In last Thursday’s post, “No Thanks, I’ll Stick with an Appraiser,” I warned that homeowners, buyers, and sellers should not take too much stock in the wave of home valuation websites that seem to be all the rage. Related to this, Fort Myers, Florida’s The News Press recently ran article that points to the fact that most Real Estate schemes often start with inflated appraisals, and that by-and-large, most appraisers operate in protected secrecy.

From The News Press:

Deliberately inflated appraisals are the key component in residential real estate schemes in Southwest Florida and across the country. Now appraisers and others are calling for reforms to protect the integrity of the system and make it easier for honest appraisers to do their work. But exactly what to do about the problem is up for grabs.

“In the end the public ends up picking up the tab,” said Woody Hanson of Fort Myers-based Hanson Real Estate Advisors, which specializes in resolving high-stakes disputes over appraised values–often in court cases.

The News-Press has turned up 47 sales in Cape Coral in which the Lee County Property Appraiser’s Office says appraisals were inflated. Padded appraisals allow sellers to make bigger profits on sales or buyers to pick up extra money from mortgages. Appraisers who stay on the straight and narrow can find themselves out in the cold if lenders, mortgage brokers and real-estate agents stop using their services, Hanson said. “They soon find themselves in a situation where they cannot say no.”

How can the problem be solved?

Hanson suggests stricter enforcement of federal legislation passed in 1979 requiring careful scrutiny of appraisals by lenders. “Let’s demand the federal legislation be enforced,” he said. While many elements of a real-estate deal are public record–mortgages, deeds and similar documents can be found in many counties with a few mouse clicks–the identities of appraisers and appraisals are private.

That should change, said Ralph Roberts, a Detroit-based real estate agent once considered the top-selling agent in the country and an author of books and articles on mortgage fraud. He is seeking to organize a national fraud task force and plans to put the creation of a national database of appraisals at the top of the list.

“It’s something that we have the technology to do, at least for all of the deals that would be coming up, and it would make a real difference,” Roberts said. “The way the system is now, these guys get to operate in secrecy. There’s no reason that we shouldn’t be able to see those appraisals.”

Others say such a solution wouldn’t work.

To read the rest of this article, click over to The News-Press.

Home valuation sites are the rage among homeowners, buyers, and sellers. Instead of hiring an appraiser to look at a house and write up a well educated estimate of its true market value, you can go online, type in the address, and find out the market value yourself instantly and best of all for free. Why pay an appraiser several hundred bucks?

Now, I like technology as much as the next person, and I believe in handing over more power to the people, but this is just another instance in which we are taking the human gatekeepers out of real estate transactions and leaving the system wide open to abuse. We are literally turning the buying process into a free-for-all, in which he who pushes the buttons on the keyboard defines the value of a home. We may as well install money machines in everyone’s home that print $20 bills.

With these home valuation sites, whenever a transaction is recorded, the data is automatically transferred to the home valuation system, where sellers and buyers can immediately access the information. While that’s not so bad in and of itself, it can intensify the negative effects of real estate and mortgage fraud. If, for example, a property’s value is artificially inflated as a part of a flipping scam, that property’s inflated value appears immediately online. People selling homes in the same area see the numbers and instantly jack up their asking prices. Buyers see property values rising and are willing to pay more. A con artist who knows how to play the game, can pull the strings on the system like a puppeteer, inflating and deflating the market at will.

Now, you might argue that given the proper incentive, appraisers have been known to fudge the numbers, too. You might also argue that these valuation models are even more honest–after all, can’t a computer automatically check whether a property’s value is out of sync with the prices of similar properties in the same area? In theory, yes, but in practice, these valuations are significantly less reliable than what competent, certified appraisers can deliver. In some areas, they may be off by 10%. In other areas, the discrepancy can be as much as 50%. I tried to look up the value of my own house, and it wasn’t even listed.

In addition, these valuations can be extremely old. Based on a valuation model, a bank could conceivably approve a mortgage loan to purchase a house that burned down two or three months ago. Only a human being, an appraiser visiting that house and looking at it inside and out, can determine whether the valuation is truly accurate.

Recently, I sold a home to a client who was approved for a mortgage loan in less than 24 hours. The lender didn’t require an appraisal and never even looked at the house. They relied exclusively on a home valuation model to verify the property’s value. I have seen enough fraud to know that if a seasoned con artist had put together a phony deal, that valuation model could not have detected it, and the deal would have proceeded without the slightest hint of suspicion.

As we rely less and less on the human factor as a system of checks and balances, we are sure to see an increasing problem with real estate and mortgage fraud. Home values will be able to skyrocket overnight without governance, creating a housing bubble that will make the dot.com crash of the nineties look like a soft landing.

When I see customers, clients, and even a few of my colleagues singing the praises of these online home valuation sites, all I can say is “No thanks, I’ll stick with a licensed, reputable appraiser.”

It has been about three months since I have written about credit enhancement schemes. Today I bring the issues up again because of an excellent story on the topic that appears on Bankrate.com. In “‘Piggyback’ can lift your credit score,” Bankrate.com staff writer Brigitte Yuille digs deep into what I still believe to be a serious problem in this country.

As I have said before, I have no problem with an individual adding someone to his or her credit account as an authorized user. It’s perfectly legal, and in most cases is done for perfectly legitimate reasons. What I’m not okay with, both as a REALTOR® and private citizen, is someone with a poor credit score or non-qualifying income being able to qualify for a home loan based on an artificially inflated credit score. In case after case, the new homeowner defaults on the loan, which only adds to the mounting problems related to foreclosure and Real Estate and Mortgage Fraud.

From Bankrate.com:

It’s called piggybacking, and like the childhood playground game, it involves getting a lift. Only with this piggyback ride, it’s your credit score that gets a boost.

Critics claim it’s lenders who are being taken for a ride.

Piggybacking works like this: After paying a fee, you are listed as an authorized user on someone else’s credit card, someone with a healthy credit rating. You don’t actually get to use the card, but the credit history of that card appears on your credit report, making it more attractive.

Internet sites that make these connections claim that this ride on someone else’s credit history can raise your credit score almost instantly. Higher credit scores mean better deals and lower interest rates on loans.

You will, of course, pay for the privilege — often thousands of dollars.

And why would the credit card holder allow you to piggyback on his or her lofty credit rating? Simple, they get paid, usually around $200 per user per month.

Critics say these sites are gaming the system and call it fraud, claiming it violates federal laws and supports identify theft. They say the credit card holders who make their credit available are putting themselves at risk too.

The “piggyback” sites disagree. It’s legal, they say, claiming that not only are they protected by the law but they are also supported by organizations within the credit industry.

Here’s more, as it relates to the Real Estate industry:

Piggyback firms also say that top mortgage brokers have used the technique for years.

Real estate and mortgage fraud expert Ralph Roberts acknowledges that real estate and mortgage brokers have been telling clients with poor credit scores to piggyback their credit. But, he calls the “artificial inflation” of credit scores an invisible enemy.

“You can’t see what has happened until the home is foreclosed. There’s no tool to detect the scheme,” says Roberts.

Roberts says piggybacking is fraud and the companies that offer it are breaking the law.

“Current U.S. Code on bank fraud says whoever knowingly executes, or attempts to execute, a scheme to defraud a financial institution by means of false or fraudulent pretenses can be fined up to $1 million or imprisoned up to 30 years, or both,” says Roberts.

To read the entire article, visit Bankrate.com.

In response to the FDIC’s Proposed Statement on Subprime Mortgage Lending, the four largest professional appraisal organizations have called for requirements to stress the need for an independent appraisal process in the mortgage lending process.

“In their effort to safeguard consumers from shoddy subprime mortgages, the agencies have overlooked the importance of selecting ethical, professional and independent appraisers,” says Don Kelly, Chief External Relations Officer for the Appraisal Institute. “Specific guidance on appraisal management and appraiser independence cannot be emphasized enough, particularly when fraud in residential mortgage lending has grown to new heights. The agencies need to revise their statement to stress this point,” says Kelly.

In a letter to the FDIC, the professional appraisal organizations pointed out that FDIC Chair Sheila Bair’s recent call for all lenders to be subject to certain baseline requirements, suggests that appraisal requirements should also be included in legislation enacted by Congress in this area. Recent studies have shown that as many as seventy-five percent of appraisers report losing a client or not being paid as a result of their refusal to “push” values. The organizations also expressed concern about how the appraisal process is being poorly managed by many financial institutions both large and small.

“We can’t stand by while those with a vested interest in a transaction try to use appraisers as a rubber stamp,” notes the Appraisal Institute’s Kelly. “Additionally, to address this debilitating problem for lenders and consumers, we need help from the entire real estate community to develop and accept an industry-wide statement of best practices on real estate appraisal and mortgage lending.”

Earlier this week, the Massachusetts Attorney General’s Office obtained a preliminary injunction against fifteen individuals and companies that are said to be involved in mortgage fraud and a foreclosure rescue scheme. As a result, the defendants in the case have been instructed to cease acting as mortgage brokers, real estate brokers, and closing attorneys, and have been ordered not to transfer any assets while the case is pending.

The individuals listed below were named in two separate lawsuits that the Attorney General’s Office filed as part of a continued effort to uncover predatory conduct in mortgage brokering and lending in Massachusetts:

• Leo Desire, Sr., a salesperson who works on behalf of Primary Mortgage Resource, Inc.
• Primary Mortgage Resource, Inc., Mortgage Broker and where Desire Sr. worked.
• Valerie Hanserd, a closing attorney.
• Home Pride Management, a company that took fees for un-rendered services.
• Leo Desire Jr., President and Treasurer of Home Pride Management.
• Dr. Joel Charles (d/b/a Sourie Corp.)
• Louis R. Joseph, Pierre N. Joseph and his wife Daphne Mompoint, Robens Joseph, Paul A. Joseph, Jean Joseph, Advie Charles, Neville Francis and Marie Betey Mereus, all property buyers.

The first of the two suits filed alleges that the defendants participated in a foreclosure rescue scheme targeted at desperate homeowners facing foreclosure. Each of the defendants allegedly conspired through their respective roles to deceive homeowners into selling their homes under the false promise avoiding foreclosure and maintaining their homes.

The defendants not only obtained the title to the homeowner’ residences but also stripped most of the homes’ equity though inflated mortgages, false fees for fictitious services, and false certifications by closing attorneys. In some cases, the defendants resold the homes amongst themselves, thereby extracting any remaining equity.

Homeowners victimized by the foreclosure rescue scheme include:

• A Roxbury, Mass. pastor who lives with his wife and two children
• A Natick, Mass. patent attorney
• A Brighton, Mass. nurse who lives with her teenage son
• A Mattapan, Mass. woman who lives with her two teenage children
• A Methuen, Mass. woman who lives with her four children
• A disabled Dorchester, Mass. nurse who lives with her husband

According to the complaint, the defendants misled homeowners about the nature of the transactions, defrauded them out of their equity, absconded with the homeowners’ money, and forged homeowners’ signatures on checks payable to homeowners. Because of the defendants’ foreclosure rescue scheme, homeowners were ultimately left destitute, facing foreclosure and eviction.

In a companion case, the Attorney General’s Office says that Leo Desire Sr., Primary Mortgage Resource, Inc., and Valerie F. Hanserd, together altered a deed from the Federal Home Loan Mortgage Corporation (a.k.a. “Freddie Mac”). Freddie Mac intended to transfer a residential two-family house to Leo Desire for $305,000, and prepared a deed to such effect. The defendants, however, altered the deed by changing the purchase price of the property from $305,000 to $475,000, and by changing the name of the grantee from Leo Desire to a “straw buyer,” Gloria Avila.

The defendants made these changes over the existing signature of Freddie Mac, and without Freddie Mac’s knowledge or approval. The defendants also provided an inflated appraised value of the real property, thereby obtaining a mortgage loan from a third party, Argent Mortgage Company, in a sum which was greater than the property value supports. They also fabricated a HUD Settlement Statement to reflect the fictitious purchase price and fictitious disbursements, and shared in the proceeds of the larger mortgage loan.

Anyone who believes they may have been victimized by any of the above named individuals or companies should contact the Massachusetts Attorney General’s Consumer Protection Hotline at (617) 727-8400.

To update a story we first covered back in late-November of 2006, Ishmael Grant, 60, of Lauderhill, Florida, one of the lead defendants in a $10,000,000 scheme to defraud mortgage lenders, has been found guilty by a federal jury in Fort Lauderdale. Following a two week trial in which 32 witnesses testified, a jury found Grant guilty on one count of conspiracy to commit mail fraud, wire fraud and aggravated identity theft, three counts of mail fraud, and three counts of wire fraud. He was remanded by a U.S. District Court pending sentencing, which is scheduled for June 28, 2007, and now faces a maximum statutory sentence of up to five years’ in prison on the conspiracy count and up to twenty years’ on each of the mail and wire fraud counts.

Ishmael Grant is the eighth defendant to plead guilty or be convicted after trial in connection with “Operation Whose House.” As of now, one defendant is awaiting trial and two defendants are fugitives in a foreign country.

According to the evidence produced at trial, the defendants engaged in a scheme to enrich themselves by obtaining mortgages from lenders using straw purchasers and through the submission of false documentation, including loan applications, employment verification forms, salary statements, and false bank account statements reflecting high account balances. The defendants also used and helped others to use false or stolen Florida’s driver’s licenses, identification cards, and social security numbers as their personal identification to facilitate the purchase of properties in the names of individuals whose identification documents had been previously stolen. The evidence also revealed that the defendants submitted more than 30 fraudulent loans to lenders around the country on properties located in Broward County, FL.

Here is the best example I’ve seen yet of a major metropolitan newspaper calling attention to Real Estate and Mortgage Fraud.

Take a look at this (over there, on the left)… it is the front page of yesterday’s Indianapolis Star (Sunday circulation: 356,995)

Here is an excerpt from the article:

Four years ago, mortgage loan officer Traci Walters got an enticing offer. An unknown broker faxed her office, promising to line up borrowers to buy Indianapolis houses.

She was in Florida. The broker was in Indianapolis. Working by phone, fax and e-mail from Oceans Funding in Clearwater, Walters set up mortgage loans totaling $1.8 million on 22 properties in Indianapolis.

But the deal wrecked Oceans Funding after the monthly mortgage payments stopped suddenly on each loan. All 22 houses went into foreclosure, triggering charges by Marion County Prosecutor Carl Brizzi against three Indianapolis real estate men alleged to have forged documents to obtain the loans.

“I’m going to have to close down,” said Walters, president of the 12-year-old firm, which was put on an industry watch list after the loans went into foreclosure. “In my experience, if there’s a stink associated with your name, nobody wants to do business with you.”

Just how a small and obscure mortgage lender in Florida was snared by an Indianapolis deal that prosecutors say was laced with fraud sheds light on a real estate industry ripe for abuse.

As mortgage lending became a national industry after the 1980s’ savings-and-loan crisis toppled homegrown S&Ls, state and federal regulations did not keep up with the change. That’s opened countless opportunities for illicit real estate deals, touching off a mortgage fraud epidemic in metropolitan Indianapolis and throughout the nation.

Click here to finish reading Open for fraud.

From my co-author, Attorney Rachel Dollar of Lanahan & Reilley, LLP, and MortgageFraudBlog.com:

Matthew Bevan Cox, 37, pled guilty to mortgage fraud, identity theft, passport fraud, and probation violation charges arising from a Northern District of Georgia indictment, criminal informations filed by the Middle Districts of Florida and Tennessee, and a Middle District of Florida revocation petition.

“Cox was the subject of a three-year nationwide manhunt while he continued to commit mortgage fraud under stolen identities in multiple states, leaving a trail of victims and missing money, said United States Attorney David E. Nahmias in Atlanta. “The repeated use by Cox of the stolen identities of minor children, the homeless and others to place multiple fraudulent loans on the same property without the knowledge or consent of the true owners has resulted in clouded property titles in several states and years of unresolved litigation. He will now face the long prison sentence he deserves for his crimes.”

According to the information presented in court: Cox rented or agreed to purchase properties from true owners, fraudulently erased prior mortgage liens and assumed the identity of the owners, used a stolen identity or paid straw borrowers to obtain multiple mortgage loans on the same property. Cox then changed locations and committed similar mortgage fraud schemes in other states. Cox and his co-conspirators used stolen identities to execute the mortgage fraud, including identities of minor children and those he received from conducting “Federal Surveys” of the homeless and drug rehab patients. Cox also used these stolen identities to obtain drivers licenses and state identification cards, purchase vehicles, lease mail drops and virtual offices, rent apartments, obtain credit cards, open bank accounts, and to apply for birth certificates and a passport used for travel to Jamaica, Greece and other foreign destinations while a federal fugitive.

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

More, from our good friend Jeff Testermann of the St. Petersburg Times:

• In Tampa, according to the newly filed charges, Cox committed $8.6-million in fraud on transactions involving 77 properties in the Tampa Heights and Ybor City areas.
• In Nashville, Cox committed $2.35-million in fraud on 22 properties, according to the new charges.
• Cox was helped by 22 unnamed co-conspirators in Tampa and Nashville, the new charges reveal.
• Now, in a deal with the government, Cox, 37, says he will plead guilty to the new charges as well as to charges in a 42-count indictment filed in Georgia in August 2004, when he was a fugitive whose name topped the Secret Service’s most-wanted list.
• Facing as many as 422 years in prison, Cox’s plea deal presumably will save him from a life term in return for his cooperation in pursuing accomplices.
• The charges in Tampa list 16 unnamed co-conspirators, identified by initials only. The charges covering Cox’s activities in Nashville list six more unnamed co-conspirators.

Launched in the fall of 2005, this site–FlippingFrenzy.com–has become one of the leading resources for following the crusade to spot, stop, and report real estate fraud. Using this site, homeowners and real estate industry professionals alike can learn about the latest efforts in the fight against the type of “flipping” that involves scammers and fraudsters committing, in many cases, mortgage fraud, and how to report it. However, what if you want to learn how to flip houses the right way, for an honest profit? Check out my new site, GetFlipping.com.

GetFlipping.com is devoted exclusively to the practice of flipping houses–buying fixer-uppers below market value, repairing and renovating them, and then selling them at or near full market price. GetFlipping.com will become a comprehensive house flipping Web site available. Right now, visitors can read a sample chapter from my new book, Flipping Houses For Dummies, check out the Flippers Tip of The Day, read an account of a sample property I flipped, check out before and after photos, and sign up for a free 31-day house flipping course.

Although the title of the Web site encourages visitors to “get flipping,” the site actually offers a more realistic view of flipping houses, pointing out some of the risks and pitfalls that investors face whenever they choose to invest in real estate. GetFlipping.com and Flipping Houses For Dummies both advise novice investors to build a strong investment team, including a licensed Realtor®, mortgage broker, and real estate attorney.

My goal in creating GetFlipping.com and writing Flipping Houses For Dummies is to help real estate investors, particularly novice investors, minimize their risks and maximize their profits. Investors must remember that you make your profit when you buy, so you have to be sure you are buying a property that you can sell for twenty percent more than your total investment in it.

Flipping Houses For Dummies includes instructions and a form for estimating the potential profit, and within the next week or so we will add an automated Purchase Price Estimator to GetFlipping.com that can help investors estimate their maximum purchase price in order to be fairly certain of earning a 20% profit.

GetFlipping.com also includes a blog, where I post additional information on house flipping and real estate investing in general, and where visitors can post their own comments, questions, and house flipping stories. Ultimately, I want to create a dynamic community of house flippers who can share information, tips, and strategies, and celebrate one another’s success.

Dateline NBC aired “Thief of Hearts” last night–a one-hour profile of noted real estate and mortgage fraud con artist, Matthew Cox. Unfortunately, the entire balance of the show focused not on the problems, warning signs, and societal issues associated with real estate and mortgage fraud–a crime that can only be described as a runaway cancer that is eating away at our floorboards. No, in typical big media fashion, NBC chose to position Cox as a ‘Don Juan’ who stole women’s hearts while attempting to overcome some sort of inferiority or superiority complex by stealing millions of dollars and the identities of close associates and “friends.”

The truth is that Matthew Cox and his known accomplices–namely, Rebecca Hauck, Alison Arnold, and Amanda Gardner (all of whom were interviewed for the piece)–literally ruined people’s lives and damaged entire neighborhoods, all in the name of greed and corruption. (To her credit, Alison Arnold turned herself in, served time in prison, and is now paying off a stiff penalty for her part in Cox’s schemes.)

Rather than focus on the damage Cox did or God forbid, the warning signs of real estate and mortgage fraud, NBC Correspondent Keith Morrison took his viewers on an hour-long journey that touched solely on Cox’s artistic ambitions, dyslexia, ability to woo women, and his writing (Cox wrote a novel called The Associates with a plot that closely resembles the time he spent committing real estate and mortgage fraud).

It’s not as though the producers of Dateline NBC were unaware of my efforts and those of my colleague Rachel Dollar in educating the public about threats from real estate and mortgage fraud. In early December of 2006, Joe Kraynak, a writer who worked with Rachel and me on the book “Protect Yourself from Real Estate and Mortgage Fraud” (to be published by Kaplan, this August, 2007), emailed the following message to the producers of Dateline NBC:

‘To Catch a Predator’ gave me an idea for another series centering around a sting operation. I’m currently co-authoring a book with the top two mortgage/real estate fraud experts in the nation–Ralph R. Roberts and Rachel Dollar. Ralph works alongside law enforcement to catch real estate con artists and educate industry professionals. I think a documentary complete with sting operations would be intriguing. Check out FlippingFrenzy.com and www.mortgagefraudblog.com. I can also provide you with additional contact information for Ralph and Rachel. Please let me know if you need additional information.

NBC had the perfect opportunity to educate and inform an alarming number of people on the dangers and warning signs associated with Real Estate and Mortgage Fraud. Instead, it only added to the problem by sensationalizing Cox’s efforts.