According this morning’s edition of The Wall Street Journal, tensions are rising between federal and state authorities as the number of agencies–including the FBI, SEC, Justice Department, Office of Federal Housing Enterprise Oversight, and New York Attorney General Andrew Cuomo’s office–investigating mortgage fraud expands.

Cuomo, the Journal reports, “is in a tussle with the Office of Federal Housing Enterprise Oversight (OFHEO), the federal regulator that oversees mortgage giants Fannie Mae and Freddie Mac… Their dispute is over who should be the investigating allegations of fraudulent appraisals and mortgage fraud.”

From Kara Scannell at The Wall Street Journal:

The interaction of state and federal oversight has long been a political hot potato. Friction is expected to increase as rising number of participants — including the Justice Department and Securities and Exchange Commission — probe the mortgage area.

Mr. Cuomo’s office is precluded by law from investigating federally chartered banks, where federal oversight pre-empts state interest.

With complaints about real estate and mortgage fraud at an all-time high, the FBI on Tuesday announced it has launched a criminal investigation into the dealings of 14 major corporations servicing the real estate industry. FBI officials told reporters yesterday afternoon that the probes involved potential violations, including accounting fraud and insider trading, but they would not identify the specific companies under investigation. Neil Power, who heads the FBI’s economic crimes unit, did say the probe reaches across the real estate industry to include developers, subprime lenders, companies that reviewed loans and the investment banks that held them.

“On insider trading, we’re looking in some cases at whether executives were aware that the value of their holdings would be going down and the executives traded on that information,” said Power, according to CNN. “On accounting fraud, we’re looking at housing developers who may have reported cash reserve accounts to reflect falsely inflated values.”

Power and other senior officials told CNN that the number of suspicious activity reports related to real estate and mortgage fraud they review for potential investigation skyrocketed from 3,000 in 2003 to about 35,000 in 2006, to 48,000 in 2007. In the first quarter of this fiscal year, Power told CNN, officials have already received 15,000 such reports, putting us on pace to receive 60,000 complaints this year.

“We anticipate in the next year that another wave of adjustable rate mortgages will reset and with that we anticipate that the mortgage corporate fraud potential cases to increase,” said Sharon Ormsby, head of the FBI’s financial crimes section, according to Reuters.

The FBI’s investigation is being run in parallel with the SEC (Securities and Exchange Commission), which has opened more than 30 civil investigations into the subprime market collapse. Some of the probes overlap, an official told Reuters. Targets of the SEC probe include Morgan Stanley, Merrill Lynch, Bear Stearns, as well as bond insurer MBIA.

One interesting figure being reported: According to CNN, the FBI says it investigates only cases involving losses of $500,000 or more, and that last year 56 percent of all cases had losses of more than $1 million.

“Subprime loans are decreasing but … suspicions of mortgage fraud are increasing,” the FBI’s Sharon Ormsby is quoted as saying.

The people selling real estate investment opportunities in Cay Clubs Resorts were slick. They didn’t just ensnare unseasoned investors in their web of lies, but they also managed to catch some fairly sophisticated real estate investors who were already experienced.

Recently, I heard from Jamie and Joe Castagna. Jamie was a loan processor at the time, who, as this story unravels, became a licensed mortgage broker. Her husband, Joe, is an electrician who had experience investing in real estate. They knew what they were doing, but as Jamie says, they were so impressed with the Cay Clubs Resorts promises and presentation and the professionalism of their sales reps, that they had few reservations about “drinking the Cay Clubs Cool-Aid.”

Here, Jamie relates Part 1 of the story about how Cay Clubs and Partners turned her and Joe’s lives upside down.

Jamie and Joe met in October of 2002 at Fort Myers Beach. We became good friends and eventually dated. Joe’s main career was an electrician, but in 2001 he started to invest in real estate. Jamie was involved in the real estate industry since high school and at that time was a loan processor. We both had a passion and love for real estate.

We eventually got married in December of 2003 and had our first child May 15, 2004. During this time we started to invest together in different real estate properties and it was a big success. With Joe having gone to real estate training and his previous experience working for a very large real estate education company and Jamie’s background in the financing, we made the perfect team!

As a newly married couple and new parents we had a serious drive to do the best for our family. In January of 2004, Joe secured a job at Findwhat.com and was in the facilities operations department. We continued to search for good real estate deals and worked hard to support our family. In approximately October or November 2004, one of Joe’s co-workers, Colin Brechbill approached him at work one day and said:

“How does a guy like you afford an Escalade on a Findwhat salary?”

Joe proceeded to tell Colin that we invested in real estate. After that point, Colin latched onto Joe like a leach. Joe had brought home different brochures from EarthMark Companies and talked to Jamie about these investments that Colin was offering. Joe said to Jamie, “I know that these investments are a little out of our price range, but please look them over.” Jamie reviewed the brochures and really did not know what to think, due to the limited information provided. The information that was in the package was for property at Mariner’s Club Bahia Beach and Mariner’s Club Key Largo. It included floor plans, aerial views of the waterfront property, an Appreciation Analysis–(showing an average of overall appreciation of 73.22% to 158.54%)–and the history of the company. It seemed like they were established developers with a great amount of success. Jamie figured that it was at least worth taking a look at.

A few weeks later (October 2004), we decided to take a trip up to the Tampa, Florida area to check out the two new developments that Colin Brechbill had told us about. The first place that we visited was at the Mariner’s Club Bahia Beach in Ruskin, Florida. This was a pre-construction opportunity which required 10 to 20% down as a deposit. You then had to close once the construction was complete. The property was shown to us by Jodi Zartman, and she even gave us a coupon to treat us to lunch at the beachfront restaurant that was located there.

After leaving Bahia Beach, we went over to the Clearwater property located in the Grand Venezia. We were told that this was a condo conversion, originally built by the same company as the high end Bellagio Casino/Hotel located in Las Vegas. Colin Brechbill steered us more in the direction to purchase at the Clearwater Cay Club, due to the fact that Dave Clark was splitting from EarthMark and was going to be running Cay Clubs. He also sold us on the fact that we would be getting a 15% leaseback check at the time of closing to pay our mortgage payment over the next 24 months while the amenities were being built. The property at Clearwater was a beautiful condominium complex, and with the added amenities we only saw the upside potential.

After many long talks, looking up information on EarthMark and SunVest (Cay Club’s parent company), and doing our due diligence, we decided based on the information provided and history of the companies’ success we would put down a $5,000 reservation deposit.

We had decided to purchase Unit #1130, even though we had never stepped foot inside the condo. Based on us looking at the outside and imagining what the type of view we were paying for, we trusted that we were getting a great deal. The reason why we could not go inside is because it was currently occupied by tenants and they did not want us to disturb them.

During the next several months we kept reviewing the paperwork that had been given to us showing the professional artist renderings and plans for our future condo. Jamie had also been working hard contacting the “preferred lenders” on the list given by Colin Brechbill. On Thursday, October 28, 2004 Colin emailed Joe some answers to questions that we had and everything sounded good. We first talked to John Garafola, a home loan consultant for Countywide Home Loans, and he told us that he was purchasing a unit in Clearwater too. He was very excited and said that we were getting a great deal. He proceeded to pull Joe’s credit and pre-qualified us for a loan in the amount of $550,000 on November 1, 2004. We then just sat back and waited for the green light to move forward with getting a fully executed sales contract.

During this time, we were so excited about our new investment that we decided to hold a meeting at our home and allow Colin Brechbill to come over and do a presentation on the property and Cay Clubs. We invited our friends, family members, and a Realtor that we knew. Colin arrived late dressed in a suit and said that he had just flew in from Las Vegas (he seemed like a pretty busy guy with the ultimate real estate investment). He delivered his Power Point presentation on our back lanai and distributed marketing materials and his contact information.

Towards the end of November 2004, we were waiting to get our sales contract finalized. Jamie was in contact with Kim Miller in making sure that the contract was written up correctly, as the price had changed from $400 per sq. ft to $350 per sq. ft. (Now we really thought that we were getting a deal!) But there was a discrepancy in the price, as I calculated the price per sq. ft dropped by $50/sq. ft x 1140 sq. ft. = $57,000 difference. So in an email I broke down the numbers for Kim Miller, showing that $350.00/ sq. ft. x 1140 sq. ft. = $399,000 plus $61,600 View Premium, less their initial discount on the condo being $17,700 which totaled $442,900. Needless to say they did not give us the discount, and we purchased the property for $459,900 plus $14,000 towards closing costs which totaled $473,900, final sales price.

They did encourage you to roll in your closing costs and membership fee into the purchase price. (Looking at the bigger picture now, they were doing this to increase the sales prices and to make the comps look better.) The contract that was sent to me was not very professionally prepared, as I would assume it would be. There were blanks left everywhere in the contract. I requested these blanks to be filled in prior to executing any agreement. They did as I requested, so I signed it, and Fed Ex’d it back to the main office in Clearwater with the remainder of our deposit, $43,142.00. In addition to the sales contract, there was an Agreement to Lease with CC 701, LLC. This lease showed that our unit would be rented for 24 months in the amount of $68,985.00.

Now we had a 10% ($48,142.00) NON-refundable deposit sitting with their escrow agent, Stump, Story, Callahan, Dietrich, & Spears, P.A. Again, Jamie was following up with Countrywide to see where we were at with doing the closing. John Garafola at Countrywide kept telling Jamie that we could not close until Clearwater Cay Club/Grand Venezia had received its condo Fannie Mae Approval. There was some problem with the way that the condo docs were written and the developer holding control of the garage units. (Now we believe that it was because they needed somewhere to store the furniture, hotel supplies, and whatever else they needed to run the property as a nightly rental complex.)

After months of waiting, Jamie, a licensed mortgage broker decided to start shopping for a loan ourselves. During this time, Colin Brechbill advised Jamie on whom to use as an appraiser for the property/condo. She was directed to Benchmark Appraisals out of Naples, Florida. It seemed a little odd that they would use an appraiser over 3 hours away from the property, but again trusting Colin (who had befriended us at this time) we proceeded to order an appraisal from Benchmark on 04/14/2005. The appraisal came in at $540,000 ($66,100 above full sales price).

We eventually closed with First Guaranty Mortgage Corp. on May 13, 2005 at the Clearwater clubhouse with Kim Miller, the closing coordinator. We signed all of the mortgage documents, closing documents, and our final 24-month lease agreement with CC 701, LLC. The attorney’s office was going to do a mail-away closing, but since we had never seen our unit we thought it would be best to drive to Clearwater (2.5 hours away from our home). Then we would do the closing and see the unit that we were getting ready to purchase. After consummating the purchase, Kim took us to our unit, which was being renovated at the time.

Then on May 26, 2005 we received a Fed Ex package with our check from CC 701, LLC for $68,985.00. At this time, we thought our responsibility was to just manager the mortgages and pay the bills. We were under the impression that Cay Clubs, “the developer,” was managing the process of fixing up the condos, putting in the world class amenities, and getting a rental pool put together so that when our leaseback ended we would have tenants that wanted to stay in our unit.

Our timeframe on this project was to hold the property 1 year and 1 day (to avoid capital gains) or a maximum of 24 months. During this time, all of the amenities would be complete and we would have a condo with a great amount in equity at a prime location. It was, as Colin always told us “a no brainer.” You did not have to think about the deal because it was so good!

During this time, Jamie wanted to refinance the 2nd mortgage, as we had done a 100% financing, and the rate on the 2nd mortgage was very high. So, in August of 2005 (just 3 months after our original purchase), Jamie ordered an appraisal to be done, by a local Tampa appraiser whom she found in the Yellow Pages. This appraiser was not referred by anyone at Cay Clubs. The appraisal had come in at $627,500. This was unbelievable; we had acquired $153,600 in equity in just three short months. This seemed like a deal of a lifetime.

As a result, we started to talk to more of our friends and family members about this excellent opportunity that we had found with Cay Clubs. None of our family members were really into real estate investing, but they had seen our history and trusted our advice. So by the end of 2005, Jamie’s mom and step dad had closed on a unit in Clearwater, Joe’s brother and sister-in-law had closed on a unit in Clearwater, Jamie’s mom’s best friend closed on a unit, friends from our church closed on a unit, and another friend closed. We were so sure of this deal.

In September 2005, Colin Brechbill again was talking to Joe about the next few projects that Cay Clubs would be rolling out of their portfolio. Colin had graciously set up a meeting for us to meet the #3 Block Buyer, Mr. Ricky Stokes. Ricky met Joe and Jamie at Page Airport in Fort Myers, Florida on September 7, 2005 to fly us on his private plane down to Islamorada to check out their new pre-construction project.

On the way in the airplane down to the Florida Keys, Ricky proceeded to tell us that he was a commercial airline pilot, CPA, and investor just like us. He also made it a point to tell us how he attends McGregor Baptist Church, sings in the choir, and is an auto dealer and gives all of the money that he makes to charity. So he painted a very nice picture of himself. We felt like we were dealing with an honest Christian man. So, after the trip down to the Keys we had strong reservations about putting a deposit down on the property.

The property was an old strip mall that still had commercial rental tenants, who were waiting for their lease to end, and the timeframe seemed too long. Since Ricky did not sell us on the Islamorada property, he started talking about what a good deal the Las Vegas property was. It offered all of the same things as the Clearwater property that we had already invested in, 15% leaseback check, $25,000 worth of furniture, converting the property from a three-star complex to a five-star complex, the agreement with the Rio Casino and Hotel for the tram and overflow guest, etc. He sold us, and we put a $15,000 deposit down that day, not even knowing what unit we were buying. He created urgency to get into the position before it filled up. We took the bait and were into another Cay Club property.

At this point, we were drinking Cay Club Cool-Aid. They had us so convinced that we had found the best deal in real estate! Stay tuned to see how this great deal turned upside down!

Jamie is currently busy composing Part 2 of the story and hopes to have it completed by the end of the week.

I would like to thank both Jamie and Joe for having the courage to share their story and warn other prospective investors about Cay Clubs Resorts and similar operations across the country that are doing their utmost to scam honest people out of the hard-earned cash.

A St Louis, MO, man has received a three-and-a-half-year prison sentence for conspiracy and money laundering in connection with a mortgage fraud ring that operated primarily in South St. Louis. Thirty-six-year-old Dack Daugherty convinced appraisers to inflate the values of properties, and then worked with corrupt loan officers to manufacture information about the income and assets of buyers. In all, Daugherty admitted to defrauding lenders of more than $500,000. As a part of his sentence, Daugherty was ordered to pay $576,390 to 21 different banks and mortgage companies.

According to U.S. Attorney Catherine Hanaway, Daugherty was a particularly effective criminal engaged in a particularly harmful crime. “Daugherty’s initiation of a second fraud scheme while trying to resolve the first makes this case unusual, Daugherty said in a prepared statement.

Daugherty arranged for the fraudulent purchase of over 50 properties. In an unusual twist, he admitted to a second fraud scheme, which resulted in an increased sentence. In a rare post-plea filing, Daugherty admitted going on a “spending spree” as his criminal indictment for mortgage fraud loomed, borrowing hundreds and thousands of dollars for classic cars, a grand piano, motorcycles, commercial equipment and even a high-end Jacuzzi spa. Just as his borrowers did in the fraud scheme, Daugherty lied in his credit applications for these items and, after successfully deceiving lenders, never made a payment on any of his purchases.

After his indictment in June, Daugherty’s parole for a previous run in with the law through the State of Missouri was revoked and he has been in state custody since the summer.

Florida’s Attorney General today announced a multi-pronged initiative to combat mortgage fraud and rescue foreclosure scams, and the filing of a lawsuit asserting South Florida-based National Foreclosure Management and multiple affiliates defrauded at least 80 homeowners out of approximately $1.7 million in home equity.

Beginning in October 2004, National Foreclosure Management–which now does business as American Home Rescue, Inc.–selected homeowners who had substantial equity in their homes but were in the process of being foreclosed upon. The company would offer to hold the titles to the homes for a year, refinance the debt, and provide cash and credit repair counseling to the homeowner, all while allowing the homeowner to remain in the house. The company claimed it would deed the property back at the end of the year after the foreclosure had been avoided and the homeowner’s credit was repaired.

Once the company had obtained the title to the house, the Attorney General’s lawsuit alleges the company would strip the equity from the homes by refinancing them at inflated prices and by assessing fraudulent fees and costs, leaving little or nothing for the homeowner to recoup. The home would then be sold outright to an investor or a straw buyer who would lease the home back to the homeowner at a rental rate far exceeding the original mortgage payment, virtually ensuring the homeowner’s eventual eviction. According to the lawsuit, the homeowners would end up with neither the titles to the homes nor the equity that rightfully belonged to them.

The lawsuit, which is the first filed by the Attorney General’s Mortgage Fraud Task Force, seeks restitution to the affected homeowners, dissolution of the rescue foreclosure companies, and revocation of the mortgage brokers’ licenses revoked. Florida’s mortgage fraud task force has been in operation since September and is made up of 25 lawyers and investigators in the Attorney General’s Office, stationed in locations throughout the state.

In addition to filing the lawsuit, Florida’s Attorney General today announced the filing of the “Foreclosure Rescue Fraud Prevention Act,” sponsored by Senator Mike Fasano (R–New Port Richey) and Representative Clay Ford (R–Gulf Breeze). The proposed legislation will ensure, among other things, homeowners are properly informed about their rights when they are signing a contract with a foreclosure rescue entity. Specifically, the proposed legislation offers the following key provisions:

1. A five-day right of cancellation period that allows the consumer to cancel the agreement with the foreclosure rescuer.
2. Requirements that foreclosure rescuers include in the contract clear and conspicuous notice to homeowners of this right of cancellation as well as a recommendation that the homeowner contact the lender or mortgage servicer prior to the signing of the agreement and a provision that states the consultant is prohibited from accepting any form of payment until all services are completed.
3. Definitions of such terms as “Equity Purchaser,” “Foreclosure Consultant,” “Foreclosure-related Services,” and “Foreclosure Rescue Transaction.”
4. That all violations of the new Foreclosure Rescue Fraud Prevention Act are defined as an unfair and deceptive trade practices and are subject to the penalties included in Part II of Chapter 501, Florida Statutes.

Parties named in today’s lawsuit include:

• National Foreclosure Management, Inc.
• American Home Rescue, Inc.
• National Property Holding Group, LLC
• The Mortgage Practice, Inc.
• Southeast Capital Mortgage Company
• Barrister Title Services, Inc.
• GMC Land Services of Florida, Inc., doing business as Richmond Abstract, Inc.
• Bernard Williams
• Wyman F. Roberts
• Lakeisha Marion
• Anna Silva
• Albert Nae
• Linda Rubinchik
• Rhona Oliver
• Tracy Needleman
• Gina Rock
• John Sarlo
• Dianna Brown-Flournoy
• Reina Roman

A copy of the lawsuit against National Foreclosure Management is available here.

Those of you who have read my many blog entries on real estate and mortgage fraud, know that cash back at closing is a form of fraud that is particularly prevalent and destructive. The reason I focus on it so much is because many people think that cash back at closing is acceptable and that at its very worst, it is a victimless crime. A buyer simply agrees to pay more for a property than what it is really worth in order to receive the excess proceeds as a refund when the transaction closes.

More and more people are beginning to realize that cash back at closing is illegal, so the con artists are starting to do what they usually do when the public wises up — they modify the technique and give it a new name. Recently victims of a large-scale real estate scam in Florida, Texas and Nevada called my attention to a new adaptation of cash back at closing called lease back at closing. In a letter from Ricky Stokes (who was selling these investment opportunities on behalf of Cay Clubs Resorts) to an investor, Stokes acknowledges that “kickbacks” at closing are illegal, so the company uses lease backs instead:

… at closing, as the investor, you get a 15% kickback they call a “guaranteed lease back.” They make this legal by calling it a lease back instead of a kickback. These kickbacks more than cover your out of pocket expenses for two years! This also allows them to have free will to renovate and then rent it to vacationers/snow birds..

In the same letter, Mr. Stokes provides the following example to show how the lease back scheme would work on a $500,000 property:

Let’s say you buy a townhouse conversion for $500K. You get 100% financing and get a check cut back to you at closing for $50K (return of your deposit). Ten days later you get another check for $75K (this is their guaranteed lease back…kickbacks are illegal). This cash back at closing will more than cover your outflow for the next 2 years. With appreciation sitting at around 23%, you can roll out of it in 18 months, and make $320K.

In other words, Ricky Stokes is claiming that simply calling cash back at closing a lease back rather than a kickback makes it okay. This is absurd. Using the same logic, we could simply refer to murder as killing to avoid a conviction for first-degree murder. Dress it up however you like, call it whatever you like, cash back at closing is illegal.

What Cay Clubs Resorts was doing was simply refunding a portion of the mortgage loans used to finance the purchase of the property to the investor. This was not Cay Clubs Resorts’ money to give away or use however it wished. This was money that the lender was led to believe was to be used solely for purchasing the property and that the property’s value was sufficient collateral to secure the loan.

Lying to the lender, which is essentially what Cay Clubs Resorts was doing, is mortgage fraud, plain and simple, no matter what you want to call it. For more about Cay Clubs Resorts, including stories from investors who fell victim to the scam, visit the Cay Clubs Resorts category here on FlippingFrenzy.com.

Late in 2007 I received a tip about exclusive opportunities to invest in Cay Clubs Resorts. Apparently, several investors had already seized the opportunity, and more than a few of them felt that they had fallen victim to a scam. I decided to take a closer look.

I fired up my computer, headed to Google, looked up “cay clubs resorts,” and clicked the most promising-looking link. This took me to the official Web site of Cay Clubs Resorts at www.cayclubs.com, where I learned that Cay Clubs Resorts had “headquarters in Clearwater, Florida and operations throughout the Florida Keys, Orlando, Las Vegas, Sarasota and Colorado.” (Soon after I began investigating Cay Clubs Resorts, access to its Web site was blocked.)

I found a phone number for Cay Clubs Resorts and placed a call. A few weeks later, a representative by the name of Dani Potter, a licensed real estate agent for Jet Realty (5526 W.13400, Suite 501, Herriman, UT 84096), called me back and delivered her sales pitch. She informed me that the company had different investment opportunities in Florida; Las Vegas, Nevada; and a new project in Galveston, Texas. She sent me pricing on a few units and information for two of their “preferred lenders.”

She also offered me the option of participating in what she referred to as “the fund.” As Potter described it, the fund was the creation of Ren Richardson and Mike Hansen, who set up a company that managed the fund — H & K Asset Management LLC. If I chose to invest in the fund, I could expect to receive a 4% to 7% percent return per month!

The fund was actually part of a cash back at closing scheme. If I invested in the Texas property, the company would lease the property back from me for two years while it was being developed. I would receive a lease back payment of $30,000 at closing and $30,000 at a later date for a total of $60,000. This would cover my down payment on the property along with my monthly mortgage payments for the first two years I owned the property.

To earn some additional income, I could choose to invest my $60,000 of leaseback money in the fund, in which case, they would pay me the entire $60,000 at closing rather than in two separate payments. I would then earn interest on that money — 4% to 7% per month.

Potter told me that if I were interested, she would send over a couple documents for me to sign, so she could set up a conference call with Richardson and Hansen, who could explain the secret fund in greater detail. Potter sent me two documents:

• Non-Disclosure/Non-Circumvention Agreement: This document had two purposes: 1) To prevent me from sharing information with anyone — I suspect that they were most concerned that word would leak to law enforcement authorities. 2) To force me into dealing through their investment organization rather than directly with anyone they introduced me to — in other words, they wanted to be sure they were not cut out of the deal, which is understandable.
• Non-Solicitation Letter: To protect themselves from any claims that they had solicited my involvement in this scheme, they wanted me to sign the Non-Solicitation Letter. The letter was also worded in a way to protect them against any future accusations of security fraud.

You can view these documents in their entirety by clicking the following links: Non-Disclosure/Non-Circumvention Agreement or Non-Solicitation Letter.

I never signed or returned the documents, but Potter, Richardson, and Hansen proceeded with the conference call anyway. They seemed very eager to explain the fund and how it worked. During the conference call, I was told the following:

• According to them, they had never experience a month in which the fund lost money.
• Even though Potter said I would get a 4% to 7% return, they actually cap it at 5% a month for investors. The way they make their money is that they take anything above 5%. If my investment earned 30%, I would get 5% that month, and they would keep the other 25%.
• Ren Richardson is a self-proclaimed expert, mentor, and instructor in the area of investing.
• Mike Hansen received his experience working for the Trump organization.

One of their investors, a licensed RE/MAX-affiliated real estate agent in Salt Lake City, let me know that he was fully satisfied with the fund. He told me that I should have no concern about getting my money out of the fund if I needed to. He once tested the fund by requesting his money, and he received it in full within 24 hours rather than the promised 48 hours.

Whether or not I could get my money out of “the fund” is a moot point. What is important here is that this organization is involved in cash back at closing — a commonly recognized form of mortgage fraud. Even though the cash is rolled into a fund, it is still cash back at closing. The lender is being fooled into approving a loan for more money than the property is worth, and the excess money is being used for another purpose. The value of the property could not possibly be securing the loan, because the purchase price of the property was lower than the mortgage loan taken out to purchase the property!

Although these “investment gurus” pretend that they have discovered a new twist on cash back at closing that makes it legal, don’t be fooled. Although it’s dressed differently and called something else, it is still cash back at closing, and it is still illegal.

[Editor's Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry's commentary is his and his alone and does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry's thoughts here on FlippingFrenzy.com most Saturdays or Sundays.]

There has been a lot of talk, news and rumors lately about the state of the mortgage industry. Some of what is being said is effectively “bashing” the industry and in particular “mortgage brokers” in the subprime market. I think it is time to look at the realities and ramifications of what is happening.

To understand the subprime industry, which I prefer to refer to as non-conforming loans, we first need to examine the difference between conforming and non-conforming loans:

• Conforming loans adhere to guidelines set by Fannie Mae and Freddie Mac. They typically require a larger down payment and are offered to borrowers who have good credit histories, solid income, reasonable debt-to-income ratios, and a couple months worth of payments in savings.
• Non-conforming loans do not adhere to the guidelines set by Fannie Mae and Freddie Mac. They are designed to allow borrowers who are at a greater risk of defaulting on a loan to borrow money to purchase a home. Borrowers who take out non-conforming loans typically pay a premium in the form of increased interest and points.

The federal government is somewhat responsible for creating a market for non-conforming loans. Its purpose was to make it more affordable for lower income families to purchase homes. After all, homeownership is one of the primary forces behind a healthy economy: The government spurred the creation of the non-conforming mortgage loan market through the following two actions:

• Subprime was actually created back when the GI Bill of Rights was created, which resulted in the VA loan at 100% financing. While VA loans are not considered subprime, any time you have 100% financing, it falls outside of the limits of conforming loans.
• Next came FHA in the 1950’s—an effort by the government to help low-income and not so credit worthy borrowers who had little or no cash available to buy homes. It stretched the debt-to-income ratios, lowered cash-down requirements, allowed less then perfect credit, and eased qualifying requirements.

The dreaded “Neg Am” loan (negative amortization loan) was created by FHA back in the early 1980’s when we had double-digit interest rates. They created the 7-1/2 percent Neg Am adjustable with no caps.

Around 1992, Congress asked the banks to come up with alternative mortgage programs to allow once again more low income people and minorities to own homes. They did so by offering incentives to the banks as well as some penalties. The banks responded, but they could not finance the programs through their banking operations, so they set up subsidiary companies to offer these loans. One of the early subprime lenders was Ford Motor Credit along with Chase and others. In no time at all, I witnessed literally hundreds of new companies/lenders emerge from banks around the country that I had never even heard of.

At that time, these programs were truly subprime; some had interest rates up to 16 percent for those with truly bad credit. These loans were called B/C loans. You might think that B/C is an acronym for Bad Credit, but B/C really referred to the credit grade. Conforming loans generally carry a rating of “A,” while non-conforming loans can carry ratings of B, C or D. These non-conforming loans were attractive to investors who could purchase high-risk investments that promised a high rate of return, kind of like junk bonds. Many private mortgage companies began to form to meet the increased demands for securities backed by non-conforming mortgages.

The large banks got in on the action, too. Bear Sterns, for example, markets non-conforming loans under its name as well as subsidiaries such as EMC. Merrill Lynch markets under its name as well as other subsidiaries like First Franklin, their latest acquisition and one of the largest subprime lenders in the country. Countrywide, a major California bank, and HSBC, the world’s third largest bank, market through subsidiaries. Lehman Brothers, JP Morgan Chase, Wachovia, GMAC and a host of other large banks are also involved in the subprime market.

In the midst of the current mortgage meltdown, many of these banks and the mortgage brokers and loan officers who have sold their products are being labeled as “loan sharks.” Don’t be misled. The people involved in the mortgage industry did not conspire to rip off homeowners. The mortgage industry was simply trying to supply people with mortgage loans to meet their needs and supply investors with mortgage-backed securities that were in high demand. The government was trying to encourage homeownership, consumers needed money to purchase homes, and lenders and investors wanted to profit. It was supposed to be good for everyone.

Unfortunately, the media is generating a lot of negative press about the mortgage industry and everyone involved in it. Mortgage brokers and loan officers have been cast as the villains, selling products that placed consumers in jeopardy simply to score some quick cash. The truth is that everyone involved is responsible for what happened, from the consumer on up to the federal government, and now we are all paying the price. Make no mistake, lenders, brokers, loan officers, and everyone else who earns a living on mortgage loans are feeling the pain.

Sure, we have had real abuses in our industry and some real incompetence as the industry grew too fast too quickly, but that occurs in every industry. Every industry, including real estate, has a few bad apples that cast a shadow on the entire group. What I am saying is that the current mortgage meltdown was not caused by a massive conspiracy of mortgage brokers, loan officers or even some lenders. It was caused by a system failure. Failed economic policy capitalized on by our largest financial institutions (Fannie Mae and Freddie Mac included) to increase profits, stock values, salaries, bonuses and commissions. In one word, GREED.

Is the country in a real foreclosure mess? Yes, there are more foreclosures now and will be even more in the future. Is this as disastrous as published? Not necessarily so. Reports are being released that 12% of the market is in this sub prime trouble and that many people are in jeopardy of losing their homes. Is this altogether true? Foreclosures have been happening as far back as the first loan was ever made with the property as collateral. There have always been thousands upon thousands of foreclosures in this country. Even those good credit people that got all those low interest rate conforming bank loans lost homes in foreclosure. The press would have you think that only the sub prime borrowers are losing their homes due to unscrupulous mortgage brokers.

The market ran wild in the last few years and we all made money–the real estate agent, the seller, the contractor, the lumber mills, the appliance manufacturers, the plumbers and plumbing supply industry, the lawn guy, and let’s not forget all of the municipalities whose tax bases have doubled, tripled, and more.

Yes, we are all in for a correction. This happens in the stock markets around the world, but you never see them close down. It happens in the retail markets, but retailing never ends. And now it is happening in our industry but real estate and mortgages will never die and disappear.

We are in a correction period–one that will overall be good for each of us and for our economy. We have lost most of the real estate investors/speculators out there, but many of them never should have been in the game to begin with. In fact, I think most of these investors are the ones that account for the increase in foreclosures. Yet, we still have non-conforming loans, and I do not expect them to go away. 100 percent financing, stated income, high debt to income ratio programs, no doc programs, no money down programs, and other non-conforming mortgage loan products are alive and well. They will simply carry more restrictions going forward.

Here is a list of lenders that have gone out of business or eliminated divisions or departments.

(Don’t misunderstand, not all of the lenders above closed down due to fraud or mismanagement. Many were good viable companies but became victims of the “meltdown” as well. This list is from www.lenderimplode.com)

All of these programs are good if used correctly in the right situation for the right borrower with their full understanding and education. These programs all fill a need, even the 2/28 that is now being touted as the worst mortgage program in the world. It is a second chance mortgage, a temporary mortgage, a starter mortgage, a mortgage that the borrower/buyer should know is only good for them for the 2 years of fixed interest, but, if they abuse their credit, make late mortgage payments, or overspend in other areas during these two years, then the blame is theirs. For those whose jobs are lost or who have major economic and personal upheaval in their lives beyond their control, they would have the same problem with any mortgage. Steps are now being taken by Congress and even by the lenders themselves to help out in these situations. You will see new lower rate financing available, no-interest soft seconds available and more.

There is still a market, people are still buying and selling and refinancing. New buyers are being created each day by virtue of our kids reaching home buying age and, for here in Florida, we are still getting 1000 new people a day moving here, and the baby boomer migration has not even started yet.

Are we (mortgage industry professionals) the bad guys? No we are not. We fueled the economy with the tools made available to us. Without us, most of the sales would not have occurred, and real estate agents throughout the country would not have made money. Whether we work for a bank, a private mortgage broker company, or private lender are here to continue to offer the products made available to us. This, in turn, makes buyers available to the real estate industry and keeps the “circle of life” going in our industry.

We will see some changes in the industry to prevent the mistakes that have occurred over the past few years, but otherwise, business will go on as usual. Real estate in the United States has been and will continue to be one of the best and safest long-term investments in the world.

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Mortgage Fraud Surging in Florida: More potential mortgage fraud cases were reported by lenders in Florida in 2007 than in the entire country the previous year, William Stern, a supervisory special agent with the FBI, said today. And Tampa, he said, ranks seventh on the agency’s top 10 list for mortgage fraud, joining another Florida city on the list, Miami, which is No. 4.

Several face charges in Canadian real estate fraud probe, including…: Ready for this one? Hold onto your hat… A 70-year-old Canadian man is among five people charged and police are looking for others in connection with a massive real estate fraud totalling nearly $4 million. Toronto, Canada police laid 135 fraud-related charges this against five people, and Canada-wide warrants have been issued for two more suspects.

Las Vegas escrow officer arrested for mortgage fraud: Sheila Katherine Williams (pictured below), a Las Vegas, Nevada escrow officer, was arrested after fraud investigators say she pocketed more than $500,000 in escrow funds. Authorities say this case is just the tip of the iceberg in what they believe will be a deluge of mortgage fraud cases in the weeks and months ahead, and that this particular arrest is another ripple effect of Nevada’s worsening foreclosure crisis.

Gary, Indiana attorney sentenced for real estate fraud: According to the AP, Gary attorney Willie Harris has been sentenced to four-and-a-half years in prison for his role in a real estate fraud scheme. Harris was convicted in September on fraud and tax evasion charges for skimming $50,000 from the profits of a 2000 real estate deal involving a now-defunct local enterprise association. The Indiana Supreme Court suspended Harris’ law license earlier this month.

Woman receives $3.5 million judgment in mortgage scam case: A Great Neck, New York woman victimized by mortgage fraud when she unknowingly gave away her house has won a $3.5 million judgment against the mortgage broker who scammed her. Priscila Nano, 66, said she was “scared” and on the brink of losing her longtime home to foreclosure in 2004 when she received an advertisement from a company called Foreclosure Options Inc., and called the company’s number. In court papers, Nano’s attorneys described her as “an underemployed, senior citizen and immigrant with a modest command of the English language … desperate to keep her home.”

Maryland expects significant rise in mortgage and foreclosure scams: A dramatic rise in foreclosures and related scams is expected in Maryland in the coming year, prompting that state’s governor and the General Assembly to roll out several initiatives intended to help people keep their homes and avoid mortgage fraud. Governor Martin O’Malley this week proposed a set of emergency regulatory reforms and bills to target predatory lending and mortgage fraud, more efficiently inform homeowners about foreclosures, and create stricter licensing regulations. In addition, there are at least five more foreclosure-related bills that have originated in the state’s legislature this year. Maryland had 6,969 foreclosures in October and November 2007 alone.

16 People Indicted in Austin, Texas Mortgage Fraud Scheme: The United States Attorney for the Western District of Texas announced that a federal grand jury has returned an indictment charging sixteen individuals for their roles in a multi-million dollar mortgage fraud scheme.

Con artists have seemingly limitless scams and schemes at their disposal to pick the pockets of honest, hard working people, and they continue to modify their scams to remain undetected. They even resort to calling obviously illegal transactions by other names to make them seem acceptable.

Hundreds of highly intelligent professionals were taken in by smooth-talking Cay Clubs promoters. The warning signs were there, but these con artists were so convincing that even the most careful investors were scammed.

A visitor to FlippingFrenzy.com recently related her experience with Cay Clubs promoter Ricky Stokes. I am including the story here to demonstrate just how convincing these con artists can be. Read the story in its entirety and see if you would have spotted the warning signs. At the end of the story, I highlight the warning signs, so you know what to look out for before investing in something that seems too good to be true.

I met Ricky Stokes through my friend Craig. Ricky wrote me an email letter outlining the specifics of buying a Cay Club unit. Here is the email he sent to me in September 2006:

I want to make sure that I tell you as much as I know concerning Clear Crystal Companies/Sunvest Communities and this way of investing. I’m only telling you about this because you were recommended as a friend of Craig. I’ll see if I can get you into this opportunity. I know the developer, Dave Clark, he’s a friend I met singing in the church choir. I’ll talk to him and see if he will let you into this investment but don’t worry I’ll put in a good word for you.

The minimum amount any investor has made per year in the last 7 years is 48%, the most anyone has made is over 300% and the average year over year for everyone is 164%. I have never found any investment to yield this return on my money year after year. To show you how secure this investment is, you may use your IRA or 401 account to do the investing for you tax deferred (at least until you retire). To do this, one needs to transfer the portion needed to invest of their IRA to a different, self directed custodian. After looking at the information, I feel very sure you will agree it is the best investment going, and if you decided to invest now, you could be totally independent very soon.

There are two ways to invest with this company. First is condo/townhouse conversion. This is by far the most profitable, and the easiest to accomplish. Currently, this is the only available investment vehicle available. A conversion is where the developer/company has purchased what use to be a hotel or townhouse rentals, renovates, upgrades, and adds amenities to the project, and then they are put on the market to the end retail buyer. Only 70% of the available units at a particular project are available to the investors. The remaining 30% is sold by the retail sales people onsite. While the sales team is selling their 30%, the renovations begin. Renovations include all tile/marble floors and granite counter tops, full $30,000 furniture package, etc. Once the renovations are completed, the sales team then resells our units to the end retail buyers. For the investor, these units are always made available to us at $100/SF below replacement cost which equals about .70 on the dollar. You have to close/own when investing in conversions. Please don’t let closing scare you because it is very low risk and is more of a paper shuffle than anything else.

First the conversion is offered to you at below replacement cost. Since you are purchasing for below cost, their lenders will give you 100% financing. Conversions do require a 10% deposit which is given back to you at closing if you choose the 100% financing option. Here is the kicker… at closing as the investor, you get a 15% kick back they call a “guaranteed lease back.” They make this legal by calling it a lease back instead of a kick back. These kickbacks more than cover your out of pocket expenses for two years! This also allows them to have free will to renovate and then rent it to vacationers/snow birds.

Your profit taking is when the unit is sold to the end retail buyer and it is quite substantial. There are sizeable tax advantages owning investment property. You may sell your unit at anytime, however I would play their game and let them sell it for me after 18 months.

Example: In Clearwater, let’s say you buy a townhouse conversion for…

[Editor's Note: To read the rest of Ricky Stokes' letter to this investor, please click here.]

After reading the above four-page email, I called the 239 phone number and spoke with Ricky Stokes, who told me he was a pilot for American Airlines. He went through the entire Cay Club concept of purchasing condo conversions with nothing down at a wholesale pricing structure, getting a 15% leaseback, and then letting the appreciation in the property grow while the developer transforms the property into a world class 5-star resort. He talked of the principals of the company and stories of how Dave Clark broke off from Earthmark because of conflicts of interest in the partners getting too greedy and cutting out incentives for investors which were necessary in order for investors to continue to back Earthmark.

Sept 2005 through February 2006

I did my due diligence and researched Sunvest Communities, Cay Clubs International, and Waterfront Resort Realty. I scheduled a trip out to Clearwater to visit the property and to meet with Ricky Stokes. Ricky’s schedule was very tight when we were out in Clearwater. I brought a girlfriend and we stayed onsite at the Clearwater project the night before meeting him. While at the sales office, we took a tour of the grounds and then Ricky did a full multimedia presentation in the clubhouse. All the while he continued telling us of the wonderful integrity of everyone in the company.

He constantly reiterated the importance of not going through the retail “sales” side of the house. If that side of the house were to ever get our contact information in their database, we would not be able to get the wholesale pricing offered to the investors.

He also talked to us about Cay Clubs and the privileges of being a member in this elite group. There was a $15,000 membership fee that was paid as part of the equity investment. This Cay Club fee was a mandatory part of the transaction. As an incentive for us to close quickly, this membership was fee was cut in half. We were told that the investment would appreciate at the same rates as the properties and that when the properties were sold the memberships would also be sold and that we would get all of our initial investment back as well as 80% of the increase in value. Supposedly the retail side of the house was selling the same memberships for $30,000.

I continued in close contact with Mr. Stokes. He had given us a history of his real estate investing, business ventures, and his educational history, which included a Masters degree in finance and a license as a CPA. He also told us of numerous units he owned in Clearwater Cay Clubs. He repeatedly mentioned that he was an investor, just like us. Our confidence in Cay Clubs and in Ricky Stokes was very high. He was attentive, returned calls and emails within a day, and befriended me. He referred me to a friend of his, a preferred lender — Jose at TransAtlantic Mortgage. Jose was disorganized and expensive and I refused to do business with him. I searched for my own lender.

Ricky assured me that with the built-in equity and the exit strategy, he would help me sell and get me out of the loans and turn a profit of $100 per square foot within the next two years, because I was buying at preconstruction pricing.

While the mortgage was being processed, Ricky told me about the Las Vegas project. I was told that this was nearly sold out but that he could get me on the waiting list for units. He said that he personally had 16 units there, that the property was across from the Rio Suites Hotel, and that there would be a relationship between the properties. An elaborate CD ROM was given that showed renderings of the property, showed five towers with roof top pools, a tram/rail between Rio and Cay Club, and descriptions of world class spa facilities, concierge services, fine dining, room service… all comprising a “world class resort.” I was assured that these units were “keepers” and that they would be “cash cows.” Given what I saw in Clearwater and the trust I had developed in Ricky Stokes, we decided to move forward.

Meanwhile, I was waiting for my leaseback from Clearwater and after multiple delays, and plausible explanations, my 15% lease back monies arrived after 60 days, although promised to arrive after 30 days.

Ricky “found” me a unit in Las Vegas and again tried to get me to use his “preferred lender,” Ross Pickard. His rates and fees were exorbitant and I refused to do business with him. Ricky put pressure but I continued to refuse.

I found another lender for much less money, closed on the Las Vegas property, and waited for my leaseback money in order to pay the mortgage. The lease back came through 4 months later after multiple phone calls. Ricky offered to pay me himself, which I accepted. Obviously he never came through and he never returned my calls for weeks at a time.

After multiple threatening calls from me, I got my check. By now I’d sent $25K for a retainer for an Orlando unit because the Clearwater property was gorgeous, the Las Vegas site was outstanding, and Orlando was going to be the site of an elite sports academy called IMG.

October 2006

All the while Ricky was befriending me and would call me “a friend” and in the inner circle and telling me he was getting me special access to properties. Most of the people allowed to buy these properties were a part of block buying groups such as ICG and were paying a premium of 6% to the buying group for access to these units.