An article in yesterday’s online edition of U.S. News & World Report points out something that may not be obvious to your average next door neighbor… as $1 trillion worth of adjustable rates mortgages are due to reset in the next two years, more and more homeowners will find themselves unable to meet their financial obligations, which, long story short, will more likely than not lead to foreclosure and the potential destruction of property values neighborhood-wide.

From the August 7, 2006 print edition of U.S. News & World Report (on newsstands now):

Call it the worst worst-case scenario. The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.

Then something really bad happens: You lose your job. There’s a medical emergency. You get divorced. You fall behind on your mortgage payments, and the bank forecloses on your home.

Those scenarios are now playing out for growing numbers of homeowners. Nearly 90,000 homes entered foreclosure in June, about a 17 percent increase over a year ago, according to RealtyTrac. Especially hard hit are homeowners in Massachusetts, where foreclosure filings jumped 66 percent in the second quarter as the housing market continued a sharp downturn. Foreclosure rates could increase more over the next year or so, “especially if we end up in a recession and see a lot of job loss,” says Doug Duncan, chief economist with the Mortgage Bankers Association.

Warning. In the past, foreclosures have largely been the result of a bad economy. Yet this time around, with a record number of borrowers exposed to rising mortgage payments through adjustable-rate and subprime mortgages, the increase in foreclosures could be a bad omen.

Click here for the rest of the article. As I mentioned back in mid-February, experts suggest that looses from adjustable-rate loan conversions will tally somewhere in the $110,000,000,000 range, and yet that figure represents less that one percent (1%) of total U.S. mortgage lending annually. Until all of us–-Realtors, Brokers, Regulators, Lenders, Law Enforcement, Appraisers, and Consumers–-get on-board with understanding what makes a real estate-related transaction go bad, the $110 billion in losses from mortgage payment reset will seem like a drop in the bucket when compared to the losses we’ll be facing as a result of the onslaught of fraudulent offers unsuspecting and desperate homeowners will fall victim to.

Yesterday, on AboutRalph.com, I blogged about how Donald Trump’s organization is bidding to bring a casino to Philadelphia, and about how I feel that this would be a disastrous move. Now, one day later, word comes that 10 Philadelphians have been arrested and charged in a massive mortgage fraud scam that involved nearly 200 separate properties.

From the Philadelphia Daily News:

the grand jury charged that Mahn Huu Doan, 38, of S. 72nd St., and an associate had made up bogus bank records, W-2 forms and pay stubs to get government-backed mortgage loans.

Most of the mortgages came from a company owned by Vincent Sirolli, 64, of West Deptford, N.J. Sirolli and three employees allegedly processed the bogus loan applications and got Doan the money he needed to buy the homes.

The feds said an appraiser inflated the value of the homes and two settlement agents prepared bogus paperwork to conceal the fraud.

Click here for the complete story.

Columbus, Ohio’s The Daily Reporter is running a three-part series on Real Estate and Mortgage Fraud:

When Franklin County Treasurer Richard Cordray and Prosecutor Ron O’Brien announced last month that they had filed a foreclosure action and a petition for receivership against the county’s “#1 Delinquent Tax Payer,” they once again brought attention to the multitude of problems associated with blighted properties and the state’s high foreclosure rates.

The Daily Reporter launched an investigation into that property owner’s business transactions and those of a company “it appears he had some connection with - Stillwater Asset Fund out of New York.”

In the first of our three-part series, we look at some of the transactions of both parties, the possible links between them and a legacy of foreclosures.

Click here for Part One, which appeared in yesterday’s online edition of The Daily Reporter.

Back in September of 2005, 63-year-old Edward Garnett and 70-year-old Shirley Akey were arrested and charged with one count each of conspiracy to commit fraud, three counts each of loan application fraud, two counts each of mail fraud, three counts each of wire fraud, and three counts each of money laundering, all in connection with a scam which netted the pair nearly $6,000,000 in fraudulently obtained mortgage loans. Now comes word from the United States Attorney for the Southern District of Florida that Garnett and Akey were sentenced late last week to serve time in jail and pay millions of dollars in restitution.

According to the U.S. Attorney in charge of the case, in order to obtain mortgages, Garnett submitted loan applications containing false financial information (such as overstated income, overvalued assets, false employment information, and false tax information) in his name and in the names of ‘nominee’ purchasers. Garnett and Akey then arranged for the nominees to become signatories on Akey’s bank accounts; that way, they would appear to have assets sufficient to qualify for the loans for which they were applying. Long story short, Garnett pocketed more than $1.4 million, much of which he shared with his longtime buddy, Shirley Akey. For her part, Akey concealed the money for Garnett and laundered it through her own personal bank accounts.

What a pair, huh?

Garnett, who has been incarcerated since his arrest in mid-September of last year, was sentenced to serve sixty (60) months’ in jail, followed by three years’ of supervised release, which was the statutory maximum sentence. In addition, he was ordered to pay restitution in the amount of $1,004,403.22. Shirley Akey lucked out, somewhat. As a result of cooperating with government investigators, she was sentenced to serve just one year in prison followed by three years of supervised release, and restitution in the amount of $1,004,403.22.

This past Sunday, Grand Rapids Press columnist Nancy Crawley took a shot at John Hayes, President and CEO of HomeVestors of America, because of a fight Hayes’ is leading to convince the Michigan state legislature to remove the words “flip” and “flipping” from bills that protect consumers against the scammers and fraudsters who commit real estate and mortgage fraud.

While HomeVestors–a Dallas, TX-based franchisor that trains an supports its franchisees in the art of flipping properties–supports legislation aimed at eliminating real estate fraud, Crawley reports that Hayes wants state lawmakers to understand that “flipping” a house is neither nefarious nor should it be made illegal. By the end of her column, Crowley basically says that Hayes’ is making a mountain out of a molehill, because regulators at the Michigan Office of Financial and Insurance Service say the proposed bills would not criminalize the practice of “flipping” if done legally.

While I understand Crawley’s criticism of Hayes and the stink he’s making over all of this, Hayes does have a somewhat legitimate concern. As I wrote for RealtyTimes.com back in January of this year, the day HUD released FR (Final Rule)-4615 Prohibition of Property Flipping, “flip” became a four-letter word. Utter the F word at a real estate industry conference or seminar, and you’re liable to be spending your lunch break at a cozy table for one. After all, flipping real estate is unethical, and according to the government flipping is illegal … or is it?

To some real estate processionals, “flip” may very well be a four-letter word, but to the hundreds of thousands of consumers who tune in to reality TV shows like Flip This House and Flip That House, flipping is a shrewd and honorable way to earn a buck. So, who’s right?

The bottom line is this… Real estate flipping has a double meaning, a split personality, a sunny and a sinister side. Criminals practice flipping to artificially inflate home values and sell overpriced homes to ill-informed buyers. Or they cash out the inflated equity, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies. The dark side of flipping destroys credit ratings, raises interest rates, and ruins neighborhoods. Over the long haul, it threatens to squash the American dream of home ownership. It is unethical, immoral, and illegal.

Flipping the right way, however, is a perfectly legitimate strategy for making 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 loss. The fix-it-and-flip-it approach that HomeVestors supports has a positive effect on communities and the real estate market as a whole. It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American dream — capitalism at work.

Michigan legislators have unveiled a legislative package they say will help stop the increasing number of mortgage fraud cases by making the crime a felony and freeing millions of dollars to investigate and fight real estate-related scams. Michigan’s real estate fraud losses have skyrocketed from almost $9 million in 2003 to $26 million in 2005, according to the FBI.

House Bill No. 6267, introduced by Representative Rick Baxter, allows money in Michigan’s Real Estate Enforcement Fund to be used by the state’s Attorney General’s Office to investigate and enforce mortgage fraud. The money, reported to be around $3 million, is currently restricted for prosecuting unlicensed activity.

Michigan’s struggling economy has given rise to a particular form of mortgage fraud. Many of the state’s residents are refinancing their homes to help pay bills, but some unscrupulous lenders are deceiving them into signing over their titles.

The legislative package introduced yesterday targets several types of real estate fraud, including equity skimming, mortgage-related identity theft, and the widespread use of property flipping, which regular readers of this blog know involves purchasing property and artificially inflating its value through false appraisals.

The package also includes a bill to prevent an appraiser from modifying appraisals in exchange for repeat or future business. The bill creates a felony class violation for appraisal fraud on any level, including influencing appraisers.

The FBI has ranked Michigan as one of the Top Ten “Hot Spots” nationwide for mortgage fraud, and has publicly made combating the crime a priority because real estate fraud hurts the overall economy and negatively affects consumers through increased interest rates and bank fees.

An Orlando-based title insurance fund recently polled more than 1,000 homeowners in Florida, and despite the fact that the FBI singles out that state as one of the nation’s top 10 hot spots for real estate and mortgage fraud, only one percent (1%) of the state’s homeowners say becoming the victim of a real estate scam is their biggest concern.

According to the survey, which is conducted annually by Attorneys’ Title Insurance Fund, more than two-thirds of those polled said their number one concern with homeownership is affordability. Other concerns include:

• 47 percent say they are concerned about being hit by a storm such as a hurricane
• 16 percent cite the impact of a housing bubble as their biggest concern
• 13 percent say rising mortgage interest rates is their number one concern
• 5 percent indicate depreciating home values tops their list of concerns

While I can certainly understand Hurricanes topping the list of Floridians’ concerns, the fact that only one percent consider real estate fraud a top concern is concerning in and of itself, and the CEO of the company who commissioned the survey feels the exact same way. Charles Kovaleski, CEO of Attorneys’ Title Insurance Fund had this to say about his company’s findings:

Surprisingly, the survey illustrates that Florida homeowners do not rank being the victim of real estate fraud as a higher concern, especially since Florida was recently named the top state in the nation for mortgage fraud. However, we are pleased to see that homeowners are increasingly turning to real estate attorneys to protect their real estate interests, which is significant given that understanding real estate laws is cited as most the confusing part of the home-buying process.“

As with nearly every other state’s efforts in the fight against real estate and mortgage fraud, mandatory fraud reporting is absent in Florida, and while the FBI is doing more now than ever before to help local authorities track reported acts of real estate and mortgage fraud, the system is almost entirely based on reacting to what happens, as opposed to being proactive in an attempt to stop it from happening in the first place.

As I have said many times before, the scammers and bad guys always seem to find ways to navigate around the system to prey on unsuspecting homeowners. We need education, more education, and even more education than that. With one percent of Floridians’ citing fraud as a top concern, will it be any surprise when Florida once again tops the FBI’s list of real estate and mortgage fraud hot spots?

If you need further proof that you must do your due diligence before entering into a real estate transaction, look no further than to the three-year prison sentence a Springfield, Massachusetts, pastor (yes, I said ‘pastor’ as in ‘religious minister’) received late last week for his role in a real estate fraud scam. From WCVB-TV, Boston’s Channel 5 News:

A Springfield pastor who admitted defrauding his own parishioners in a $600,000 real estate scam was sentenced to three years in prison. The Rev. Paul Starnes was also sentenced Friday to five years probation and ordered to repay $137,000 to two banks defrauded in the scheme.

In January, Starnes pleaded guilty to two counts of wire fraud and one count of conspiracy to launder money. Federal prosecutors said Starnes and two others from Trinity Mortgage Brokerage Co. were involved in a land-flip scheme that involved buying depressed properties and paying off appraisers to inflate their values. They then recruited poor, first-time buyers and drafted phony financial documents to obtain mortgages.

Assistant U.S. Attorney William M. Welch told U.S. District Judge Michael Ponsor that the minister targeted four of his own parishioners at the Morning Star Church. “I can’t figure out what’s worse: Defrauding a total stranger. Or a family member. Or one of your parishioners,” Welch said.

Starnes’ attorney, Peter Ettenberg, argued his client should be given credit for helping prosecutors win convictions against two of his employees. He told Ponsor that Starnes’ resorted to unethical practices while arranging loans when his company struggled in the late 1990s.

This is not the first time–nor do I suspect it’ll be the last–that religion has found its way into a real estate fraud scam. So-called ‘mortgage elimination’ companies will sometimes use biblical references to lure susceptible homeowners into their web of deceit and trickery (if you’re not familiar with these scams, mortgage elimination schemes work because they resonate with the most vulnerable of homeowners–namely, those who are facing bankruptcy or foreclosure and believe God can and will bail them out).

If you suspect that you’re being taken advantage of inside the confines of a real estate-related transaction, seek help immediately. Click here for further details on who to turn to for help.