homeowners ahead of irresponsible lending that drains home equity from vulnerable citizens. If what Nicklaus really means to say is that Congress should not pass the proposed “Responsible Lending Act” (H.R. 1295), which would allow many abusive practices to continue, then I agree. The truth is that while “The Responsible Lending Act” claims to offer greater protections to vulnerable consumers, in fact, many key provisions of the Act come with loopholes that will continue to permit wealth-stripping and lead to foreclosures.

For example, unscrupulous lenders can drain a family’s wealth by inserting exorbitant fees into mortgage loans. They can repeatedly refinance the same mortgage until the borrower’s equity is gone. They can prevent victims of predatory lending from protecting their homes against foreclosure after the lender has sold their loan. Clearly, “The Responsible Lending Act” is nothing but irresponsible legislation.

On the other hand, “The Prohibit Predatory Lending Act” (H.R. 1182), which was previously introduced in Congress, offers a better option for protecting consumers and homeowners alike. Unlike the so-called “The Responsible Lending Act,” H.R. 1182 is based on anti-predatory lending legislation that is already effective in several states, including North Carolina, the home of many of the nation’s largest banks. Predatory lending has decreased dramatically in North Carolina while subprime lending continues to flourish. One study estimates that North Carolina citizens saved $100 million during the first year alone.

“The Responsible Lending Act” ignores state laws that are working well in areas where the subprime mortgage market continues to flourish. Rather than encouraging responsible lending practices, H.R. 1295 would allow abusive lending to continue while providing no meaningful enforcement and overriding successful state laws.

This is a time when foreclosures are rising in many areas, families are struggling with debt, and abusive lending practices are harming some of our most vulnerable citizens. David Nicklaus is only half-correct when he says Washington should stay out of the fight. Members of Congress should do the right thing by working to protect, not harm, the financial future of our nation’s working families.

The Detroit News is reporting that a Grosse Ile, MI, man has filed a class-action lawsuit against 17 companies and individuals, alleging he was the victim of real estate fraud based on grossly inflated residential property appraisals. Blaise Repasky, who The Detroit News says filed suit last Friday in U.S. District Court in Detroit, alleges that he purchased eight Detroit area homes in 2004 at a total cost of $940,000 but later learned that the true value of the homes totaled just $393,150. Click here for The Detroit News article.

A Dallas, TX, television station is reporting that a local man stands accused of running a mortgage fraud scheme that involved a home once owned by a popular ex-Dallas Cowboy football player. According to Dallas’ CBS 11 News, Oltha Austin, Jr. is wanted on suspicion of committing mortgage fraud. Apparently, Austin forged his mother’s name on a loan application and falsely claimed that she had a trust fund worth an estimated $6,000,000. Click here for the entire story.

From HattiesburgAmerican.com: “Richard Lucas, the alleged ringleader in a mortgage fraud case, was jailed Friday afternoon on a federal court order. Lucas, 31, was booked into Forrest County Jail about 1:10 p.m. Friday and remained there today. He and nine other people face federal charges of bank fraud, wire fraud and conspiracy to commit bank and wire fraud in connection with a so-called mortgage flipping scheme. During a March 1 hearing, U.S. Magistrate Robert H. Walker ordered Lucas to report to Clearview Recovery Center for drug treatment as soon as a bed was available and to maintain communication with federal probation officers. He had ordered Lucas to undergo a drug assessment as part of a pre-trial release agreement. It was not clear today why Lucas was ordered jailed.”

From The Chicago Tribune: “Federal authorities said Friday that a banker who fled the country after being indicted for mortgage fraud arranged for the wire transfer of $800,000 to accounts he controlled in Switzerland and Dubai shortly before he was charged. Fugitive banker Michael Kakvand was arrested in December in Canada, returned to Chicago but now wants to be released on bail. His lawyer, Edward Genson, is arguing that he is not a flight risk. U.S. District Judge William Hibbler has scheduled further hearings on the issue. FBI agent Jay Hagstrom testified Friday that Kakvand was secretly and illegally tape-recorded by a one-time co-worker while he was on the run. In one recorded conversation, Kakvand tells the worker: “I am sure from the bottom of my heart I have not done something terribly wrong.” Prosecutors contend that Kakvand was part of a ring that engaged in a $29 million mortgage fraud scheme.”

As I reported on February 3rd, as well as on the February 23rd, Real Estate Fraud is booming in Canada. Click here for an excellent article from the Saskatoon StarPhoenix on just how serious the problem has become.

Finally, the Atlanta Business Chronicle is reporting that a husband and wife team have been sent to prison and ordered to pay more than $2.5 million in fines for mortgage and bankruptcy fraud. According to the Atlanta Business Chronicle, Hurb Grant was sentenced last week by a U.S. District Judge to three years in prison and ordered to pay $1.3 million restitution for bankruptcy fraud related to a scheme to retain fraudulently acquired properties, while his wife, Jennifer, was sentenced in January to five years in prison and ordered to pay $1.3 million restitution. Click here for the Atlanta Business Chronicle’s article on Hurb and Jennifer Grant.

Real estate and mortgage fraud have become so prevalent that I now spend as much time on the phone talking with journalists, consumers, and other industry professionals about real estate fraud as I once did–back in the mid-1970s (when I first started out in this business)–selling real estate. On any given day, I field no less than 10-20 phone calls from newspaper reporters, victims, and real estate industry insiders… all of whom ask for help in understanding, fighting, and defending against real estate and mortgage fraud schemes and claims.

One such call came a few weeks ago. Lucinda Lienau from GMAC Real Estate/The Kee Group called to see if I could help a husband and wife from my area who unknowingly sold their house when what they thought they were doing was simply using their house as equity for a loan. Lucinda wanted to know if I could help Brenda and Terry Edwards prove that they’re victims of real estate fraud. Then, last week, a call came from a newspaper reporter covering the Edwards’ case.

From this weekend’s online edition of The Daily Tribune:

A DIRTY DEED
by Catherine Kavanaugh, Daily Tribune Staff Writer

Published March 19, 2006: Brenda and Terry Edwards wanted to take out a small home equity loan to pay back taxes. That’s all. Instead, the couple became targets of an unscrupulous lender who took them for all they have in a mortgage fraud scam that plays out in different variations every day in the United States.

The couple needed a quick $10,000 and decided to tap their biggest investment — a tidy bungalow on Hilldale Drive that they have lived in for 32 years and paid off in 1997. The Edwards found a mortgage company in the phone book, but it didn’t handle loans that small. They said the loan officer referred them to a personal lender named Gustavo Aguilar with the now defunct Hispanic Financial Group of Southfield.

The couple said Aguilar offered them service with a smile, coming to their house with his children on a Sunday, delivering them paperwork to sign and then cutting the check to Oakland County to cover their delinquent taxes just before the March 2004 due date. Sometimes Aguilar even stopped by unannounced to say hello and see how they were doing, Brenda Edwards, 54, said.

From April to October 2004, the Edwards said they called Aguilar repeatedly about a payment plan. To finalize the loan, the couple was told to go to a Farmington Hills office where they were presented with a stack of papers.

“There were some big figures in the papers, like $87,000 and $137,000,” Brenda Edwards said. “I didn’t know what was going on but I trusted Gus. I trusted him like you trust the doctor is going to take out your burst appendix and not cut off your leg. I signed things and we sold our house without knowing it.” Now the Edwards are tenants facing eviction from the 79-year-old house they bought as young newlyweds, lovingly updated, and never planned on leaving.

Shuffling through a file of documents with allegedly altered dates and forged signatures, the Edwards pull out an order from 44th District Court notifying them that they must vacate the premise by March 28 or face eviction.

The Edwards fell victim to a scheme called equity stripping, according to Ralph Roberts, a realtor, author and expert on mortgage fraud. In the typical equity stripping transaction, a lender or investor purchases the homeowner’s interest in a property for a fraction of the value, pays off the owner’s debt against the property and then sells the home to a third party for a handsome gain.

Roberts said these cases of equity stripping, loan flipping, packing and straw buyer schemes are just the tip of the iceberg. He said the FBI typically investigates complaints of losses totaling $500,000 or more. Roberts estimates one in four mortgage transactions involve some kind of fraud and he is urging Lansing lawmakers to tighten state laws to protect homeowners.

“This is the cancer of the American dream of home ownership,” Roberts said.

He wants to be the chemotherapy. A self-described crusader in the industry who discovered one of his agents participating in shady deals, Roberts contacted the FBI and started lobbying to close the legal loopholes.

“A loan officer doesn’t even have to be licensed in Michigan,” Roberts said, pointing to one of flaws in the system. “That has to change. You can scam someone, get fired for it and go to work somewhere else with no record of it.”

The scam against the Edwards began on the Sunday when Aguilar had the couple sign a…

Click here for the rest of Catherine Kavanaugh’s article, which shows exactly why I ALWAYS recommend the following:

Always, always, always understand what you are signing and agreeing to, AND always seek assistance from a skilled real estate attorney. If you do not understand something you’re being asked to sign, ask for clarification and re-read the document again before signing.

In fact, click here or scroll down to yesterday’s blog entry for my Top 10 Tips for Avoiding Real Estate and Mortgage Fraud.

Newspaper reporters and other real estate industry insiders often ask me for my top tips for avoiding real estate and mortgage fraud. While this list is not my 100 percent my own (it’s been culled from the FBI and other respected industry organizations), it does represent current thinking, with my own edits and additions for addressing the evolving nature of the problem:

TOP 10 TIPS FOR AVOIDING REAL ESTATE AND MORTGAGE FRAUD

1. Always, always, always understand what you are signing and agreeing to, AND always seek assistance from a skilled real estate attorney. If you do not understand something you’re being asked to sign, ask for clarification and re-read the document before signing.

2. Ask for and check referrals and references for real estate and mortgage industry professionals. Check the licenses of the real estate and mortgage professionals with state, county, or city regulatory agencies. Make sure the people you’re dealing with are ‘in good standing’ with the appropriate regulatory bodies.

3. Be suspicious of outrageous promises of extraordinary profit in a short period of time. If it sounds too good to be true, it probably is!

4. Always conduct business at either the real estate professional’s office or a bank. Doing so gives you further opportunities to verify the agent or broker’s professional standing, as well as alleviates pressure you may feel if someone is strong-arming you inside of your own home. Never sign documents in an unmarked office, i.e., an office without business identifying signage.

5. Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques and people who play to your emotions or religious beliefs. Again, if it seems too good to be true, it probably is!

6. Look at written information to include recent comparable sales in the area and other documents such as tax assessments to verify the value of the property.

7. Make sure the name on any documents you sign matches the name on your own personal identification card, i.e., driver’s license, social security card, state issued identification card, etc.

8. Review the title history of the property to determine if the property has been sold multiple times within a short period. If so, it could mean that this property has been “flipped” and that the value has been falsely inflated either by the seller or appraiser.

9. Know and understand the terms of your mortgage. Check your information against the information in the loan documents to ensure they are accurate and complete.

10. Be cautious of any real estate industry or mortgage professional who conducts 100 percent of their business on a cell phone on the road. Upstanding real estate industry professionals almost always have an official office and telephone line. Verify this information before agreeing to conduct business exclusively via a cell phone.

If you have suggestions for how to improve this list, please e-mail me at RalphRoberts at RalphRoberts dot com, or leave a comment by clicking on the “Comments” link below.

I’m in Boulder, Colorado, today and tomorrow meeting with a small group of highly successful REALTORS® from around the country. All of us are here at the invitation of Howard Brinton, founder of STAR POWER® Systems, and a real trailblazer and thought leader in the area of REALTOR® networking. Howard started STAR POWER® back in the late-1980s, and has guided it to be one of a very small handful of highly-respected real estate education companies on the planet.

All of us who have gathered here in Boulder believe that if we want to be wildly successful, we must surround ourselves with other wildly successful people. It’s a pretty straightforward concept, and it serves as the very basis of why STAR POWER® exists in the first place.

Later today I’ll be meeting with top real estate producers, including Ed Birdsong (Lake Jackson, Texas), Alexis Bolin (Pensacola, Florida), Martin Bouma (Ann Arbor, Michigan), Judy Markowitz (Flushing, New York), Jeff Meyer (New Port Richey, Florida), Debbie Morris (Indianapolis, Indiana), Sandra Nickell (Montgomery, Alabama), Cathy Russell (West Lafayette, Indiana), Russell Shaw (Scottsdale, Arizona), Mike Watkins (Greenwood, Indiana), and Debbie Yost (Casa Grande, Arizona).

Our agenda includes sharing ideas, thoughts, tips, and experiences on a variety of topics, including those related to:

- Pricing
- Commission Models
- Listing Presentations
- Creating Buyer Urgency
- Prospecting and Marketing

Along the way, we’ll be sharing our own statistics and stories on operating in a down market, as well talking about the types of materials we put into the hands of our clients; what types of dialogues we each find to be most effective; and how we differentiate ourselves and our approach under hot and down market conditions.

Gatherings like this one are not about keeping score or calling in a favor. They’re truly about helping one another to be the best people we can be. I think it was Albert Einstein who said, “Try not to become a man of success but rather to become a man of value.” That’s exactly how I feel, and it’s what drives me to help my fellow real estate industry professionals as much as it does to help my customers.

2006-03-15 09:45
Here’s some feedback I received related to yesterday’s blog posting about Colorado’s proposed Mortgage Broker Registration Act (HB 1161). I posted the following question on a discussion board over at BrokerOutpost.com:

Late last week, Colorado’s House of Representatives passed a Bill that–if approved by the state’s Senate and Governor–calls for all mortgage brokers to:

1. Register with the State.

2. Submit to a criminal background check.
3. Disclose any relevant administrative discipline that has ever been taken against them.
4. Post a $25,000 bond.

I’m just curious: what does your state require of you, and how do you feel about Colorado’s proposed law (especially the bonding part)?

Here are the responses I’ve received thus far:

1. It’s about time. CO lets anyone be a broker/LO without any regards to their abilities and no regulation. — Scott from Washington

2. This is to be a broker, not just an Loan Officer, right? Stuff like this makes our work more exclusive and helps justify our pay. If you are still in the biz with a law like this, then you’re probably worth your fees. — Andrew from Massachusetts
3. Kentucky requires a $50,000 bond! — Chris from Kentucky
4. For NY Mortgage Bankers… It is just the cost of doing business. — Martin from New York
5. Georgia requires a $50k bond as well. As an AE, it’s relatively handy in signing brokers up b/c a bond acts in lieu of company financials and shows liquidity. For the broker that doesn’t like to open up his books or even print off a balance sheet it makes things simple. — Scott from Georgia
6. Ohio requires a $50k bond also and there has to be some form of regulation in each state in order to improve the industry. — Dave from Ohio
7. In all seriousness, a $75k or higher bond should be required for a shop to open it’s doors, and it should increase with every originator added to the office. Any Loan Officer caught originating WITHOUT the bond in place should bring a fat fine to the office. Maryland is going to begin a more expensive lic’g process for Loan Officers that would have a fee attached, and part of it will have to be paid again, any time an LO moves to another shop. The hurdles to get into the biz are a joke in most cases. — Steve in Maryland
8. A 25K bond does not cost much of anything to buy… just a couple hundred a year. Bad thing is you have to personally guarantee it. — Corey in Missouri
9. West Virginia requires a $50k bond. Virginia requires a $25k bond. Both cost about $350.00 per year. — Natalie in Virginia
10. The idea that Loan Officers at mortgage companies somehow should have been immune from having the same requirements as Loan Officers at brick and mortar local banks was stupid in the first place. I hope to God that Missouri gets some kind of licensing requirements passed. I will be down there taking the exam the first day it’s available, and I’ll be laughing like a maniac at all the fools who can’t pass the exam or don’t meet background check requirements. — Matt in Missouri

It seems like everyone agrees… a $25,000 bond is a small price to pay to play.

Did you know that Alaska and Colorado are the only two states that don’t require mortgage brokers to at least register with the state in order to conduct business? I didn’t, and that’s why I’m happy to share that last Friday, Colorado’s House of Representatives voted 50-12 to pass the state’s very first Mortgage Broker Registration Act (HB 1161). If approved later this year by Colorado’s state Senate, 1161 would require all mortgage brokers in the state to register every three years with the director of the state’s Division of Real Estate. Mortgage brokers would also be required to submit to a criminal background check, disclose any relevant administrative discipline that has ever been taken against them, and post a $25,000 bond.

According to language contained within the Act, Colorado’s Real Estate Division could deny registration to any applicant who has filed an application containing material misstatements; been convicted within the last five (5) years of a crime concerning fraud, deceit, material misrepresentation, theft, or the breach of a fiduciary duty; or had a license, registration, or certification related to real estate, insurance, law, or investments revoked or suspended in Colorado or elsewhere.

Oddly enough, despite the fact that Colorado appears on the FBI’s list of top 10 “hot spots” for mortgage fraud, the Rocky Mountain News takes exception with the bonding requirement. From this morning’s online edition of the state’s second largest daily newspaper:

“…we support HB 1161…with one exception: The Senate should remove from the bill a mandate for brokers to post a $25,000 bond before they register… It could easily prevent would-be brokers who lack experience or personal wealth from entering a business that should not demand extensive certification or deep pockets.

Click here to read the Rocky Mountain News’ entire editorial.

Personally, I like the $25k bond requirement. I say leave the language in the Bill as is. The cost of a bond of that size–according to the Rocky Mountain News–would be around $400-$500 per year, which I feel is a small price to pay for an additional insurance that each and every mortgage broker in the state is operating above-board and in accordance with the law.

What do you think?

As I mentioned back at the beginning of February, I am now a contributing columnist on RealtyTimes.com, a leading real estate industry web site that over the last few years has become one of our most informative and timely sources of news and information.

Here’s a preview of my second article:

Eliminate Your Mortgage in Less Than a Year?:
By Ralph R. Roberts, CRS, GRI

Banks, mortgage companies, and other lenders offer plenty of legitimate ways to eliminate a mortgage. You can borrow less, refinance for a shorter-term loan at a lower interest rate, make payments every two weeks rather than every month, pay a little extra each month toward the principle, or sell the property.

Now, there’s an even better way. Dozens of companies promise to help homeowners completely eliminate their 30-year mortgages in a matter of months for a flat fee of only a few thousand dollars up front!

What a deal! For three thousand bucks or so, all you have to do is kick back in your lounge chair twiddling your thumbs, and in less than a year, you can own your home free and clear, even if you’re facing foreclosure! Even better, you may qualify to cash out tens of thousands of dollars in equity!

Here’s how a typical mortgage elimination scam works:

So, how exactly do these mortgage elimination scams work? To find that out you’ll need to read the article in its entirety by clicking here. And, as I mentioned in February, more of my articles can be found on RealtyTimes.com about once every month or so.

The headline for today’s post is not a misprint. Just when you thought you’ve seen it all, a story like this one comes out and knocks you off your feet. According to the Pittsburgh Tribune-Review, a Fayette County (PA) Assistant District Attorney was fired earlier this week after a title insurance company filed a lawsuit alleging he that the ADA forged closing documents bearing the title company’s name on real estate transactions through the ADA’s private law office. From today’s Pittsburgh Tribune-Review:

First American Title Insurance Co. filed the complaint Monday against Mark F. Morrison and Deborah DeFranks Morrison in Fayette County Common Pleas Court. In one instance, First American alleges Morrison and his wife, who is a secretary at his law office in Hopwood, South Union Township, were unable to account for money received from a mortgage company to pay off a mortgage for a client’s Hopwood residence at the time of the Aug. 17 closing. In lieu of satisfying the outstanding mortgage to Vanderbilt Mortgage, Morrison’s law office continued paying the monthly amount due, the lawsuit claims. As of Feb. 7, the outstanding mortgage was $46,615, according to the lawsuit…

During an interview with the Tribune-Review on Tuesday night, Morrison denied that he or his wife forged any documents and said the mortgage has been paid off. “I feel in the end, it’s going to be shown that I haven’t done anything wrong,” Morrison said. “The main point is the money was always there. There’s no money missing.”

Morrison has practiced law in Fayette County for more than two decades, serving as a defense attorney, solicitor for county departments and, most recently, as a prosecutor. District Attorney Nancy D. Vernon hired Morrison in August to fill a new position, administrative assistant district attorney, which the county salary board set at $34,963 annually…

Vernon said yesterday that Morrison had been very helpful in prosecuting some high-profile criminal defendants. However, some of the allegations could constitute criminal charges, leaving her with no alternative but to fire Morrison, she said. “I terminated him to avoid the appearance of impropriety in this office,” Vernon said. “I felt that I had no recourse.” If any criminal allegations were to arise, Vernon said she would refer the matter to the state Attorney General’s Office.

In its lawsuit, First American says it believes Morrison and DeFranks Morrison forged documents in the form of closing protection letters, title commitment letters and title insurance policies. In turn, those documents were issued to buyers and lenders in real estate transactions in which the defendants supplied the closing services, according to attorney Stacey F. Vernallis, of Pittsburgh.

Click here for the rest of the article.

For me, there are two ways I can approach this one. On the one hand, I can sound the alarm that even the prosecutors are dirty. That, of course, is not true, so I’m not even going to go there. On the other hand, I can hope and pray that this is all a big misunderstanding and that Morrison won’t be found guilty of misappropriation of funds and/or conspiracy to commit fraud.

The last thing we need right now in the fight against real estate and mortgage fraud is a case involving someone who is supposed to be prosecuting the bad guys. I mean really, can you image what an uphill battle we’d have on our hands if state officials were in on the action? It’s too difficult to even conceive, so I’m going with the ‘other hand.’ Let’s all hope this one is just a big misunderstanding!

Washington Post staff writer Debbie Wilgoren has an interesting piece in this morning’s paper about a Washington, D.C.-based man who faces 12 to 18 years behind bars for his role in a real estate fraud scam. From this morning’s online edition of The Washington Post:

A D.C. entrepreneur who has promised to help hundreds of low-income tenants turn their apartments into condominiums is being held without bond in the D.C. jail after he was convicted of cheating investors of nearly $750,000 in an unrelated real estate scheme.

Robert L. Hall Jr., 33, … ran his investment scam from 2001 to 2003, prosecutors said. He gave investment seminars and advertised on the radio, in newspapers and on the Internet. He told people he would double, even triple, their money if they invested in a real estate venture called the Trinidad Project, in the Trinidad area of Northeast Washington. In fact, there was no such project, prosecutors demonstrated at trial. And while Hall made payments to some of his initial investors, that money came from subsequent investors rather than from real estate profits. The payouts were offered as bait, prosecutors said, so that early investors would spread the word and recruit others.

Authorities described the scam as a pyramid, or Ponzi, scheme. Such a scheme is doomed to collapse when it runs out of investors, they said.

Assistant U.S. Attorney Steven J. Durham, the lead prosecutor in the case, said documents showed that about 160 investors had signed contracts with Hall. Of those, 71 responded to government inquiries and said they had lost most or all of their money. They included a soldier now serving in Afghanistan who gave Hall $30,000 he had been saving as a down payment on a house, a university professor from Seattle and a retired New York City police officer who turned over $10,000 that was supposed to pay for his daughter’s wedding. Although Hall is not a lawyer, he represented himself during the trial before Judge Henry H. Kennedy Jr…

Click here for the rest of Wilgoren’s article.

In the meantime, it might be helpful to know that Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi, who duped thousands of U.S. citizens into investing in a postage stamp speculation scheme back in the 1920s. According to the U.S. Securities and Exchange Commission, Ponzi thought he could take advantage of the differences between U.S. and foreign currencies used to buy and sell international mail coupons. He told investors that he could provide a 40 percent return in just 90 days compared to 5 percent for bank savings accounts. Ponzi was deluged with funds from investors, reportedly taking in as much as $1 million during one three-hour period—and this was in 1921 for gosh sakes! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.

Decades later, as we see in the Washington, D.C. case, Ponzi schemes continue to work on the “rob-Peter-to-pay-Paul” principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

If you read this blog with any regularity, you may have noticed that I’ll be speaking at next month’s Joint NPRRA-REIPA Conference in San Antonio, TX, about technology’s growing influence in detecting real estate and mortgage fraud. With nearly every major newspaper in the country, along with industry trade publications and blogs like mine, covering the surge in real estate and mortgage fraud-related activity, it’s a no brainer that tech firms are rushing to market with solutions they claim can detect the warning signs of fraudulent real estate transactions.

Carlsbad, California-based BasePoint Analytics–an early provider of ’scientific fraud scoring’ software for the banking industry–says it now helps mortgage lenders by applying ‘lessons learned’ in banking’s fight against credit card fraud in the fight against mortgage fraud. As a result of using BasePoint’s ‘FraudMark‘ software, the company says real estate industry insiders are able to protect against fraud while keeping their mortgage offerings more affordable.

BasePoint may be onto something here. To combat credit card fraud, the nation’s banks essentially went through a 4-step ‘fraud detection solution evolution’ that spanned nearly 30 years. Those steps included:

1. Reactive Investigations: Banks manually investigated customer reports and tips from other institutions and law enforcement officials.

2. Exception Reporting: Banks used computers to track common indicators of risk, such as the number and amount of transactions in a day.
3. Analytical Prevention: Using advanced scientific pattern recognition software, banks were able to provide early warnings of potentially fraudulent activity.
4. Optimized Fraud Sciences: Banks optimized scores and rules to obtain the greatest profit while keeping fraud at a minimum.

The result of banking’s investment in this process has been a 70 percent reduction in credit card fraud.

As we know all too well, fraudsters and scammers have expanded their focus to include real estate, where complex underwriting processes and a competitive lending market enable them to steal money on a much larger scale. Making the problem even more challenging is the fact that fraudsters are joining forces with industry insiders like REALTORS, brokers, appraisers, lawyers, notaries, and closing agents to achieve their goals. BasePoint says its customers are turning to their company’s technology to leapfrog steps two and three in the fraud solution evolution and keep fraud in check.

As a part of my research for next month’s talk at NPRRA-REIPA Conference, I did some research on BasePoint’s FraudMark system, and found that it uses patent-pending technology to identify and provide analysis of applicants, brokers, and appraisers behavioral trends, as well as provide analysis of the historical patterns of both fraudulent and non-fraudulent loan applications. By combining both approaches, BasePoint says FraudMark provides a high degree of predictiveness to identify which loan applications present the greatest risk of fraud.

It’s an interesting claim, but since I’ve never used FraudMark myself, I can’t say one way or another if it actually works. At the end of the day though, despite unique ‘patent-pending technology,’ the product won’t make a bit of a difference unless mortgage brokers, lenders, and other industry insiders agree to use it. I don’t know how much FraudMark costs to install and deploy, but I’m guessing it’s a fairly expensive proposition. Despite the unknown cost associated with using the product, the fact that the overwhelming majority of real estate and mortgage fraud acts are NOT committed by mistake begs the following questions…

1. Will enough industry insiders use FraudMark (or any number of other technological solutions being rushed to market) to make a measurable difference in the fight against real estate fraud? And…

2. If not, why not?

I’ll take an educated guess at the ‘why not’ part… 1. Because industry insiders who commit fraud have no real incentive to stop; and 2. Because those who want to contribute in the fight against fraud cannot afford to participate via the use of ‘cutting edge’ technology like FraudMark.

While I’m a firm believer in capitalism and all that it stands for, perhaps it’s time for the Federal government to step in and develop educational standards and an evolving technological solution that all real estate industry insiders are compelled to use. I know that sounds like a pretty dramatic solution, but something has to be done soon to educate the masses and put affordable fraud detection technology into place.

According to BasePoint’s own internal data, mortgage fraud has grown at a rate of 140 percent per year over the past three years, costing mortgage lenders and their customers between $1 and $3 Billion annually. BasePoint also says that at least one in every 250 mortgage loans contain some element of fraud that will result in financial loss to the lender, and that up to 40 percent of early payment defaults include material misrepresentations on loan applications that could have been detected before the loan was funded.

Clearly, the risks and costs are too high for us not to be talking about this.

2006-03-07 09:00

CONVICTED OF REAL ESTATE FRAUD BUT STILL SELLING HOMES!

In early-October of last year, a Federal jury in Iowa convicted a Des Moines real estate agent of three of nine real estate-related fraud charges that were brought against him. According to The Des Moines Register, 52-year-old Leonard Fazio was convicted of one count of mail fraud and two counts of wire fraud stemming from the unlawful resale of foreclosed homes in boith 2002 and 2003. From the archives of The Des Moines Register:

Des Moines, Iowa: October 11, 2005 — Prosecutors claimed during Fazio’s trial that the Des Moines real estate agent orchestrated a scheme from his Re/Max A-1 Best Realtors office to improperly pad his commission from a California-based mortgage company. Jurors acquitted Fazio of five of those six charges but found him guilty of mail fraud involving Fazio’s request to be reimbursed $1,650 in August 2002 for trash clean-up at a Des Moines home. Prosecutors alleged that that and other bills were inflated using fake invoices and checks written on a closed account.

Fazio insisted during the trial that the fraud was carried out by a former office manager whom prosecutors had given immunity. The remaining two convictions involve the sale of a New Virginia house that was sold to Candy Olson, Fazio’s former girlfriend. The house, which was sold to Olson for $48,000, was resold less than three weeks later for $110,000. Olson testified during the trial that she was unaware of the deal. Fazio acknowledged signing some documents for Olson but said he did so with her knowledge.

Now comes word out of Iowa that despite his conviction, Fazio is still selling homes! Can you believe that? I couldn’t! From NBC-affiliate, WHO TV in Des Moines:

Indicted, and convicted of fraud. But it’s business as usual for a metro realtor. A federal jury found Leonard Fazio guilty on two counts of wire fraud and one count of mail fraud back in October. But he’s still selling homes. Why?

The Iowa Real Estate Commission says the law won’t let them suspend or revoke a real estate license until a judge has signed-off on a conviction. That doesn’t happen until sentencing, and that doesn’t happen for Fazio until March 16th. The CEO at the Iowa Association of Realtors says he’s seen it before. He says the association can’t legally revoke membership until the state revokes the license.

Did you read that last part? While everyone knows that Fazio is guilty, his state’s real estate commission cannot stop him from working as a REALTOR. Remember now, the Iowa Real Estate Commission’s mission is to “protect the public through the examination, licensing, and regulation of real estate brokers,” and there’s still not a darned thing they can do to stop fraudsters like Fazio from representing buyers and sellers in real estate transactions. That my friends is nothing but a darned shame.

Back in mid-January of this year, I sent a letter to every states’ Attorney General to warn them about a credit enhancement scheme that’s gaining in popularity among some mortgage and real industry professionals. As Geoff Dutton writes in this morning’s online edition of the Columbus Dispatch, “Companies such as Creditlauncher.com and Seasonedtrades.com have transformed a common white lie in the real-estate industry into a full-fledged business.” Wondering what the common white lie is that Dutton’s referring to? From that letter I sent out in mid-January:

According to their website (http://www.creditlaunchers.com), Credit Launchers can add the name of a consumer applicant on Credit Launchers’ own credit accounts and allow them to reap the benefits of a drastically improved credit rating that they did not earn themselves. Through aggressive Internet-based advertising, this company markets its services in every state in a manner that specifically intends to deceive lenders and consumers alike.

I tip my hat to Geoff Dutton and his editors at The Columbus Dispatch. Every newspaper in the country should be covering this story, as should each and every real estate industry trade publication and website. In fact, if you’re a regular reader of my blog, you’ve probably already noticed that I also wrote about this very same issue as recently as last Tuesday (click here for that post). In the meantime, from this morning’s Columbus Dispatch:

Having trouble qualifying for a mortgage? There are a slew of tricks for padding your credit score, and a horde of companies peddling them. Internet companies are advertising a new tactic, a controversial service that is the latest twist in the murky world of “credit repair.”

It’s an open secret among real-estate professionals that prospective home buyers with marginal credit can improve their credit scores by persuading someone with good credit to add their name as an authorized user on their credit card — even if they have no access to the card. By piggybacking on someone else’s credit history, loan applicants boost their own credit score. Real-estate agents and loan officers sometimes recommend it. Local seminars have promoted the trick. And now, thanks to the Internet companies, you don’t have to rely on a friend or relative.

For a fee of several hundred dollars, the companies offer to add your name to a “seasoned” credit card, one with a history of timely payments. For several thousand dollars, they will add your name to multiple cards for a bigger boost.

Government officials and consumer credit counselors say legitimate methods for improving your credit score are free but take weeks or months. These experts recommend against paying for alleged shortcuts designed to fool the automated credit-scoring process. The blunt assessment of Steve Baker, the Midwest director of the Federal Trade Commission: “We’ve never seen a legitimate credit-repair company.”

In Ohio, a growing number of people are turning to them and feeling ripped off. Complaints to the attorney general about credit-repair companies have been on the rise, records show, including one filed recently against Creditlauncher.com by an industry watchdog.

“It’s very, very wrong,” said Ralph Roberts, a real-estate guru and best-selling author based in Michigan, who filed the complaint in Ohio. “They’re manipulating the system.”

Click here to read the entire Columbus Dispatch article. While the article itself is not as in-depth as I feel it could be, it’s a good start, and it shows once again–as I pointed out in a blog posting a few weeks back–just why the state of Ohio is out in front when it comes to providing across-board coverage of real estate and mortgage fraud-related issues.

I hope more and more newspapers and real estate trade publications start to cover this story as well. In fact, if anyone from the media happens to land on this post, and would like more information about this developing story, please contact me at editorial1 at ralphroberts dot com. I’d be happy to share a press release we’ve developed on the topic of credit enhancement/credit card piggybacking, which is also available on PR Newswire by clicking here.