After considering the developments of the past year, I am admittedly concerned about the real estate and mortgage fraud outlook for 2007. Real estate and mortgage fraud is a complicated issue, one that presents a spectrum of societal challenges in the form of costs and consequences.

• Industry leaders express concern without revealing a concise and cohesive strategy to combat the epidemic.
• The U.S. Justice Department continues a misguided agenda of prosecuting mostly notorious fraudsters in metropolitan areas.
• State and local authorities often recognize the existence of a problem, but lack the resources to confront this sophisticated form of theft.
• As a matter of public policy, the causation factors that result in a breakdown of protocol in real estate transactions are either misunderstood or conveniently ignored.

We are told that real estate and mortgage fraud is properly managed by tagging individuals and properties as high risk factors based on information contained in databases. Transparency is the sound-byte of the day and ostensibly a contributing factor to loan quality enhancement and loss mitigation. Sadly, though, technology is the only publicly disclosed solution proposed by lenders and title insurers at this time. The two industries that stand to lose the most have inexplicably shown little initiative in solving, i.e., studying the problem. A dependence on technology has blinded them from a simple truth: The consequences of real estate fraud are a human reality, not a virtual reality. Why would a cybernetic approach to fraud prevention work in 2007 if it did not work in 2006?

The unrealistic expectations placed on automation by the real estate industry begin at the advent of every transaction. Homes are listed and sold locally, yet lenders and title companies now embrace a business model that espouses the virtues of mass production. The variables leading to homeownership are not linear and quantifiable as suggested by the “factory mentality” that is loan and title processing in today’s world. Escalating real estate and mortgage fraud statistics correlate directly to the application of new technology. The real estate industry has lost site of the fact that advances in technology are meant only for the advancement of the human condition. The incidence of real estate fraud was statistically insignificant in the past when lending and title services were personalized and community-based.

Far too often, fraudsters target communities and individuals that can least afford the abuse. A boarded up home is visible evidence of real estate fraud; despair is the human cost that’s publicized so rarely. Consumers are sensationalized as villains by professional associations and the media when, in reality, all schemes require the orchestrated efforts and coaching of industry insiders. Legitimate studies conclude that predatory lending practices are biased towards minority and lower income groups. Deceitful Realtors enlist the cooperation of title agents and appraisers to exploit unsophisticated or otherwise vulnerable borrowers. A study released earlier this month by the Consumer Federation of America indicates that woman with above average income and credit scores were more likely to obtain sub-prime financing than men with similar profiles. Households headed by woman, particularly women of color, are unable to realize financial security through the traditional path of homeownership. The “yield spread premium,” an advanced banking concept designed to bundle disparate loans in commodity markets, is often used abusively by mortgage brokers to over-sell unsustainable payments to trusting customers. The deceitful mortgage brokers are then paid undisclosed fees by wholesale lenders. I strongly oppose the use of the yield-spread premium in retail markets without disclosure requirements that are much stricter than those currently employed.

In some ways, 2006 marked the beginning of a period of accountability for industry insiders who commit or facilitate real estate and mortgage fraud. A dramatic spike in default rates occasioned by rising interest rates has unearthed a generation of loans originated by internally falsified documentation and over inflated appraisals. It is now impossible for lenders to use hyper-appreciated REO values to understate actual losses caused by foreclosures. The crimes of the past decade are finally coming to light. The media suspects that the real estate industry has had its collective hand in the ill gotten profits of fraud. Future articles appearing in respected publications will provide the basis for criminal investigations, regulatory inquiries, and class action litigation.

Reform will take a very long time and will offer no relief for those already victimized by fraudsters. In his book, “An Inconvenient Truth,” former Vice President Al Gore wrote: “We have everything we need to begin solving the crises, with the possible exception of the will to act.” An informed and concerned community of consumers is the fraudster’s worst enemy! A community-based approach to fraud prevention presents opportunities for consumers to avoid exploitation, especially when initiated by industry insiders. FlippingFrenzy.com is a perfect example of a learning opportunity for consumers and industry insiders alike. I predict that fraud statistics in 2007 will escalate to startling heights. For reasons I cannot comprehend, legislators and industry leaders will continue to approach the problem with stone hearts and closed minds.

Real estate and mortgage fraud is a human issue that can only be solved through a shift in public policy and public perspective. Once society recognizes that human suffering is the primary cost associated with fraudulent activity in the housing market, things will change. The system is broken and needs fixing, and while 2006 saw some progress, sadly, it was not nearly enough.

Earlier this month, Robert S. Mueller, III, Director of Federal Bureau of Investigation (FBI) appeared before the United States Senate Judiciary Committee to discuss the progress of what he called the FBI’s transformation efforts. From the Director’s December 6, 2006 testimony:

Good morning, Mr. Chairman, Senator Leahy, and members of the committee. I am pleased to be here today to discuss the progress of the FBI’s transformation efforts.

When I was sworn-in as the sixth Director of the FBI on September 4, 2001, I was aware of the need to address a number of management and administrative challenges facing the Bureau at that time. However, the terrorist attacks of September 11, 2001, the emerging threats brought on by globalization and advances in technology, and the continued traditional criminal threats, required far more changes than we could have ever expected. Indeed, the last five years have been a time of unprecedented change for the FBI.

While there have been some setbacks along the way, there has also been remarkable progress. Today, the FBI is a stronger organization, combining greater capabilities with the longstanding commitment to the security of the United States.

Buried among the Director’s 9,400+ words of testimony was the following, which those of you who are concerned about real estate and mortgage fraud in this country might find interesting (if not disappointing):

Since October 2001, the FBI’s Financial Institution Fraud (FIF) Program has targeted the most egregious financial institution offenders, both insiders and outsiders.

The FBI’s Mortgage Fraud Program, for example, consists of our working with approximately 200 contacts in law enforcement and industry at the national level, and task forces and contacts at the field office level, in order to address this over $1 billion crime problem. The Mortgage Fraud Program focuses our resources on those engaging in mortgage fraud for profit, as opposed to property, typically involving rings of professional insiders. In December of 2005, the FBI participated in Operation Quick Flip, a national takedown that resulted in 156 indictments, 81 arrests and 89 convictions. The losses associated with these cases alone cost the mortgage industry $607 million.

Since October 2001, the Financial Institution Fraud Program has made more than 6,000 arrests, obtained more than 13,000 indictments and informations, and secured more than 12,000 convictions. These investigations have resulted in more than $131 million in recoveries, $159 million in seizures and forfeitures, $14 billion in restitution payments, and $632 million in fines.

Anyone care to comment on what Director Mueller categorizes as “remarkable progress”?

In the real estate business, we tell our clients think of a wish list as criteria for the perfect home. While it’s rare to find everything they’d like in the house they finally purchase, sitting down and making a wish list will help them find the house which most closely matches their dream.

Syndicated columnists Gail Liberman and Alan Lavine have released their wish list for the banking industry, and taking steps to address this country’s real estate fraud problem is near the top of their list:

1. Consolidation of U.S. bank and financial services regulatory agencies and creation of an independent financial-services consumer advocate. The advocate should be reachable via a toll-free line, mail or e-mail and have authority to immediately investigate and act solely in response to complaints against financial institutions. Right now, there are more than four federal financial regulatory agencies alone. This dramatically delays enforcement and leads to a lack of awareness — even among industry experts — about whom to contact with a financial problem.
2. Centralized U.S. government financial crime statistics, including those for identity theft. Any and all financial institution crimes charged by consumers, financial institutions or local police should be reported immediately to a single federal agency. That agency should have authority both to investigate and notify appropriate law enforcement agencies and financial institutions. Right now, the only official bank crime statistics that we know of are logged by the Federal Bureau of Investigation, and apply to bank robberies–6,748 in 2005, down from 8,496 in 2001–at federally insured financial institutions. Decentralized data lead to a lack of enforcement, unredeemed losses to those who need money most and high financial-institution losses. Trade association data are inadequate–given the FBI’s acknowledgment that roughly 80% of the increasing mortgage fraud losses involve industry insiders or collaborators.
3. Public online disclosure of both financial crimes and consumer complaints. The aggregate tallies per named financial institution, brief summaries and dispositions should be included. These should be posted at appropriate regulatory agency web sites.
4. Consolidation of consumer protection laws. That would include laws on checking accounts, e-checks, ATMs, debit cards, prepaid cards, money market deposit accounts and wire transfers. Liability for fraud and/or errors should not be based on the nature of the transaction. Bank customers should not have to hire a costly attorney for obvious errors or fraud.
5. Greater consumer protections on deposit accounts and credit cards for businesses, which lack nearly all protections available to consumers. Of the 25.8 million U.S. businesses, 99.9% represent small firms with fewer than 500 employees, according to the Small Business Administration.
6. An industry move away from risk-based pricing on loans and the rewarding of high-balance customers on deposits. The nation’s lowest-income should neither have to pay the highest mortgage and loan rates, nor should they have to earn the lowest interest rates on savings. “Reducing the costs of living for lower-income families by just one percent would add up to over $6.5 billion in new spending power for these families,” reports a July Brookings Institution study.
7. Regulation for all. All financial institutions–including finance companies, mortgage companies and industrial loan companies–should be accountable to the same strong federal consumer protection and disclosure rules.
8. Financial institutions should strive to offer special, fairly-priced accounts for those who never have had a checking account or credit card. More institutions should waive bounced-check fees to persons who never have bounced checks or who unknowingly deposited a bad check from someone else. Before bounced check fees ricochet due to one incident, accountholders should be alerted.
9. Speed. Faster crediting of interest on deposits, which is only fair now that banks are debiting checking accounts faster.
10. Choice of venue for complaints. Consumers opening bank accounts should not be required to submit to arbitration if they have a dispute with their bank.
11. More uniform disclosure of credit-card fees, interest rates and other pricing nuances. If a solicitation or ad offers an attractive rate, the institution should be required to display any catch to it in equal-size type.
12. Give notice. If terms of a bank account or credit card have changed, institutions should be required to provide in notices both what they are, and what they will be. Easy-to-read disclosure of specific account terms should be required with account approval notices.
13. Universal default clauses should be prohibited on credit cards and loans. Rates and fees on a bank loans should not increase based upon a misstep with another unrelated customer account.
    More speed. Improved bank customer service response times.
14. Soldier solidarity. More financial education and assistance to our military, whose families are getting particularly clobbered by steep bank fees and unfair practices.
15. More attention to bank online security. And along with that stronger guarantees of reimbursement to consumers who bank online. Elimination of phishing, viruses and hacking incidents that lead to both consumer and bank losses.

Liberman and Lavine are husband-and-wife columnists and authors based out of Palm Beach Gardens, Florida. Their columns run on Dow Jones MarketWatch and in the Boston Herald, Pittsburgh Post-Gazette, several Scripps Howard newspapers, MyFinancialAdvisor.com, Fundsinteractive.com, Allaboutfunds.com, and Quicken.com. Their latest book, Quick Steps to Financial Stability (Nov. 2006, Pearson/Que) reflects their dedication to helping consumers make informed decisions about their personal finances. With any luck, the banking industry is listening, also.

Yesterday, the National Association of Realtors® issued a press release voicing the organization’s concern “…over the rising rate of defaults and foreclosures occurring in many areas around the country.” It was an attempt to warn consumers to steer clear of exotic mortgages and predatory lending practices. Although the warning is an important one, it does very little, literally, to help homeowners avoid the common trap of digging themselves deeper and deeper into debt, and comes far too late for the millions of individual homeowners and families who are already facing foreclosure.

Personally, I am a 30-year veteran of the real estate industry, and sadly, I am no stranger to foreclosure. I lost one of my first homes (over 25 years ago) to foreclosure, and I run a real estate business in a state considered by many to be the foreclosure capital of the America. Throughout my career, I have bought and sold foreclosure properties, along the way helping thousands of people facing foreclosure escape the foreclosure trap.

Over the years, when it comes to foreclosure, I have come realize one thing above all others: Homeowners facing foreclosure are often too embarrassed or terrified to seek help. What few of them realize is that the longer they wait, the fewer their options. Wait too long, and you end up losing your home, your credit, and any equity you may have built up in that property.

I encourage everyone involved in real estate, including homeowners, lenders, and real estate professionals, to work together stem the tide of foreclosures. Homeowners–you need to need to know your options; and real estate professionals–you must make distressed homeowners in your area more aware of their options. What options am I referring to? Well, for starters…

1. Contact the lender: Homeowners facing foreclosure often make the mistake of avoiding their lender, which is exactly the wrong thing to do. If you are facing foreclosure, contact your lender early, explain your situation, and find out your options.
2. Contact family members or friends: Ask for help. If you were in a position to assist a family member or friend who was facing a similar situation, how would you feel if they didn’t ask you for help?
3. Reinstate the mortgage: If you can come up with enough cash to bring mortgage payments up to date, the lender may agree to hold off on foreclosure proceedings.
4. Negotiate a forbearance: If you contact your lender early enough, they may be willing to restructure your payments to help you get back on track after a temporary financial setback. Even if you think it is too late, it’s never too late to ask!
5. Refinance out of foreclosure: With a good credit history, you may be able to consolidate your debt with a loan that requires a total monthly payment of less than you’re paying on all your other loans put together.
6. Sell your home: If you owe less on the home than what you can sell it for, consider selling the home and find more affordable accommodations. Selling the home is what 90 percent of those who are facing foreclosure really need to do, but unless you act quickly, you may run out of time.
7. Negotiate a short sale: Lenders typically want to avoid foreclosing, because it costs them money. You may be able to convince the lender to accept less than the total amount owed on the mortgage. Again, you never know unless you ask.
8. Sell the home and renting it back: A real estate investor may be willing to purchase your home and then lease it back to you or sell it back to you on a lease-option agreement, which is like a rent-to-own agreement. Be careful though with these types of agreements: always seek the counsel and advice of a lawyer when dealing with lease-option and rent-to-own agreements.
9. Give a deed in lieu of foreclosure: If you owe much more on a house than what you can sell it for, you may be able to offer the lender the deed in exchange for them not foreclosing on you. You lose the house but retain your credit rating.
10. File for bankruptcy: Bankruptcy is rarely the best choice. In most cases, it simply buys you some time, but is often the most costly option.
11. Do nothing: Doing nothing is, by far, the worst option. It ultimately leads to losing your home, any equity you may have built up in that home, and compromising your ability to qualify for future loans.

In addition to encouraging homeowners to know their options, I strongly recommend that they know their redemption rights. In areas with a redemption period, homeowners may retain possession of the home for three months to a year after someone buys the property at a foreclosure auction. Many disreputable investors fail to properly inform the homeowners of their redemption rights. As soon as they buy the property at auction, they show up at the house and claim that the homeowners must leave immediately. By knowing your redemption rights, you can prevent this from happening.

I also want to warn any homeowners who are facing foreclosure to watch out for greedy investors and con artists. When foreclosure rates rise, the con artists crawl out from the rocks they were hiding under to prey on the vulnerable homeowners. To protect yourself, know your options and know your rights.

On November 26, 2006, the Orlando Sentinel published an article by noted syndicated columnist Robert Bruss entitled “Hear this loud and clear: A “silent mortgage” is fraud.” The term “silent mortgage,” synonymous with “silent second,” is one that I hadn’t heard for nearly a decade. Feeling admittedly startled, the observation of a lending industry veteran shared long ago came to mind: Fraudulent schemes from the past have a way of resurfacing when the housing market slows.

The term “silent second” was used often among industry insiders to describe a popular scheme to defraud lenders during the 1990’s. With this being said, consumers need to know enough about “silent seconds” to avoid them and the accompanying criminal consequences. The FBI’s website offers this definition of the silent second:

Silent Second: The buyer of a property who borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

It is important to note that the buyer actually intends to repay the debt to the seller. As harmless as this scenario might appear, it’s riddled with deeper underpinnings of fraudulent activity including the misrepresentation of the borrower’s financial profile to the lender. A common fallacy to avoid at all costs is one dependent on the right of buyers and sellers to have side agreements that are not disclosed to lenders.

There is another scheme involving second mortgages and multiple layers of criminal planning that is also worth mentioning. The scheme, known as the “throw away second,” works like this:

Once a selling price for a home is agreed upon, a second contract is fraudulently drafted for a higher (predetermined) amount. The primary lender is deceived into relying on the existence of a second mortgage between buyer and seller for the difference between the actual selling price and the overstated selling price. Why? Some conventional loan programs allow a buyer to borrow a percentage of the selling price from the seller as a substitute for a deposit. The “throw away second” is typically recorded, but sellers are asked to sign a release at the closing table. Payments are never made or expected. In addition to the two (2) different contracts of sale, this particular scheme is evidenced by two (2) different settlements sheets and a commission paid on the lower selling price.

Quite obviously, the crimes described above could not exist without the assistance of Realtors, title agents, loan brokers and appraisers. Once a scheme to defraud a lender is revealed, buyers and sellers face a distinct risk of prosecution in spite of a contradictory misconception held by many. The following federal case illustrates an example of a consumer being implicated along with an industry insider:

On May 9, 2006, a 31-year-old mortgage broker from Centerville, Ohio, pled guilty in federal court to one count of money laundering as part of a mortgage fraud scheme. The scheme involved the mortgage broker and the seller of a home that the mortgage broker was purchasing as a personal residence. The two conspired to deceive a lender by misrepresenting seller’s monies as the buyer’s down payment. Both individuals were indicted by a federal grand jury. The settlement sheet signed by buyers and sellers at every residential transaction contains the following warning:

It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment.

The vast majority of home loans have a nexus to federally insured funds. It’s as simple as that! My advice to consumers and industry insiders alike:

1. Avoid any aspect of a real estate transaction that’s described by the word “silent”
2. Avoid any transaction where an “actual” second mortgage is not disclosed to a lender
3. Avoid any transaction where a “fabricated” second mortgage is disclosed to a lender
4. Avoid any transaction that requires two (2) differing settlement sheet and/or contracts of sale
5. Reject any notion that real estate fraud is not actively prosecuted by authorities

The recent implosion of the housing market has created a difficult situation for many people trying to sell a home. Rumors abound of innovative and creative inducements being offered to prospective buyers. While the temptation to participate in seemingly benign schemes that make a house more affordable to buyers may be overwhelming, keep one thought in mind though: Any time the success of Real Estate deal requires less than total and honest disclosure to a lender…it is illegal.

Robert “Bob” Bruss–a California Real Estate attorney/broker and the former director of the National Association of Real Estate Editors, but best known as a respected and widely syndicated writer and consumer advocate for all things Real Estate–just reviewed my latest book, Flipping Houses For Dummies. From Bruss’ weekend column:

Realty Broker Reveals How to Profit From Flippers
By Robert Bruss
Sunday, December 17, 2006

In good markets or bad, real estate broker Ralph R. Roberts reveals in “Flipping Houses for Dummies” how he acquires run-down houses, fixes them up, and then either “flips” (sells) them for a profit or holds for long-term investment. Roberts, a highly respected real estate author, trainer and broker, shares his techniques along with advice on how to minimize the tax bite on profits.

Every serious real estate investor who wants to earn large profits needs to understand the methods Roberts uses because he has perfected flipping houses almost to a science. He thoroughly understands and explains all the critical aspects, including locating the properties to determining if they are suitable, negotiating a successful purchase, supervising the fix-up work, and making a profitable resale.

As a longtime real estate broker, Roberts knows all aspects of the home brokerage business and he doesn’t hesitate to share his insider secrets. For example, he says, “Nothing on the MLS (multiple listing service) is the gospel truth. Sellers and real estate agents alike often estimate room sizes or make mistakes when entering details. Approach all prospects with a discerning eye.”

Even if you are not interested in “quick flip” real estate profits, this is a great book to study because the author shares so much of his real estate knowledge which he gained, starting at age 19, over more than 30 years in the real estate business.

Maybe Roberts is getting a little “salty” in his old age, but he exposes secrets most Realtors would never share with their clients. Examples include how to obtain a “listing history” of a property, how to determine what the seller paid, how long the property has been on the market even with more than one listing, and if the property is difficult to “unload.”

This is a “fun read” book in the usual dummies style, which includes features such as tips, warnings and even several sanity checks. Along the way, Roberts shares many personal examples to illustrate the topics, making the book extremely valuable so the readers don’t make the same mistakes he made.

Throughout the book there is heavy emphasis on what to look for in a potential flipper house, how to locate them, how to acquire them, and how to finance them. Roberts provides valuable insights about the importance of borrowing funds. “As a real estate investor, good debt gives you leverage,” he advises, meaning you control the property with little of your own cash.

Along the way, there are several excellent checklists such as the “profit projector” and the “home inspection checklist” so no important aspect is overlooked when evaluating a possible flipper candidate.

Especially valuable is the chapter on “The Art of Haggling: Negotiating a Price and Terms.” Having sold thousands of homes at his real estate brokerage, Roberts is a “pro” when it comes to negotiation and putting sales together. His negotiation strategies are priceless. I especially enjoyed the part about “digging up pertinent information about the seller.” If you are a serious real estate investor, this chapter is a “must read.”

Foreclosures receive extra attention because they offer special flipper profit opportunities. Acquiring these properties can be tricky, but Roberts simplifies the process as much as possible without getting bogged down in details. Of course, it helps that he has a full-time associate who specializes in acquiring these distress properties.

This book is designed for realty investors who want to profit from buying below market, making cosmetic improvements to add value, and then quickly reselling. But real estate agents and home buyers should also study it because of the valuable insights offered by a longtime, very successful real estate broker. On my scale of one to 10, this superb book rates an off-the-chart 12.

Flipping Houses for Dummies, by yours truly and Joe Kraynak is available in stock at bookstores across the country or from Amazon.com.

In August of 2005, a federal grand jury returned a twenty-one-count indictment against four people for participating in an extensive land-flipping scheme involving residential properties in Manatee and Sarasota Counties, Florida. Named in each of the twenty-one counts were Kelly Abercrombie and her husband, Todd Kerber. The indictment alleged that Abercrombie and Kerber, along with Todd Kolbe, Kirk McVey, Aaron Kolbe, and Amy Samelson, participated in a scheme to defraud Home Star Mortgage, LLC, a New Jersey based mortgage lender which made, bought, and sold residential loans/mortgages, by illegally flipping some thirty residential properties located in Bradenton, Osprey and Sarasota, Florida.

The indictment alleged that companies owned and controlled by Kolbe and Abercrombie purchased residential properties at or near their fair market value and immediately flipped or resold them to straw buyers who received mortgage loans in amounts substantially higher than the value of the properties.

The reason I mention this now–a full year-and-a-half later–is because this morning’s online edition of the Herald-Tribune reports that some of these fraudsters have finally been sentenced and are now heading federal prison in South Dakota. For an extensive account of one family’s involvement in real estate fraud, read Family, friends in on real estate plot, by Herald-Tribune business reporter and columnist Michael Braga.

Two industry insiders–one a prominent Realtor in Edmond, Oklahoma; the other a successful real estate broker in Kansas City, Missouri–have pleaded guilty in separate cases to committing mortgage fraud.

In the Oklahoma case, high profile Realtor Ann Campbell pleaded guilty on Wednesday to a federal felony charge of conspiracy to commit wire fraud in connection with cash back at closing scheme. The 66-year-old Campbell, who heads the RE/MAX affiliated “Ann Campbell Team,” was a primary figure in the sale of a home in Edmond’s upscale Oak Tree neighborhood. According to Assistant U.S. Attorney Susan Cox, Campbell–who represented the seller of the house–conspired to falsify loan-related documents that stated that the seller would pay certain closing costs that then were kicked back to the buyer through a title company account belonging to–guess who–Ann Campbell.

In a statement, Campbell’s attorney said “Mrs. Campbell has acknowledged making a serious error in judgement… She did not retain any funds beyond her normal commission…” But as part of her plea, has Campbell agreed to pay back more than $50,000 from her commission on the sale of three Oak Tree homes, and now faces up to five years in prison and a $250,000 fine.

In Kansas City, Missouri, 59-year-old real estate broker Doris Taylor pleaded guilty in federal court on Wednesday to transferring money obtained illegally through fraud across state lines. By pleading guilty, Taylor admitted that she caused a mortgage company to transfer $331,859 to an Independence, Missouri, bank account because of a fraudulent loan application. Taylor, who ran Doris J. Taylor Realty, faces up to 10 years in federal prison without the possibility of parole, plus a fine up to $250,000 and an order of restitution.

Smile… today is Friday

In the style and tone of NBC’s The Office and Comedy Central’s Reno 911, Flipper Nation takes on the seemingly simple and profitable world of flipping real estate. Can Richie and David flip their way to becoming millionaires, or will they flop their way into the poor house? There is more where this came from over at FlipperNation.com.

You can now add The Christian Science Monitor to the list of major American media outlets that is choosing to provide coverage of the growing problems associated with a cooling real estate market and fraud. On page two of today’s edition, Staff Writer Patrik Jonsson take readers on a journey that starts with Matthew Cox’s most recent court appearance, and ends with a reminder that for every Cox that’s caught, thousands of others remain on the loose and difficult and track down. In between, Jonsson provides insight from a Rutgers University policy analyst, a former loan officer who spent two years in federal prison for conspiracy to commit mortgage fraud, and yours truly–FlippingFrenzy.com founder, Ralph Roberts.

From The Christian Science Monitor:

Real estate fraud has now firmly emerged on the FBI’s radar as the country’s fastest-growing white-collar crime - all, in essence, polite forms of bank robbery. Industry losses ran to at least $606 million last year, it says. And the Treasury Department’s suspicious-activity reports are up 35 percent this year. The Internal Revenue Service’s criminal case numbers in mortgage fraud have been doubling every two years through the first half of this decade.

If the downturn continues past 2007, experts say the implications for the economy could be dire.”Real estate fraud is going to make the S&L crash look like two cars in the parking lot that bumped into each other at five miles an hour,” predicts Ralph Roberts, the author of “Flipping Houses For Dummies,” in Warren, Mich.

Georgia is a major hot spot of mortgage fraud, where metro Atlanta has become known as the mortgage fraud capital of the US, according to rankings by Fannie Mae.

For the complete story, see Real estate fraud rises in US.

A former Los Angeles-based real estate developer charged with running a $50 million mortgage fraud scheme arrived in the United States yesterday afternoon to face criminal charges. Charles Fitzgerald was arrested and deported by authorities in the Independent State of Samoa, a Pacific island nation where he fled to in June 2003 after he was sued for fraud by Lehman Brothers Bank.

Samoan law enforcement officials, responding to a request from the United States, arrested the 46-year-old Fitzgerald in the Samoan capital of Apia on Monday. Fitzgerald was deported by Samoa because his United States passport had been revoked after the criminal charges were filed, which in turn subjected him to immediate deportation under Samoan law.

Fitzgerald arrived at Los Angeles International Airport yesterday afternoon, and was immediately transported to the Metropolitan Detention Center in downtown Los Angeles. He is expected to make a court appearance in U.S. District Court this afternoon, where he’ll answer to charges of conspiracy to commit bank fraud and loan fraud, four counts of bank fraud, one count of loan fraud, five counts of money laundering, and one count of obstruction of justice. In addition to Fitzgerald, the following people were previously charged with working alongside the former real estate developer to defraud Lehman Brothers Bank:

• Mark Abrams, 45, of Long Beach, CA
• Nicole LaViolette, 37, of Palm Springs, CA
• Jamieson Matykowski, 33, of Laguna Niguel, CA
• Timothy Holland, 35, of Santa Ana, CA

Abrams previously pleaded guilty to charges of conspiracy to commit bank fraud and loan fraud, bank fraud, making a false statement on a tax return and obstruction of justice. LaViolette, Matykowski and Holland previously pleaded guilty to charges of conspiracy to commit bank fraud and loan fraud, as well as wire fraud. All four are scheduled to be sentenced next year by United States District Judge Dean D. Pregerson.

Fitzgerald and the others were involved in a wide-ranging and sophisticated conspiracy to defraud federally insured mortgage lenders out of tens of millions of dollars. As part of the scam, they obtained inflated mortgage loans on homes in some of California’s most exclusive neighborhoods, including Beverly Hills, Bel Air, Holmby Hills, Malibu, Carmel, Mill Valley, Pebble Beach and La Jolla. According to the recently unsealed charges, the conspiracy was spearheaded by Fitzgerald and Abrams.

In the charges filed against the others, in late-1999/early-2000, Fitzgerald went into business with Abrams in a mortgage brokering company called Desert Pacific Financial, Inc. (DPF). The company sent mortgage loan applications to lenders for review and funding, and received commissions from those lenders when the loans closed. In late 2001, Fitzgerald and Abrams renamed the company Beverly Hills Estates Funding, Inc. (BHEF).

LaViolette was a loan processor at DPF/BHEF, and Matykowski was a property scout who helped locate homes for potential purchase. Fitzgerald and Abrams also had several in-house escrow companies, in which Holland was the escrow officer.

Fitzgerald and Abrams, working with Matykowski and real estate agents, located homes for sale. According to court documents, they primarily looked for homes with purchase prices they could inflate, which generally meant they used homes with good views in expensive neighborhoods throughout California. As part of the scheme, Fitzgerald and Abrams purchased homes at their real market values. For example, the case against Abrams details the purchase of a home in Bel Air, which Fitzgerald and Abrams bought for $735,000 in the name of “Matykowski or his assignee,” even though they were at all times in actual control of the home.

Fitzgerald, Abrams and their associates then recruited straw borrowers to obtain inflated loans on the properties. The straw borrowers, some of whom received payments, allowed Fitzgerald and Abrams to use their names and credit to obtain mortgages as part of a property flipping process. After obtaining inflated appraisals and other false documents that were submitted with loan applications, Fitzgerald and Abrams obtained mortgages in the names of the straw borrowers for double or triple the actual values of the homes. For example, when they flipped the Bel Air property, they sold the residence to the straw borrower for $2,370,000. Abrams’ charges allege that a bogus loan application package went to Lehman Brothers Bank seeking a loan of $1,422,000, nearly double the true $735,000 purchase price, and that Lehman Brothers Bank unwittingly funded a loan of more than $1.4 million on the property, almost all of which ended up in one of the in-house escrow companies controlled by Fitzgerald and Abrams.

The victim lenders, having been deceived by the false documentation supplied by Fitzgerald, Abrams, and others, unwittingly funded the inflated loans. According to Abrams’ charges, Lehman Brothers Bank alone was deceived into funding about 80 such inflated loans from March 2000 through March 2003. These 80 loans were more than $50 million over the true prices of the homes. Fitzgerald and Abrams received millions of dollars of these excess loan proceeds, and their associates received kickbacks, inflated appraisal fees, and large commissions.

Lehman Brothers Bank sued Fitzgerald, Abrams and others in federal court in Los Angeles in 2003 and obtained a receivership, temporary restraining orders, and preliminary injunctions against them. If he is convicted of the 12 counts in the criminal complaint, Fitzgerald faces a possible sentence of 265 years in federal prison.

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 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 most people who read this blog, “flip” may very well be a four-letter word, but to the hundreds of thousands of people who tune in to reality TV shows like “Property Ladder” on TLC, Discovery’s “Flip That House,” and “Flip This House” on A&E, flipping is a shrewd, honorable, and perfectly legal way to earn a series profit in real estate.

Real estate “flipping,” or buying a property cheaply, renovating it to add value, and quickly reselling it at or near market value for a profit, is on the rise. If you want to get in the game, legally, or if you’re already in it and want expert advice and tips to become more successful, my newly published book, Flipping Houses For Dummies, can be your guide.

Flipping Houses For Dummies is a no-nonsense book that gives you the start-to-finish scoop on buying, renovating, and selling property, with plenty of time- and money-saving tips, strategies, and warnings to keep you on budget and on schedule. Topics covered include:

• Find properties to flip
• Project your profits
• Secure financing
• Draw in buyers
• Work with contractors, agents, and other real estate professionals
• Steer clear of legal gray areas, including cash back at closing schemes

Flipping Houses For Dummies will also make you aware of savvy strategies for negotiating deals, modernizing for maximum profit, marketing flipped properties, avoiding common blunders, and staying afloat in a slow market. Also included is coverage on negotiating, property inspections, mortgages, taxes, and working with contractors, brokers, and real estate agents.

Like all ‘For Dummies’ books, mine concludes with a “Part of Tens,” including chapters titled “Ten Renovation Cost-Cutting Strategies,” like hiring students over the summer and buying overstocked or discontinued building materials, and “Ten Common House Flipping Blunders” such as failing to inspect the property before closing on it. The “Cheat Sheet” in the front of the book provides lists of signs of attractive fixer-upper and potential money pit, as well as check lists for home staging and cosmetics.

Flipping Houses For Dummies is available at bookstores all across the U.S., and can be purchased online from Amazon.com.

Amy Ning of The Orange County Register shares some interesting data in an article published in yesterday’s online edition. From ocregister.com:

• Banks pass the cost of fraud to consumers, says Mike Ela, president of San Juan Capistrano-based HomeSmartReports.com. Ela says fraud could push up mortgage rates one-eighth to one-quarter of a percentage point. That would cost a borrower about $600 a year extra on a loan of 80 percent of the cost of a median-price home, he said.
• Peter Norell, who leads a Santa Ana-based white-collar crime unit of the FBI, said fraud is being fueled by the volatile housing market, an increase in loans available to consumers and the widespread use of automated lending systems.
• Nationwide, more fraud cases each year involve straw buyers, which often means a criminal has stolen someone’s identity, according to a fraud report released last month by the Financial Crimes Enforcement Network and experts.
• Irvine, CA-based New Century Financial, which makes loans to borrowers with risky credit profiles, has spent about 18 months working with Carlsbad-based BasePoint Analytics on a computer system to detect potential fraud. The system, now in place, looks for suspicious patterns, such as appraisers who tend to overstate the value of property. A senior vice president with New Century say the system has helped the company avoid making nearly $1 billion in suspect loans so far this year.

For more information, read Masked Mortgages.

The U.S. Attorney for the Northern District of California announced earlier this week that Tony Daniloo, the former President and CEO of a Modesto, CA, real-estate brokerage company, plead guilty to 122 charges of fraud and money laundering in connection with a scheme to defraud homeowners and lenders of millions of dollars in cash. Daniloo, 32, of Turlock, California, was originally indicted by a federal grand jury on August 31, 2006. The grand jury charged him with 41 counts of wire fraud, four counts of mail fraud, and 77 counts of money laundering.

This week’s guilty plea demonstrates that federal law enforcement will work to hold accountable those who would enrich themselves through real-estate fraud at the expense of innocent homeowners. Fraud in real estate financing deprives homeowners of their life savings. The victims in this matter were defrauded out of millions of dollars.

In pleading guilty, Daniloo admitted in open court that he defrauded real-estate lenders and clients in the East Bay and the central California valley of millions of dollars in cash that had been intended for the lenders and clients. Pursuant to a plea agreement, he plead guilty to all 122 counts charged in the indictment. Daniloo further admitted in the plea agreement that the loss amount for his fraud scheme was between $2.5 million and $7 million; that he derived more than $1 million in receipts from financial institutions; that he abused a position of trust; and that he served of an organizer or leader in a criminal activity.

From 2000 to 2002, Daniloo served as manager of the Dublin, CA, branch office of Residential Credit Corporation, a mortgage brokerage company based in Westminster, CA. Daniloo admitted that while employed at Residential, he created a scheme to defraud lenders by falsely claiming that liens existed on borrowers’ properties, duping lenders into funding these phony liens instead of the debts that lenders required be paid. Daniloo then–go figure–paid himself “commissions” out of this extra cash.

In 2003, Daniloo co-founded DreamLife Financial, which maintained headquarters in Modesto and as many as seven branch offices. Daniloo admitted that he defrauded lenders and clients by using phony documentation to cause large amounts of cash—cash that had been intended to extinguish his clients’ former mortgages—t