President George W. Bush issued the following statement today:

This administration will soon issue regulations that require mortgage brokers to fully disclose their fees and closing costs. We’re pursuing wrongdoing and fraud in the mortgage industry through the Department of Housing and Urban Development, the Department of Justice, the Federal Trade Commission, and other agencies. In other words, if you’ve been cheating somebody we’re going to find you and hold you to account. And we’ll continue to do our part to help improve all aspects of the mortgage marketplace that is really important to this economy of ours.

Bush’s statement, which was made while addressing the media on the larger issue of homeownership financing, is his first related to real estate and mortgage fraud that I could recall. The President, who was joined by Department of Housing and Urban Development Secretary Alfonso Jackson, and Henry Paulson Jr., Secretary of the Department of Treasury, also said:

Economic growth is healthy, and just yesterday we learned that our economy grew at a strong rate of 4 percent in the second quarter of this year. Wages are rising, unemployment is low, exports are up, and steady job creation continues.

And…

We [Bush, Jackson, and Paulson]… had a good discussion about the situation in America’s financial markets. … One area that has shown particular strain is the mortgage market, especially what’s known as the sub-prime sector of the mortgage market. This market has seen tremendous innovation in recent years, as new lending products make credit available to more people. For the most part, this has been a positive development, and the reason why is millions of families have taken out mortgages to buy their homes, and American homeownership is at a near all-time high.

Unfortunately, there’s also been some excesses in the lending industry. One of the most troubling developments has been the increase in adjustable rate mortgages that start out with a very low interest rate and then reset to a higher rate after a few years. This has led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments, or facing foreclosure.

And…

The recent disturbances in the sub-prime mortgage industry are modest… But if you’re a family–if your family is one of those having trouble making the monthly payments–this problem doesn’t seem modest at all. I understand these concerns, and therefore, I’ve made this a top priority to help our homeowners navigate these financial challenges, so that many families as possible can stay in their homes. That’s what we’ve been working on, a plan to help homeowners.

And…

We’ve got a role, the government has got a role to play — but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.

And…

In the coming days, the FHA will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages.

And…

I’m going to work with Congress to temporarily reform a key housing provision of the federal tax code, which will make it easier for homeowners to refinance their mortgages during this time of market stress. Under current law, homeowners who are unable to meet their mortgage payments can face an unexpected tax bill. … I believe we need to change the code to make it easier for people to refinance their homes and stay in their homes. … I’ve called Senator Debbie Stabenow of Michigan and told her that she’s on to a good idea with the bill that she…submitted to the Senate. … With a few changes in the Senate version and the House version, this administration can support [the] bill.

Above, when Bush refers to U.S. Senator Stabenow’s bill, he’s talking about the Mortgage Relief Act. The Mortgage Relief Act, introduced in May of this year by Senator Stabenow, would change current law that forces individuals to pay an income tax when they have had a part of their mortgage loan forgiven or have been forced to foreclose because of their inability to pay their mortgage.

Finally, Bush had this to say about the nation’s extremely high rate of foreclosures:

My administration will launch a new foreclosure avoidance initiative to help struggling homeowners find a way to refinance. Secretary Jackson and Secretary Paulson are going to reach out to a wide variety of groups that offer foreclosure counseling and refinancing for American homeowners. These groups include community organizations like NeighborWorks and mortgage lenders and loan services, and the FHA, as well as government-sponsored enterprises like Fannie Mae and Freddie Mac. These organizations exist to help people refinance, and we expect them to do that.

The Bush administration is hopeful that the aforementioned steps will deliver help and hope to American families who need it. “We’ll help guard against future problems in the housing sector, President Bush said. “We’ll reaffirm the vital place of homeownership in our nation. When more families own their own homes, neighborhoods are more vibrant and communities are stronger, and more people have a stake in the future of this country.”

Turn on the news or visit your favorite news Web site, and you’re likely to see a report about the foreclosure epidemic. The reports you’re not likely to see, however, are about something that is closely related and equally if not more disturbing–real estate and mortgage fraud. As foreclosure rates rise, so does fraud. And as the incidence of fraud rises, foreclosure rates follow. It is as vicious a cycle as any economist has ever witnessed.

Which came first is a chicken-and-egg scenario that I do not want to get into. Sometimes rampant fraud can trigger foreclosures. I am currently involved in the investigation of such a case in Detroit, Michigan. In a classic cash-back-at-closing scheme, a builder who was having trouble selling his homes managed to find someone to pay nearly $800,000 for a home with a true market value of no more than about $550,000, scamming the lender out of over $250,000 in cash.

A homeowner in the same subdivision contacted me to report her suspicions when she noticed two of the builder’s homes across the street in bad need of some TLC. They were without lawns, window dressings, and furniture. Apparently, once the buyers purchased the homes and “earned” their cut of the ill-gotten proceeds, they simply neglected or even abandoned the homes. The homeowner who contacted me was concerned that housing values in her subdivision would drop as a result. And her concern is a very valid one.

Real estate and mortgage fraud can turn a beautiful neighborhood into a ghost town.

Increases in foreclosure rates also trigger rising rates of fraud. This happens for several reasons. One is that builders and homeowners who are having trouble selling their homes in a depressed market often search for ways to give buyers extra incentives–such as cash back at closing. A homeowner may agree to sell their home for tens or even hundreds of thousands of dollars more than the home is worth and then kick back the surplus to the buyer, just to unload the home. Builders have been know to do the same thing, offering cash, free upgrades, furniture, and even vacations and cars as enticements to buy… all of which are financed by lenders who are fooled into approving loans in excess of the property’s true market value.

Another reason why rising foreclosure rates trigger fraud is that con artists have more tools to work with in the form of bargain properties. They can purchase rundown REO (Real Estate Owned or repossessed homes) from banks at bargain basement prices, do some cosmetic renovations, order an inflated appraisal, and either refinance the home or sell it for significantly more than its true market value to an unsuspecting buyer (illegally flipping the home). In many cases, the illegal flipper recruits people who are financially strapped to go along with the deal. Eventually, the buyers cannot afford the monthly payments, default on the loan, and lose the home in foreclosure. That same home can then be used again in another scam.

To fix the problem with rising foreclosure rates, we need to wage a two-pronged attack that helps homeowners steer clear of the foreclosure trap while shutting down the perpetrators of real estate and mortgage fraud.

A former licensed Real Estate appraiser and an appraisal coordinator for a real estate investment company have plead guilty for their respective roles in a conspiracy that defrauded hundreds of individual investors of over $50 million and banks of over $2 million.

Thirty-seven year-old William Page 37, of Old Bridge Township, New Jersey, pleaded guilty before a U.S. District Judge earlier this month to a one-count information charging him with conspiracy to commit mail fraud for creating materially false and misleading property appraisals and construction progress letters. The inflated appraisals were used to assure individuals that their investments in NJ Affordable Homes Corp., (NJAH) were secured by investment properties. The false construction progress letters falsely stated that renovations and improvements were made to investment properties and were used to fraudulently disburse investors’ funds from escrow.

Another defendant, John Morris 61, of Fort Lee, New Jersey, pleaded guilty to a one-count information charging him with conspiracy to commit wire fraud in connection with his role in a conspiracy to defraud mortgage lenders of at least $2 million. Morris oversaw the creation of fraudulent property appraisals that were sold by NJAH to straw buyers. Using the fraudulent appraisals, NJAH prepared fraudulent loan applications in the names of nominee buyers and sold the properties at inflated prices. The scheme left mortgage lenders with loans that were grossly under secured, and nominee buyers with outstanding mortgage loans in their names. Page and Morris are the fifth and sixth individuals associated with NJAH who have pleaded guilty in related investment and mortgage fraud schemes.

NJAH first came under scrutiny of the Securities and Exchange Commission, which obtained a restraining order against the company in September of 2005. NJAH subsequently was ordered into receivership and then bankruptcy by a federal judge. In March of this year, Michael Meehan, 47, of Belmar, NJ, pleaded guilty to his role in the conspiracy to defraud various lending institutions. In January, co-conspirator Katrina Arrington, 34, of Hillside, NJ, pleaded guilty to her role in the conspiracy, while co-conspirators John Kurzel, 55, of New Brunswick, NJ, and Lucesita Santiago, 37, of Woodbridge, NJ, both pleaded guilty to the same conspiracy charge for their participation in the mortgage fraud scheme in October of 2006.

At his plea hearing, William Page admitted that from 1998 through September 2005, he knowingly created materially false and misleading property appraisals that fraudulently inflated the value of properties that NJAH used to secure investor funds. The appraisals were used by NJAH to persuade individuals to make and retain over $100 million of investments made with the company. Page also admitted that he created materially false and misleading construction progress letters that were used to release investors’ money from an attorney escrow account.

At his plea hearing, John Morris admitted that from about March 2003 through September 2005, as NJAH’s appraisal coordinator, he participated in a conspiracy to defraud various mortgage lenders by submitting materially false and misleading property appraisals and altered photos of properties. The appraisals overstated the value of the properties and falsely claimed that the properties had substantial improvements such as new windows, bathrooms, electric wiring, plumbing and siding.

Remarkably, both Page and Morris are free on $25,000 unsecured bonds (both are scheduled to be sentenced on Monday, December 10, 2007). The charges to which Page and Morris pleaded guilty carry a statutory maximum penalty of five years in federal prison and a fine of $250,000.

On the surface, it looks likes one of those too-good-to-be-true businesses, plucked straight from a late-night television infomercial. You buy foreclosed homes and turn them around in a short time for a big profit. “It’s the American dream,” notes Scott Smith, a Staff Writer who covers the courts, crime and high seas rafters for Stockton, California’s The Record.

And in the case of Stockton’s own Iftikhar Ahmad — who was arrested by federal agents earlier this month and arraigned on seven charges of identity theft, mail fraud and illegally sending money out of the country, only to be freed on a $1 million property bond — Smith tells us how federal agents suspect it’s all too good to be true.

From this past weekend’s online edition of The Record:

FBI details housing fraud case
Stockton man awaits a court hearing Thursday

By Scott Smith
Record Staff Writer

Ahmad is accused of spearheading a ring using his company I&R Investment Properties to illegally “flip” more than 100 homes, allowing him to reap millions of dollars along the way. Flipping property, or buying a home to fix it up and sell it at a profit, is not a crime, but authorities say Ahmad broke the law the way he did it.

So far, Ahmad, 36, and two others have been arrested and charged in a Sacramento federal court based on a 140-page FBI affidavit that implicates a dozen others, including Ahmad’s three brothers and those who appraised, notarized and serviced the escrows for the properties.

The one common thread in all the deals was Ahmad who bought up Stockton homes in foreclosure - often paying cash - and sold them at inflated prices to “straw buyers,” or fake buyers, created with the help of stolen identities or fake documents, the affidavit said.

Ahmad supposedly sold the homes to some of those named in the affidavit who obtained subprime loans using the false identities. That allowed them to put little or nothing down to start. Most of the homes went into foreclosure within months when nobody made the loan payments, the affidavit says.

Ahmad amassed $8.6 million in the past decade, and sent $484,000 to his native Pakistan without reporting it, according to federal agents, who were tipped off when a Sacramento-area woman reported she was a victim of identity theft.

“I still want to know, ‘How did I get involved?’” said Rebecca Wood, a senior legislative assistant for state Assemblyman Greg Aghazarian of Stockton.

Wood said she never bought property in Stockton and does not recall ever meeting Ahmad. But one day nearly four years ago, stern creditors started calling to tell her she was not making her house payments. Wood called police.

“I had visions of me in a jail cell,” she said, describing the panic she felt at first. “Seriously.”

The FBI and Internal Revenue Service turned their attention to Ahmad, digging papers from his curbside trash, going undercover to inquire about the sale of the El Camino Motel on Mariposa Road owned by one of Ahmad’s brothers, and pouring through 100 mortgage deals.

For more on this developing story, including a list of illegal house flipping red flags to be on the lookout for, read “FBI details housing fraud case.”

Michael Garcia, the U.S. Attorney for the Southern District of New York, announced the indictment of Wilson James Baston, Jr., also known as Will James, by a Federal Grand Jury in Manhattan last week. The Indictment alleges that, over the past five years, Baston defrauded victims out of millions of dollars through Will James Equity Partners, Inc., which claimed to be a real estate investment program which purchased distressed properties in the New York City area as investment vehicles for long and short-term investors.

According to the indictment, from 2002 until earlier this year, Baston recruited over 70 investors through false promises of guaranteed short-term, high rates of return on investments in distressed properties, with additional guarantees on the principal investment. Baston recruited investors in Will James Equity Partners, through a variety of means including word-of-mouth referrals, classified advertisements in the New York Times, and promotional literature. According to one promotional brochure, Will James Equity Partners, purchased so-called “pre-foreclosure” property using funds from “a variety of equity partners,” with terms determined on an individualized, venture-by-venture basis. The brochure stated that, “…equity partners are securitized by first mortgages on the property; paid interest at above market rates; and receive their full equity loan in a balloon payment together with an agreed upon bonus at the sale of the renovated property.”

Baston documented the terms of these investments in promissory notes, in which he promised to pay interest rates, often as high as 20 or 30 percent, to investors along with a guaranteed return on their principal balance within short periods of time, often 30 days or less.

On many occasions, Baston initially repaid both the invested principal and interest as promised, which served to entice his investors to continue investing in Will James Equity Partners, and in most cases, to invest additional, larger sums of money. To make these initial payments to new victims, Baston used monies from other investors, rather than from purchasing, renovating, and flipping preforeclosure properties as he had described to investors. Because his victims believed these initial investments to be successful, many agreed to roll-over their invested funds into new investments, or often invested additional, larger sums of money in the scheme.

Once his targets invested a significant amount of money in Will James Equity Partners, Baston stopped paying them the promised interest and did not return their principal. Eventually, when the victims began to complain to Baston that he had deceived them, Baston employed a variety of lulling tactics and avoided responding to their calls and inquiries. Baston specifically instructed his remaining staff members to deflect inquiries from victims in order to avoid them. When he was unable to avoid some of his investors, he gave false explanations as to why they had not been paid. Despite his claims to victims that Will James Equity Partners, had financial difficulties and was unable to pay back its current investors, Baston continued to recruit new investors by falsely representing the enterprise’s success. In some instances, Baston paid the most vocal victims with the funds he received from these newer investors.

The Indictment alleges that Baston obtained over $10 million from his victims pursuant to this scheme, and charges him with 11 counts of mail fraud and six counts of wire fraud. If convicted on all counts charged in the Indictment, Baston faces a maximum of 85 years’ imprisonment.

Here is an update to a story Flipping Frenzy first covered in July of 2006. At that time, we reported the following:

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.

Now, one year and one month later, the Attorneys’ Title Insurance Fund is back with an updated version of last year’s survey, and like the 2006 version, the 2007 survey shows a similar attitude among Floridians to the ever-present threat of Real Estate and Mortgage Fraud. Despite increasing levels of Real Estate fraud and Florida being ranked as the second highest state for mortgage fraud (according to the Mortgage Asset Research Institute, which used data from the nation’s biggest lenders to compile its annual survey, released in March 2007), homeowners listed being the victim of Real Estate fraud as last on their list of biggest concerns with only 2 percent.

Last month, Florida’s governor signed into law legislation ensuring that all Floridians who participate in the American dream of home ownership receive more consumer protections, especially with regard to Real Estate and Mortgage Fraud. The new law, which goes into effect later this year, creates a comprehensive consumer protection package relating to mortgages, and makes mortgage fraud a third-degree felony in the state of Florida. Provisions of the new law also provide that mortgage brokers and lenders supply to borrowers detailed disclosures for various loan products, and that in every mortgage loan transaction, mortgage brokers and lenders notify a borrower of any material changes in the terms of a mortgage loan that was previously offered to a borrower.

The following post was written by Carola Von Hoffmannstahl-Solomonoff.

Poor mortgage fraud. It still doesn’t get the big eyeball. What does a white collar crime have to do to get real paparazzi action? Sleep with an A list celeb and become rehab material? OK. If that’s what it takes here goes: according to the FBI, mortgage fraud is hooked up with the same lending practices that pumped the housing bubble–on the way up and on the way down. And fraudsters continue to invent new ways to get high on the spread.

The FBI skinny goes something like this: when the bubble was inflating, the mortgage industry hydroplaned loans over the home plate sans sufficient quality control. Mortgage fraud went along for the ride. By the time the bubble began to deflate, industry players were used to mega profits and didn’t want no stinking housing correction. The last shreds of quality control vanished in efforts to pump up the volume. Mortgage fraud rode that one too, right into foreclosure land. By 2006, one in every 92 households across the mortgaged plain was filing for foreclosure. Many of the souring loans were adjustable rate mortgages (ARMs) carried by subprime borrowers.

Note to those just out of a coma: subprime borrowers typically have poor or insufficient credit histories. Lenders cover subprime risk with high interest rates and servicing fees, and by uploading subprime loans to the secondary market as mortgage backed securities (MBS). During the bubble daze, nonprime mortgages (the mortgage lending tier which includes subprime and its more upscale cuz Alt-A) were massive money makers for lenders and investment marketeers–with some investment firms supplying lines of credit to the same lenders whose MBS they marketed. In the effort to turn everyone, no matter how broke or brain dead, into grist for the mortgage mill, more and more wacky loan products and derivative investment instruments were employed. ARMs, which start out with low interest rates, were promoted as an affordable mortgage product. Borrowers were encouraged to gamble that housing values would continue to soar, allowing them to refinance at better rates or flip before their ARMs exploded. For awhile, the gamble paid off. Then it didn’t. The fallout is being felt on Main Street and Wall Street.

Mortgage fraudsters dug ARMs too. Still do. Less money up front is a major bennie when you have no intention of sticking around for the bill. And fraudsters go with the flow. Foreclosure? Bring it on. Mortgage fraud flourished when ARMs were golden and continues to thrive in the lingering afterglow. Foreclosures free up more cheap properties for illegal flipping (as opposed to the legal kind shown on HGTV) and homeowners who want to get out from under are ripe for exploitation. Foreclosure rescue frauds are the newest twist on the housing bubble hit parade.

Attention parents! Is your teenager hanging with jive talking Realtors, value jacking appraisers, fly by night mortgage brokers, document juggling attorneys, and easy lay lenders? If so, get the kid into rehab. Not the kind used as a beard for home equity stripping refi scams–but a substance abuse facility staffed by caring counselors who know mortgage fraud is an addiction. One found not in only in subprime circles but in Alt-A subdivisions. Folks who lie on mortgage loan docs, or who look the other way when real estate pros do it for them, can’t help themselves. THEY HAVE TO HAVE THAT HOUSE. God isn’t making any more land, any more land, any more land…

That John and Jane Doe’s addiction to what the FBI calls “fraud for property” has caused no and low doc mortgages to be labeled “liars’ loans” is distressing. Still, the most degenerate junkies are real estate industry insiders who indulge their addiction over and over in groups. Committing “fraud for profit” with multiple properties in multiple places. Mainlining mortgages supplied by pusher lenders. Including ones insured by the U.S. Department of Housing and Urban Development. Aka HUD. The enabler of many a mortgage fraud addict. Never never forget that HUD spelled backwards is DUH.

Mortgage fraud addiction takes its toll. Addicts can end up strung out, turning real estate tricks in crack(ed) houses. Soliciting unwilling appraisers. A fate embodied by Aaron R. Dare of Albany, New York. Albany is the state capital. Aaron Dare is the former head of the Urban League of Northeastern New York. In 2001, the League collapsed under a government enhanced Dare development deal turned ethical swamp. By 2006, Dare was copping a plea to federal fraud charges involving several major HUD backed properties. One was Historic Pastures, a multi-family complex covering blocks of inner city Albany. Aaron Dare’s co-conspirator was Berne Watkins, a regional developer and tech entrepreneur from an affluent Albany County suburb. When Watkins was busted his attorney said Watkins was just another victim of big bad Aaron Dare. In July 2007, Watkins pleaded guilty to charges that mirrored Dare’s.

In 1997, Berne/Bernie/Bernard Watkins in the form of his wife and Pastures LLC, bought 43 buildings in Historic Pastures from the Albany Local Development Corporation (ALDC) for $1.04 million. The ALDC is the quasi-public arm of the City of Albany. The ALDC had taken over Pastures in 1991, after a local bank threatened foreclosure. In 2002, Watkins sold 39 buildings in Pastures to Aaron Dare for $4.2 million. The appraisal value was faked, as were the proofs of Dare’s finances which Berne supplied through his companies. The mortgage was by AMI Capital through Fannie Mae’s Delegated Underwriting and Servicing (DUS) program and was insured by HUD. After closing, Dare pulled an EPD. As in–early payment default. A neon sign of mortgage fraud. Foreclosure followed. Apres auction, taxpayers swallowed nearly $2 million in losses on Pastures and the other Berne/Dare HUD properties. Meanwhile, Berne plowed his profits into other real estate ventures.

Aaron Dare kept on going too. Fraudulently flipping 31 subprime properties in and around Albany with the alleged assistance of Albany Police Detective Kenneth Wilcox and unidentified others. Among the “others” were drug dealers allegedly recruited by Wilcox to serve as fake buyers–or “straw buyers.” Officer Wilcox’s actions will remain alleged: he died in a car crash in 2006. Berne Watkins’ current attorney, who has represented a number of law enforcement officers in the Albany area, says Wilcox was “probably one of the most dishonest dirty cops the city has had.”

The feds are taking their time with co-operating witness Aaron Dare: he hasn’t been sentenced and until recently, was out on bond. Dare’s plea deal was set to bring him less than 4 years. But dang if Dare didn’t go and endanger the deal for an alleged hit of his favorite thing. In August, the New York State Police busted Dare on fraud and forgery charges related to recent real estate deals. Plus, Dare was reportedly seen in an Albany inner city nabe, soliciting appraisers to pump up the value of haggard properties.

The mortgage fraud-for-profit addicts of upstate New York tend to be locals with historic connections. The downstate scene can be more exotic. Though still connected. Take the case of United States of America v. Aleksander Lipkin aka Alex aka Shorty aka Melekiy. Twenty two other people follow Lipkin on the indictment issued in January 2007, by the U.S. Attorney for the Southern District of New York State. Three more names were added in July. The full 26 were affiliated with three mortgage brokerages based in Brooklyn: AGA Capital, its successor Lending Universe, and related entity Northside Capital. Aleksander aka Shorty was a mortgage broker. As was Igor Mishelevich aka Ryzhiy and Igor Buzakher aka Jeff. Yup “Jeff.” Galina Zhigun, who was indicted in July, is an AGA owner. Then there’s mystery man Oleg Anokhin (no aka) of Staten Island. Oleg, who has disappeared into the Dostoevskian night, allegedly supplied the capital which floated the mortgage frauds of Igor and Igor and Aleksander and Masha and Lyosha and Marina and Mariya and Faina and so on and so forth. Not to suggest all the indicted are Russian. Callahan, Ciafolo, Acosta, Neustein, Ellison, and Carr also appear on the list.

The AGA indictment sprang from investigations by the FBI, Homeland Security’s Immigration and Customs Enforcement Division (ICE) and the NYPD, and covers frauds allegedly done between 2004 and the end of 2006, the years when nonprime was starting to tank. The indicted include mortgage brokers, bank officers, loan processors, settlement agents, and property appraisers, plus assorted straw buyers and their recruiters/handlers. The AGA crew allegedly perped over 1000 (known) fraudulent mortgage and home equity loans in the five boroughs of New York City, and in Sullivan County in the Catskill region. New Jersey was hit as well. Impacted lenders included nonprime biggie Countrywide Financial, plus BNC Mortgage, Washington Mutual, National City Bank, and the late New Century Financial. (New Century sank under subprime in early 2007.) Many–though not all–of the frauds flowed through lender branch offices in White Plains and Tarrytown in Westchester County.

The alleged game went like this: the AGA crew employed the usual fake appraisals and straw buyers. Proof of income, assets, residence, heartbeat, etc. were forged. When necessary, AGA insiders at banks altered docs. Some buyers only existed on paper–the product of identity theft. Deals typically involved 100 percent financing, via one or more mortgages and/or home equity loans. Properties were secretly controlled by players. The spread between inflated loans and actual sales price was skimmed. AGA professionals collected commissions on crooked transactions. Straw buyers either milked properties for more loans and/or rental income, or defaulted immediately. The AGA crew surfed that wave too. Staging foreclosure rescues by flipping defaulting properties to other straw buyers. Some lenders bought back properties from straw buyers at less than the face amount of the inflated loan. And several individuals named in the federal indictment have been sued by homeowners in South Brooklyn, who say the AGA players tricked them out of their property titles. A neon sign of foreclosure fraud.

During the years when they were allegedly scamming it up, AGA was touting their creative mortgage solutions at professional gatherings and in press releases. In September, 2004, an AGA president appeared before the Flatbush Real Estate Board at the Flatbush Council Building in Brooklyn. Accompanied by a chief investigator from the New York Department of State’s Division of Licensing Services. According to an AGA press release, the man from AGA and the man from the Department of State were there to announce a “Major Breakthrough in Real Estate Buyer Broker Transactions.” In April 2005, AGA issued a press release (Creative Mortgage Puts $3 Million in Owner’s Pocket at Closing) about their special touch with mortgage arrangements. Such as high loan to value, and no doc and low doc loans. Claiming “AGA Capital’s commitment to providing extraordinary results is earning a reputation like no other.”

Like most PR poop, kind of a brag. While the AGA/Lending Universe crew is indeed alleged to have a monster mortgage fraud habit, their reputation is not “like no other.” According to the FBI, New York is among the top 10 states for mortgage fraud. There are plenty of other addicts in the Empire State, each with their own mega monkey. And as ARMs explode all over the place, the rescue rush is on.

Copyright (c) 2007 by Carola Von Hoffmannstahl-Solomonoff. This material may be distributed only subject to the terms and conditions set forth in the Open Publication License, vX.Y or later (the latest version is presently available at http://www.opencontent.org/openpub/).

I am often approached by people who spot fraudulent transactions and are completely at a loss over what to do. Some are victims, others are whistleblowers, and some are actual accomplices who became aware that what they were doing was wrong and are suddenly concerned over what will happen if they get caught or turn themselves in.

Recently, a whistleblower called a huge case to my attention. She had access to about 50 files proving that a certain fraud ring had scammed a large lending institution out of hundreds of thousands of dollars and was getting ready to con them out of even more.

This ring leader is a name dropper, using a pro football player, a state representative, and a prominent attorney to lend credibility to his scam. He places ads in the paper offering to find homes for people and offering cash back at closing — an illegal practice in which the buyer agrees to pay more for the home than its true market value in order to get cash back when the transaction closes.

In the transaction that broke the case wide open, the con artist approached a 21-year-old man who had been refused mortgage loans because of his low income. The young man had perfect credit, so he was an ideal candidate for this particular type of fraud — he just needed to show that he was earning more money. The con artist solved that problem by hiring a phony company called CB Global to verify the man’s employment and salary. I called the “800″ number myself to verify the man’s income, and they provided me with the false information, too. All I needed to supply was the man’s name and the last four digits of his social security number.

Once they got around the minor obstacle of low income, the next step was to find a house and artificially inflate its price. The fraud ring found a house worth about $70,000 and had it appraised for $100,000 (to fool the lender into believing that the home’s value was sufficient collateral to secure the loan). They then had the man approved for a $100,000 loan to buy the house, with the understanding that they would split the proceeds (the extra $30,000) they would receive at closing 50/50 — the fraudsters would receive $15,000, and the young man would have a house and $15,000 in spending money.

If the fraud ring had paid the young man his $15,000, I probably would not be writing this story right now. The fraudulent deal would have gone undetected. What happened is that they refused to pay the man his cut. Unfortunately for them, this young man’s mother worked for the company that was perpetrating the fraud, and when they refused to pay her son, she gathered up some files (over 50 of them), found me on the Internet, and gave me a call. Upon meeting with her and examining the files, I saw immediately what was going on. This was big. Surely the lender would want to know about it. They usually do.

I called the lender to report what was going on. I managed to get pretty high up and left a message for the vice president. He never returned my call. I called back with all the key details, but he cut me short and said that I really needed to call their fraud hotline.

So that’s what I did. I called the troll-free fraud hotline, where a woman answered and asked me for the loan number. I gave her the loan number off of one of the files I had. She then asked me for my name, and I told her “I’m Ralph Roberts.” She then said something like “Well, that’s not the name on this file.” I told her I knew that, but I was calling to report dozens of fraudulent deals. Her reply? “Well, I don’t do that.”

I said, “What am I supposed to do? Your mortgage company is being ripped off. You’re the fraud hotline, you need to be looking into this.” She told me I needed to call the Better Business Bureau. I asked to talk with her supervisor. She placed me on hold and when she returned, she told me, “My supervisor doesn’t want to talk to you. My supervisor said that you can write us a letter.”

I explained that I did not want to write a letter. I needed to talk to someone. Five closings were scheduled for the coming week… five fraudulent transactions! I told her that I was a real estate and mortgage fraud expert. I knew what I was talking about. I had over 50 files proving that they had been scammed and were about to be scammed again — a stack of files about four feet high sitting on my desk! They were getting conned into approving risky loans. They needed to take action immediately. Instead of doing that, the lady on the fraud hotline proceeded to give me the address where I could send my letter.

I could not believe it. Here was a lender that had been scammed out of hundreds of thousands of dollars in illegal mortgage loans and was about to suffer more losses, and the person working the fraud hotline did not want to hear about it and did not know what to do. Worse yet, the vice president, who I tried talking to in the first place, apparently did not want to hear about it!

Most lenders are very cooperative when I call. They want to hear about instances of fraud being perpetrated against them. Unfortunately, however, I encounter far too many lenders who simply drop the ball on fraud prevention. It is as though the cash register is wide open, and nobody is watching the store. If you are a lender, you have to ask yourself, “Who’s watching the store?”

Last Friday, the Los Angeles Times today ran a story entitled “Brokers to Westside elite accused of fraud,” in which staff writers Annette Haddad and Diane Wedner reported the previous day’s indictment of two “high-profile Beverly Hills real estate agents and two licensed appraisers” on multiple charges of conspiracy, bank fraud and loan fraud (another term for mortgage fraud). The quartet stand accused of conspiring to dupe lenders out “more than $40 million in fraudulent loans for homes in some of Southern California’s most expensive neighborhoods.”

Named in the indictment are Joseph Babajian and Kyle Grasso, agents with Prudential California Realty, and appraisers Lila Rizk of Trabuco Canyon and Scott Robinson of Dana Point. Babajian and Grasso were also charged with money laundering.

Although those charged are certainly innocent until proven guilty, this case draws attention to the growing problem of real estate fraud and mortgage fraud and the threat that fraud poses to the real estate industry and homeowners, as well. As I explain in my most recent book, co-author of the recent book Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership:

Most people consider mortgage fraud to be a victimless crime, but that is far from the truth. The way this type of mortgage fraud typically works is that the buyer obtains an inflated appraisal making the home appear to be worth more than it really is, so the lender will loan them more money. At closing, the buyer gets the extra money back. Some people think that there is nothing wrong with this practice. After all, the buyer must make payments on a larger mortgage, the agent receives a bigger commission, and housing values in the area tend to rise. On the surface and in the short term, it appears that everybody wins.

As my co-author Rachel Dollar and I go on to explain, however, this sort of logic simply rationalizes the very real crime of mortgage fraud. Artificially inflated appraisals and mortgage fraud eventually result in inflated housing prices, higher loan default rates, increasing rates of foreclosures, higher property taxes, and the erosion of neighborhoods.

Cash back at closing schemes, like those described in the L.A. Times story, are designed to intentionally fool a lender into approving a loan that’s higher than what they would normally have approved if they had all the facts. As I have pointed here on FlippingFrenzy.com before, every 1003 (Uniform Residential Loan Application) has a statement you have to sign claiming that the information on the form is correct to the best of your knowledge. If you sign a form that contains false information, you are guilty of committing a felony, regardless of what you decide to use that money for.

We should all be committed to getting the word out about real estate and mortgage fraud, so consumers as well as industry insiders (who happen to be involved in more than 80 percent of the cases involving mortgage fraud) will have no question of what is right and what is wrong. We ned to provide consumers and professionals with the information and tools they need to spot the signs of fraud, stop it in its tracks, and report it to the proper authorities. Only by creating a army of fraud busters can we hope to turn the tide and preserve the American Dream of Homeownership.