The Securities and Exchange Commission (SEC) has charged three people who targeted military families in a multi-million dollar real estate fraud scheme that forced victims into personal bankruptcy and their homes into foreclosure. The scam also targeted other affinity groups, including members of Southern California’s Filipino community and the accused’ fellow church members. James Duncan, Hendrix Montecastro, and Maurice McLeod stand accused of soliciting investors investors in Southern California, Arizona, and elsewhere using sham investment seminars and “referral partners” including a member of the Air Force who solicited his fellow servicemen.

The SEC’s complaint alleges the three men gained control over investors’ finances by offering them securities in the form of real estate investment contracts, and purporting that the money investors earned would help make mortgage payments on investment homes purchased on their behalf. Instead of investing client funds as promised, Duncan, Montecastro, and McLeod operated a Ponzi scheme by using money from new investors to make mortgage payments on previously purchased investment homes. When the scheme unraveled, it cost more than 75 investors an estimated $10 million.

With the type of fraud Duncan, Montecastro, and McLeod operated (commonly referred to as “affinity frauds”), con artists infiltrate tight-knit groups by showcasing a respected member of that community as one of their successful investors, giving the false illusion of a safe and secure investment opportunity and conning new investors into their Ponzi-like schemes.

Between October 2004 and June 2006, Duncan, Montecastro, and McLeod operated through Murrieta, Calif.-based Pacific Wealth Management, LLC (PWM) and Stonewood Consulting, Inc., to defraud investors from several affinity groups. The SEC’s complaint alleges that all three falsely promised investors that their funds would be invested in real estate and various other investments that would subsidize their investment homes. The SEC’s complaint further alleges that Duncan, a recidivist, raised $1.2 million in a separate offering of preferred membership units in Total Return Fund, LLC, to approximately 20 investors. The complaint alleges that the proceeds raised in both offerings were commingled and used to run a Ponzi-like scheme that fell apart and left investors with homes in foreclosure and forced some investors to declare bankruptcy.

According to the SEC’s complaint, Duncan, Montecastro, and McLeod failed to disclose several key facts about the purchase of the investment homes. They charged exorbitant real estate transaction fees financed by the investors, and submitted false mortgage loan applications on behalf of investors. The complaint also alleges that Duncan, who was touted as a financial genius, failed to disclose his prior securities laws violations.

The SEC’s complaint further alleges that Duncan and Total Return Fund misrepresented how investor money would be used. Specifically, while the Total Return Fund offering documents stated that 95 percent of investor funds would go towards the purchase of real estate, business assets, or accounts receivable, in fact, investor funds were used to pay returns to prior investors, and were used as part of the PWM fraud.

The SEC’s complaint charges Duncan, Montecastro, and McLeod with violating the antifraud and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of ill-gotten gains, and civil penalties. The complaint also names Christopher Oetting, Anthony M. Contreras and Biocybernaut Institute, Inc., as relief defendants, alleging that they received ill-gotten gains from the defendants’ fraudulent conduct.

Great news out of the state of Michigan this morning. The state’s Senate and House of Representatives has approved a series of bills, which if enacted by the Governor, will create a validating registration process for Michigan mortgage loan officers. As reported earlier week by Crain’s Detroit Business, the bills require loan officers to meet specific and measurable educational requirements, register with the Michigan Office of Financial and Insurance Regulation, and undergo a criminal background check. The newly passed legislation also include measures that prohibit loan officers from engaging in fraud, intentionally failing to provide borrowers with required information, or issuing false or misleading ads about mortgage loans or their availability, according to Crain’s.

In a press release issued yesterday afternoon by the Michigan Mortgage Lenders Association (MMLA), Dan Grzywacz, MMLA’s president said that enactment of the legislation “will be very effective in removing the small minority of ‘bad actors’ from the mortgage origination business and will enhance the skills and professionalism of loan officers.”

Under the passed legislation, registered loan officers will be included in a national database in order to track their registration status and compliance record. This national database is expected to help thwart bad loan officers who travel or move across state borders to continue their unscrupulous practices.

Hats off to the Michigan Senate and House of Representatives for passing these important measures!

In related news, Michigan State Police (MSP) investigators report that they are now better prepared to handle cases of mortgage fraud following a two-day mortgage fraud investigation and prosecution training held earlier this week in Livonia, Michigan. The training, which was a cooperative effort between the MSP, Michigan Attorney General’s Office and the mortgage industry, drew more than 40 law enforcement officers and mortgage industry personnel.

“With mortgage fraud becoming more prevalent, it is important that investigators have the tools needed to both identify it and build a case against an offender,” says Detective First Lieutenant Marty Bugbee, commander of the MSP Criminal Investigation Section.

Developed specifically to address mortgage fraud in Michigan, the training consisted of classroom instruction and scenario-based workshops. Officers learned how to identify fraudulent activity, as well as advanced investigative techniques that will lead to a higher likelihood of prosecution.

Here again, hats to to the Michigan State Police (MSP) for conducting this type of training and for engaging in the process of planning future training sessions for additional law enforcement personnel. Great Job!

The mortgage meltdown and resulting foreclosure epidemics are an American crisis that will require the united efforts of all citizens of the United States to come together and resolve. Professionals in the real estate and mortgage lending industries need to stop paying homage to the almighty dollar and limitless profits of those good years and hunker down with homeowners to get through these hard times. As I see it, this is the only hope we have to keep the American Dream of homeownership alive.

Fortunately, a large majority of professionals in the real estate and mortgage industries are trustworthy and dedicated to the long-term health of their businesses and careers. Unfortunately, too many professionals are focused entirely on their own short-term interests.

Recently, one of the true blue professionals in my industry called my attention to a situation in Arizona in which she suspects rampant fraud is taking place. She is an honest, well-informed real estate agent who is dedicated to doing her part to clamp down on fraud in the real estate industry, which she loves. She has witnessed other professionals, driven by greed, become involved in cash back at closing schemes that are designed to stimulate the sales of condos by providing buyers with $18,000 to $40,000 in cash (undisclosed to the lender) following closing.

To further hide what was really going on, the people involved in this alleged scheme adjusted it so the cash back would not be paid as a lump sum but paid out in installments in the form of guaranteed rental payments. This tactic did not fool our whistleblower. She tells her story here.

I am writing this because of my concern regarding all of the mortgage loan fraud that has been in the media specifically in the past year.

You are about to read my experience over the past year and what I believe to be a sophisticated case of loan fraud.

My background

I first started in the industry as a RE/MAX receptionist in 1990, since which time I have acquired over seven years experience in the new home arena, over seven years in the resale arena, and three years in the corporate office of a mortgage company.

January 2007

I interviewed for a position the first business day of the New Year and started the following week. I was excited as this gave me an opportunity to explore a whole new area within the new homes arena.

The community, Sunscape Villas, Scottsdale, AZ consisted of 442 units. Sales of the units began in early 2006, and over 210 units were closed on from May to Dec 2006.

Developer/Seller – Partners:

• Crown - California company
• MCZ Centrum - Chicago company

Sales and Marketing by:

• Urbis Properties, Cheryl King, Owner (Licensed)

We were told to get ready as they were in the process of finalizing a special program for one of their power brokers who worked with a lot of investors. We weren’t given much detail only that it was a program similar to what they were doing Landmark on Central (4750 N Central, Phoenix, AZ) that helped sell and close over 70 units. Landmark was Cheryl’s prior community, in the final stages of close out. The Developer/Seller was Crown (out of California) one of the partners at Sunscape Villas.

March 2007

The details had been ironed out and they were ready to launch the new program. A sales meeting was scheduled to go over this program along with two other similar programs that were going to be offered to different groups.

It was stressed to all of us the importance of these programs not getting out to the general public as they were only being offered to the select groups. Making matters worse, the three groups each had different deals set up and no one could know about the other.

Power Broker No. 1 - Moser & Perry

• Greg Moser, Realty Expert (Licensed)
• Jay Perry, Estate Planner (unlicensed)
• Moser & Perry’s Preferred (only) Lender: House 2 Home (Mike Low, Owner)

The program was set up to allow the investors to cash flow for the first couple of years. Two days after close of escrow an Option to Purchase agreement would be drawn up by Urbis and sent to the office of Moser and Perry for Buyer’s (now owner’s) signature and bank wiring instructions. The office of Moser and Perry returned signed Option and wiring instructions to Urbis who would forward on to Seller (Crown/MCZ Centrum) for a pre-determined amount (8-21% of purchase price) to be wired into the Buyer’s (now owner’s) bank account. All parties knew there was never the intent for the property to be (re)purchased per the agreement.

Editor’s Note: This was just a way to kick back money to the buyer under the guise of paying for an option to purchase the property from the buyer, when nobody had any intent of ever purchasing that property from the buyer.)

Greg Moser was set up on a graduated co-broke: 6% for the first 25 sold, 7% for the second 25 and 8% for everything thereafter. He felt confident that he could sell between 70 and 100 units.

The sales staff was instructed that there would be nothing in the purchase contract nor would there be anything in writing regarding the Option given to the buyer. They were told just to refer any/all questions from the Moser clients back to Greg Moser or Jay Perry, all sales needed to do was show the property and print out the contracts.

We were given strict instructions that this agreement COULD NOT be signed until two days after close of escrow. In addition we were told that since this happened outside of closing, neither the real estate broker nor the title company needed to know, as well as this ‘incentive’ was not to be disclosed to the appraisers coming to the sales office for comps of recent closings.

I recalled reading an article on AZ Central.com about Cash Back at Closing, I began questioning if this could be done. I forwarded a copy of the article to the Urbis team. (I had forwarded a few helpful articles before that). After several discussions around the office, a point was made to let everyone know that this was not the same thing as what was written about on AZ Central. We were assured that the attorney’s had looked at the agreement and said that it was legal. A gal in our office was mid-way through her real estate licensing classes and Cheryl King suggested she asked the instructor, which she did and was told that they couldn’t do that. When told what she had learned, Cheryl King brushed it off as not being explained the right way.

Having been in the industry for a number of years, I understood the mechanics of the Option to Purchase. This was not the way I recalled seeing this used in the past. I started to question my knowledge base, but, I didn’t push the issue. After all, who was I to question the corporate attorney or Cheryl with her MBA and paralegal background?

I wasn’t the point person for Urbis and the Option Agreements, as Cheryl had taken on three new listings, two of which I was in charge of the entire contracts & closings process, so I was very busy with those duties. It was out if sight, but never far from my mind.

Being a reader of all things real estate related, I’ve gained valuable insight through out the years. I always make sure I can back up what I’m saying in writing via various publications, statutes, and disciplinary orders. People in my office have referred to me as “a walking real estate encyclopedia,” and Cheryl gave me the nickname “Sherlock” and would come to me frequently to find out this and confirm that, as she was beginning to trust that I knew what I was talking about.

Summer 2007

MCZ Centrum had bought out Crown, making MCZ/Centrum the sole seller / developer for Sunscape. Roles and responsibilities that had been handled through Crown in California had been moved to various people / departments at MCZ/Centrum in Chicago. Shortly thereafter, Moser was informed that certain heads at Centrum were not comfortable with the Option program currently being offered, and it was just a matter of time before they pulled the plug on it.

Moser threw a fit, he was not happy. The Option program was what he was selling (40+ had already closed). Several contracts had been printed and were out to the buyers, and he believed many more were on the horizon. He didn’t understand why they would go back on their word and not let him continue selling under the program exactly the way it was. He had held many seminars, generated from his (and House 2 Home Lending’s) regular talk radio spot on real estate investing, which aired on Wednesdays at 4:00 p.m. on 1100 KFNX-Phoenix).

Then came all the talk of loan fraud becoming a felony starting in September. The change in events piqued my interest into revisiting my original feeling of this not being legal. Why would they stop something that was obviously selling condos? Why was this program never rolled out at the other Urbis listing? Was it possible it was not as legal as everyone was lead to believe? EQR, new Urbis listing, a publicly traded company would have nothing to do with it.

Would this have anything to do with loan fraud becoming a felony in Arizona?

In mid-August, we were informed that the Option program had ended and we were rolling out a new program — Master Lease, Lease Subsidy, Rent Guarantee — it changed names several times as it was being drawn up. I felt a little bit better about this program at first, because at least the title company knew about it as they’re who connected Cheryl with Noteworld.

When the Rent Guarantee program was rolled out, the only difference was instead of the buyer getting a lump sum payment back from the seller after close of escrow, the lump sum payment was going to Noteworld and they would in turn distribute monthly installments to the buyer for 12 or 18 months depending on the terms.

Sunscape had over 30 resale properties listed for sale on the MLS, some of which had been on the market as long as I had been with Urbis. It was apparent that the developer’s pricing was factored in when setting the resale pricing. The majority priced lower than the sales office advertised price – not a single unit had sold.

The Sales office closed 84 units in 2007 (36 under the Option program, 25 under the Rent Guarantee program, and 23 advertised public program); thelast public deal closed on August 10. Not a single Sunscape re-sale sold despite being priced lower during the same time frame.

Leading me to explore further, I looked at other condo’s in our same zip code. According to MLS data there were 43 comparable condos (non Sunscape) that closed from Oct 1, 2007 – Jan 21, 2008 in zip code 85251. The average price per sq. ft. for a one-bedroom/one-bath/was $168 (ours $244 & $276); the average price per sq. ft. for a two-bedroom/one-bath was $171 (ours $276-$325); and, the average price per sq. ft. for a two-bedroom/two-bath was $163 (ours $289).

Needless to say, Sunscape is showing all of the classic signs outlined in the many articles that I had been reading for the past year. We are the only community in zip code 85251 (probably the entire valley) that didn’t see property values decline over the past year.

The appraisers were not informed that 73% of the 2007 Sunscape closings included a non-disclosed cash back after closing ($18,000 to $40,000) given to the buyer.

I originally thought NONE of the appraisers were aware of the of the program, until I discovered one of the two appraisers sent to Sunscape to do all of the appraisals for House 2 Home Lending purchased a property at Landmark on Central under the program. The Owner of House 2 Home, Mike Low, his son Justin Low, his brother Andy Low purchased several units at Landmark under the program.

The final piece of this horrible puzzle has begun with the foreclosures (three are currently scheduled for trustee sale, which were bought under the original Option program with cash back given back to the buyer after close of escrow).

I understand from everything that I have read that it can sometimes take years for these cases to unfold and difficult to prove. I hope that all of the information that I have compiled over the past year will help in expediting the process and stop this before it goes any further.

Ruth Lamb

When you see rampant mortgage fraud like this being committed by the very professionals that we trust to do the right thing, it becomes very difficult to place faith or trust in our fellow Americans or to trust the systems we have in place to protect us. In this case, the perpetrators are being rewarded, not only with increased commissions from selling properties with inflated values, but we also see the companies they work for rewarding them for their supposed achievements.

Until this stops and we get serious about policing our industry and shutting down the fraud, it will continue to chip away at the very foundation of our industry. It will generate distrust among our clients and potential clients and eventually lead to the demise of the industry on which all of us earn a living and feed our families.

We need to begin to follow this whistleblower’s lead and, like her, have the tenacity to follow through and put the fraudsters out of business for good!

The Santa Clara County (California) District Attorney’s Office has been hit with a surge in complaints about real estate and mortgage fraud, even as funding to prosecute these cases is plunging. From The Mercury News:

The district attorney’s office opened 125 new investigations into mortgage scams last year, four times as many as in 2006, prompting one prosecutor to call 2007 “the year of lending dangerously.” The total loss to victims topped $40 million during the 2006-07 fiscal year, the office said.

Funding to prosecute these cases is tied in part to the real estate market, so the slowdown in home sales has led to a drop in the amount of money coming into the district attorney’s office.

The situation has led to grumbling in the legal community over the pace of prosecutions.

Ron Rossi, a San Jose real estate lawyer who said he is seeing more mortgage-fraud cases now than in his 39 years of practice, is “convinced the DA is probably overwhelmed with the number of cases. They are very hard to prosecute and are not normally what DAs do. DAs are normally involved in hard crime. The staffing is probably not enough to even get close to what’s going on in the industry.”

‘Slow,’ ‘frustrating’

“It’s incredibly slow, it’s incredibly frustrating,” said a civil attorney who has dealt with the district attorney’s office on real estate fraud matters; he asked not to be named because he expects to do so in the future.
“The cases are streaming through the door, and we’re doing our best to cover it,” said Deputy District Attorney Mike Fitzsimmons, one of only two lawyers assigned full time to real estate fraud. Fitzsimmons said he’s working nights and weekends to keep up with the volume.

The budget shortfall could exacerbate the problem. If funding continues to decline, the office may have to cut staffing, the district attorney said in a report to the board of supervisors this month.

The primary funding source for the district attorney’s real estate fraud unit is a $2 portion of a county real estate document recording fee. The money declined from $1 million in previous years to $544,000 last fiscal year because fewer documents were recorded due to the record slowdown of home sales.

That’s the same amount of money the district attorney’s office had nine years ago with a much lighter caseload, Fitzsimmons said.

Fitzsimmons has drafted legislation, sponsored by the California District Attorneys Association, that would give county boards of supervisors the option of doubling the amount set aside for real estate prosecutions to $4.
The legislation, SB 1396, was introduced by Sen. Dave Cox, R-Roseville.

Complicated cases

The cases pose a particular challenge for prosecutors because they tend to be complex. A typical criminal real estate fraud case involves multiple parties, voluminous documents and three to five search warrants, according to Deputy District Attorney James Sibley, the other lawyer assigned full time to real estate fraud.

“That means that from when somebody walks in the door, it could be six months” before charges are filed, he said.

The unit has 2 1/2 investigators and a paralegal.

The cases are a mixture of identity theft, misrepresentation of loan terms, loan applications with exaggerated statements of income and assets, and flippers who illegally skim equity from homes they never intended to occupy or pay for.

A recent case involved 90 boxes of seized records, according to the real estate fraud unit’s annual report. Another involved 100 boxes of evidence, along with seized computers.

In one case, Sibley said, a minister who signed his name to a home loan for one of his parishioners had his identity stolen by the mortgage agent, who used it on two other properties.

In another case still under investigation, elderly victims lost their life savings to a man who falsely claimed the money would be used to fund loans on Bay Area property. Victims’ total loss in that case is more than $43 million, the district attorney said.

A husband and wife are facing prosecution on an illegal flipping scheme in which the couple bought 10 homes in the San Jose area worth $8.5 million, qualifying for the loans with false statements of income and assets.
Some of the workload is being shifted to other deputy district attorneys, and larger cases may be referred to the U.S. attorney “because it just chews up too many of our man-hours,” said Scott Tsui, supervising attorney for economic crimes.

Other district attorney’s offices around the state have been hit with similar floods of cases, according to Stanislaus County Deputy District Attorney Marlisa Ferreira, who compared notes with other prosecutors at a recent meeting of the state association.

In Stanislaus County, “We’re completely overwhelmed with complaints,” Ferreira said.

Many people who read my posts about Cay Clubs Resorts and the various individuals who promoted Cay Clubs properties as no- or low-risk, no-hassle investment opportunities may wonder whether a crime was ever committed. Perhaps Cay Clubs investors were simply speculators who got burned when the housing bubble burst. After all, this happens to investors in the stock market all the time — stock prices rise and fall, and the speculators who buy in just before the crash take the biggest hit.

Unfortunately, the people who were promoting Cay Clubs Resorts knew they were carefully orchestrating a smoke and mirrors scheme to deceive investors. In this blog entry, Paul Doroh–my colleague at Ralph Roberts Realty and a co-author on my latest book, Foreclosure Self-Defense For Dummies–lays out the case against Cay Clubs Resorts and its promoters.

Cay Clubs Resorts: What Crime?
By Paul Doroh

Everyone who bought a Cay Clubs Resorts property had a special set of circumstances and an independent reason for signing up with Cay Clubs or one of its affiliates. What is common to each investor is that they were materially misled concerning several elements of their Cay Clubs transactions.

Most investors were roped into the sale by the expectation of huge profits at little or no risk to them and little or no money out of pocket. The properties were presented to mom and pop investors using elaborate marketing brochures and claims of huge equity returns. Although Cay Clubs promoters were usually careful to insert a small disclaimer that “past results are no guarantee of future returns” and “invest at your own risk,” the predominant message in all of their marketing materials was that investors could expect huge returns, sometimes in excess of 200 percent over a short period of time. These returns were presented as reasonable expectations, when they were, in fact, anything but reasonable.

Many owners were induced to “sign up” based on these representations alone. At the time Cay Clubs was making these representations, they knew them to be inflated, self-created, and patently false and misleading.

Pressuring Investors to Act Quickly

Many investors were given little or no time to perform their due diligence. Cay Clubs used high-pressure tactics to elicit closings without the proper measure of investigation by prospective buyers. Cay Clubs created its own hype and used it to pressure owners into buying units, often times sight unseen, for fear of losing out on the “opportunity.”

Pushing Its “Preferred Lender”

Cay Clubs often encouraged owners to use its preferred lender as a way to control the process and prevent investors from obtaining information from unbiased, independent sources. Cay Clubs went so far as to promise additional returns if buyers would agree to use Cay Clubs’ inside loan originator. Cay Clubs had pre-selected brokers to help them pull off the closings. Loan officers placed loans using falsified or misstated incomes and other financial information about the applicants. The loan officers often falsified the nature of the purchase (claiming an investment property as a second home, for example) in order to receive larger commissions. Brokers knowingly encouraged owners to leave vital information blank, explaining that they would fill it in as needed to guarantee approval. Applicants relied on the loan originator’s advice. Cay Clubs held these loan originators out as mortgage professionals. Owners were confused in many cases and relied on expertise of Cay Clubs and the people it recommended.

Providing Inflated Appraisals

To validate the prices they were charging for properties, Cay Clubs hired cooperative appraisers to provide inflated appraisals. In several cases, the appraiser was from a distant geographical location and had no idea of what comparable properties were selling for in the same neighborhood as the Cay Clubs properties. Investors were lead to believe and did believe that the unit values were a true reflection of their market values. Cay Clubs knowingly created a false market value for its units either by fixing the price of comparables or by promising glamorous renovations and improvements. Most of the improvements were never completed and promises never fulfilled.

Investors were discouraged from using their own real estate agents, who would probably have encouraged them to hire their own independent appraiser. A local agent representing the investor would have easily seen that the property values were inflated and discouraged his or her client from buying the property.

Falsifying Homeowner Association Documents

Cay Clubs proffered one set of homeowner association documents to prospective buyers and then changed the documents before recording them with the recorder’s office. The duly recorded documents were never provided to buyers for review before closing. The recorded documents appear to exempt all common areas and retain them in fee to Cay Clubs. Owners in many Cay Clubs locations do not own an undivided interest in the common areas. This misrepresentation materially affects the value of the property and was intentionally concealed from buyers.

Recruiting Cooperative Real Estate Professionals

Cay Clubs recruited real estate professionals who were not licensed to conduct business in the state where the properties were located in order to validate Cay Clubs’ wild claims and give investors a false sense of security. Owners relied on the information and representations made by these real estate agents, believing that they were receiving unbiased, independent advice.

Enticing Investors with Illegal Cash Back at Closing Kickbacks

Cay Clubs promised and provided cash back to buyers that was not disclosed to the lenders, making it illegal. The cash back was disguised as “guaranteed lease back money.” Lenders knew nothing of the lease back money, and it was not disclosed on the HUD – instead it was part of a separate side deal. Owners were misled to believe that this was a legitimate and perfectly legal process. Cay Clubs employed attorneys and licensed escrow professionals to assure owners of the legality of the cash back money. This misrepresentation was just one more piece in Cay Clubs’ shell game. It allowed Cay Clubs to continue to perpetuate its fraud without creating questions in the minds of investors. Cay Clubs, by way of an affiliated company, kicked back as much as 20 percent of the purchase price to buyers, all without the lender’s knowledge.

The Fallout: Property Values in a Freefall

The final common element among all Cay Clubs transactions is that every investor has seen the values of their units plummet. As the scam unravels and units are foreclosed or abandoned, or left in a state of disrepair, values continue to fall. Many units have seen the value drop as much as 60 percent. The inflated values are coming to light and true market values are being reflected. Lenders are facing the loss of hundreds of millions of dollars. Owners are facing foreclosure or the proposition of continuing to make huge monthly payments on fraudulently placed, massively inflated mortgages. Owners cannot sell their units for the debt owed and in many cases cannot even pass clear title. In some cases, Cay Clubs has cost investors their life savings and retirement savings, ruined their credit, torn apart marriages, and shattered people’s lives. Cay Clubs has benefited to the tune of millions of fraudulent dollars and continues to perpetrate the fraud on unsuspecting buyers through shell successor companies.

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About the Author: Paul Doroh is one of the co-authors of Foreclosure Self-Defense For Dummies and a subject matter expert in the legal implications of foreclosure. Paul works alongside Ralph Roberts and many other talented real estate professionals and support personnel at Ralph Roberts Realty in Washington Township, Michigan, where he frequently assists homeowners grapple with foreclosure and gain more control of their housing-related situation.
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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.
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As mentioned in the recent post, “Rally Is on to Stem Foreclosure Epidemic,” the government, mortgage lenders, and consumer advocacy groups are scrambling to come up with all sorts of solutions to stem the rising tide of foreclosures in the United States and resuscitate a flagging economy. Unfortunately, all of these fixes tend to be stopgap measures designed to make their proponents look good rather than offering real long-term solutions to suffering homeowners.

I say that we need to take this foreclosure crisis personally. By that, I mean that we need to toss out all the traditional policies and automated foreclosure systems and put people in charge of solving this very human crisis. We need to replace the collection robots with living, breathing, caring people. We need to give management back the decision-making powers based on their knowledge and knowledge of the situation. Throw away the policies and procedure manual that might read like this:

“…upon a 90 day default from a borrower, no remedial action shall be taken by our firm and the file is to be immediately turned over to our attorneys for foreclosure action regardless of any extenuating circumstances that may exist with a borrower which would otherwise have us rethink and possibly restructure our loan with them.”

No, this isn’t a real policy quoted from anyone’s manual, but it’s a pretty good depiction of how the system currently operates. In fact, I was told by one lender when attempting to work out a loan for a client, “They will have to bring the account current before we can even begin to discuss anything.” That’s just mind boggling — a Catch 22 if there ever was one. “Well,” I replied, “if they could do that they wouldn’t be delinquent nor need my services and we wouldn’t be having this conversation.”

Where is the logic? A lender forecloses, incurs thousands of dollars in legal fees, earns no interest, pays thousands of dollars to prepare the property for sale (in addition to holding costs, including property taxes and insurance), sells the home for well below what was owed them, and pays the listing agent a commission. They take the write down, diminishing the value of their own company and reducing their operating income. As a result, they have to lay off a good portion of their personnel to compensate. (GMAC had to lay off 15% of its automotive finance unit due to collection problems. Citigroup recently laid off 20,000 due to their mortgage shortfalls. Employees of Merrill Lynch faced similar layoffs, as did employees at other lending institutions.)

Would it not be better to freeze a rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose? Any contractual obligation can be renegotiated by both parties. If the lenders/mortgage note holders wanted to offer solutions to borrowers, they could.

Look at the benefit of the extreme — cutting the rate in half.

Say someone is paying 8%. Due to extenuating circumstances, such as an expensive family illness or company layoffs (see “Homeowners Aren’t the Only Ones Hurt by the Mortgage Meltdown“), the person is unable to make the monthly mortgage payments.
If you were the lender, would you rather have:

1. A non-performing loan that will cost you tens maybe even hundreds of thousands of dollars if you foreclose.
2. A property physically deteriorating, as vacant foreclosed homes typically do.
3. A further reduction of the property value and neighborhood value.
4. A loan returning zero percent income prior to, during, and after the long foreclosure process that can last for 12 months or more.
5. A loan that loses value for the investor in the mortgage-backed security (MBS).
6. Moreover, most of all, creating a homeless situation for an American family.
7. A LOSE/LOSE situation for EVERYONE.

1. A well maintained property, maintaining value.
2. A property maintaining the value of the neighborhood.
3. A loan that is no longer a complete write off but is still producing income.
4. A return to the investor in the MBS, albeit smaller. Isn’t something better then nothing?
5. No cash expense and loss to the lender.
6. A steady stock value of the lender.
7. A family that remains in its home.
8. A WIN/WIN situation for EVERYONE.

This solution is not for everyone. The speculative “investor” earning $25,000 a year who purchased 10 properties while living in an apartment (true story) should not be saved. Investors in general, who purchased for little or no down payment with the intent to “flip” and got caught up in this crisis, BY NO MEANS deserve a break. However, to the owner occupant, with qualifications, I say why not?

We don’t need legislation or political maneuvering. The government can’t and shouldn’t bail out mortgage lenders and homeowners. The people who created this crisis are the best people to resolve it, and “people” is the key word; this crisis requires people working together to develop rational, practical solutions. Our country has always prided itself in coming together when times are tough. Now, times are tough. Corporate America, you are part of the citizenry and should “come together.” Your profit motives brought this crisis on, and the fallout is destroying you as well. Do you not see the potential for self-preservation?

There is more to this story and additional solutions. More is coming. Stay tuned.

A U.S. District Judge in Florida has sentenced a former mortgage broker to seven years in prison and ordered him to pay more than $2.3 million in restitution for his role in a mortgage fraud scheme that racked up more than $17 million in fraudulently secured loans. Justin D. Barker, 31, of Jacksonville, Florida, who was sentenced earlier this week in the Middle District of Florida, was also ordered to forfeit $4,419,024.15, jointly and independently with other conspirators.

According to court documents, Barker’s scheme operated in 2005 and 2006 when he negotiated the purchase of residential real estate properties, either on behalf of himself personally, on behalf of a company he controlled, or on behalf of a third-party buyer. Barker, his company, or the buyer would then enter into a purchase and sale agreement with the seller of the property in question. Barker then retained a licensed real estate appraiser to appraise the property at a significantly inflated price. The appraiser would appraise the property at the price Barker requested, using inappropriate comparable properties and other fraudulent methods to obtain the price requested.

At the closing on the properties in question (more than 40 in total), Barker or his company would receive the difference between the loan amount, which was based on the inflated appraisal, and the actual purchase price, usually described with terms such as “assignment fee” or “payoff of second mortgage” that did not exist. This difference was the proceeds of the fraud.

During the course of the scheme, fraudulent loans totaling about $17.7 million were obtained on more than 40 properties. These loans would not have been approved but for the fraud. To recover some of these illicit proceeds, the government seized from Barker the following items:

• 2004 Bentley Continental
• 2007 Cadillac Escalade
• 2002 BMW 745Li
• 2005 Chaparral 330 Signature 36′ boat
• 1997 19′ Wellcraft boat
• 2006 and 2001 Yamaha motorcycles
• 2-carat loose diamond
• 1-carat diamond necklace
• .5-carat diamond necklace
• Diamond stud earrings
• Two Movado watches

Barker’s co-conspirator in the case, a title agency manager named Robert W. Hulbert Jr., pleaded guilty to the same charges and was sentenced this past December to three years in prison.

A Dearborn Heights, Michigan, tax accountant has been sentenced serve five years in prison and ordered to pay more than $11 million for his role in a mortgage fraud scam that defrauded lenders nearly $22 million in loses. Kalil Khalil, 36, according to court documents and information released by the United States Attorney for the Eastern District of Michigan, admitted that during a 2½-year period beginning in January 2001, he participated in the preparation of fraudulent loan applications and related documents that were submitted to mortgage lenders. Each of Khalil’s loan packages was fraudulent in one or more of the following ways:

• The purpose of the loan was not to buy or refinance a residence
• The borrower described on the application was not the true borrower
• The description of the borrower’s employment was false
• Documents purporting to substantiate the borrower’s employment (W-2 Forms, check stubs) were bogus
• The appraisal was inflated and forged
• Title to the property was not free and clear
• The title company purporting to guarantee clear title was merely a name used by Khalil and his codefendant, Tariq Hamad, to carry out the scheme
• Photographs were included that depicted a property other than the property identified in the loan application

Many of Khalil’s fraudulently prepared loan packages were approved and the loan proceeds were wired from the mortgage lenders, which were located outside of the State of Michigan, to bank accounts controlled by Khalil and Hamad that were located in metropolitan Detroit in the names of straw title companies. Khalil used most of the fraud proceeds to buy and sell stocks.

In addition to his prison sentence and order to pay approximately $11.1 million restitution to mortgage lenders and a legitimate appraisal company whose name he used on bogus appraisals, Khalil received a three-year term of supervised release following his exit from prison. He also agreed to forfeit his interest in bank and securities accounts containing about $300,000 that were seized by the government as part of its investigation.

Khalil’s codefendant, Tariq Hamad, 37, of Dearborn, pleaded guilty to one count of wire fraud in December 2006 and was sentenced in September 2007 to 9 years’ imprisonment and ordered to pay restitution in the amount of $11.4 million. The judge in the case, U.S. District Judge David M. Lawson, noted that he would have imposed a similar term of imprisonment on Khalil had it not been for Khalil’s substantial cooperation with the government in unrelated investigations being supervised by the U.S. Attorney’s Office.

In the first decade of the 21st Century, Cay Clubs Resorts with a little help from its friends, including IAI (International Association of Investors), were involved in what can best be described as a pump and dump scheme. During the first half of the decade, when real estate was a hot commodity, they were busy pumping–selling Cay Clubs Resorts condo conversions as low-risk, no-hassle investment opportunities. In 2007, when the housing bubble burst, they converted to dump mode–leaving investors with inflated mortgages, unfinished condo conversions, and property worth a fraction of its purchase price.

One of the investors who got burned by Cay Clubs Resorts and IAI recently forwarded to me an email letter she received during the pump phase of this operation from Don Burnham, CEO and Founder of International Association of Investors (IAI) and Creator of the Christian Wealth Builders Seminar Series. The letter, which is pasted in below word-for-word (punctuation and all) with the recipient’s permission, shows former Federal Reserve Chairman Alan Greenspan’s concept of “irrational exuberance” applied to real estate investments.

Sent: Monday, January 10, 2005
Subject: Hi Sharon, Don Burnham Here!

Hello Sharon,

The year 2004 year was a real great year. And 2005 will even be better. IAI has evolved into an incredible investment tool for its members. Now member/investors can invest all across the country just as if they are investing in their own neighborhood. IAI has become an investment instrument which packages high yielding real estate investment while minimizing the risk. Our members are making money because IAI has open up the hottest real estate markets to them no matter where they live.

My son Marc grossed $120,000 in profit on a Condo Conversion deal in Tampa while he lives in Portland, Oregon. He bought 3 units at IAI prices and flipped all three, making $40,000 each.

Don and Judy Jacobs spent the summer in Maine while their IAI investments made them over $50,000. Then they still had a unit left over so they came down and lived in it while their brand new home was being built

Walter and Deborah Bakaletz in Salem Massachusetts bought two units at Latigo in Vegas for $159,000 in November. Next month they will close on both that are now appraised at $192,000.and get $66,000 in equity. They bought these units after buying 2 units in Clearwater Fl $300,000 that are now worth $447,000. That’s about $300 grand in equity and they did it from their easy chair. They have not even seen their Vegas units yet.

The Hughes’ wrestled with using their home equity to buy a couple of units in Orlando. They live In Miami. Well they did and made $50,000 on each unit.

Put a couple of more testimonials

!FANME!, Clearwater Cay which you may have gotten in at $300 per foot and $350 per foot was just appraised at $447 per foot. No kidding, I told you it would happen. Now that means if you got a 1000 sq foot unit you made about $150,000 a unit. Folks, I have five of them. On those five units combined, I made $750,000. You are reading this right. If you who bought in Las Vegas Cay, I believe the same thing is coming down the pike.

Sharon, if you bought at $300, I believe we will see appraisals of $450 by the time we close (I have five of those too?) Bingo another $150,000 a unit. Some of you paid $350 but against an expected $450 appraisal that is still $100,000 a 1000 sf. The numbers work great.

Look at Latigo which were much less expensive units. Some of our members paid $159,000 for a two bedroom and it is now worth $192,000 and it is not going to closing until next month. Now tell me what’s that unit going to be worth next year at Vegas appreciation

Sharon, last week we introduced a high rise, up scale, condo conversion deal at $350 a foot with high-rise condos in the same area going at $500 a foot. Now that deal is a moneymaker for our member/investors. In a few weeks I will be introducing a great investment deal in Sarasota right on the water. Not only is it on the water, but it also has a marina. Also we got deals coming up in Key West and Nassau.

Sharon, we are humming with real estate deals that are great moneymakers. Of course, as always you must do your own due diligence and not depend on my opinion or what I say.

And while are projects, all our projects are making money for out member/investors we must always inform you that past investment results are not necessarily indicators of future investment performances. Be that as it may IAI members are making money so IAI has to be doing something right

Well Sharon, that is what has been going on. I hope to see you out there in Miami, Sarasota, Vegas, Key West, Nassau and all the hot markets that are yielding fantastic returns. Be er oa faithful member of IAI. Consider all the investments presented. Listen to my National Tele-Conferences. Come to the seminars across the country using our Fly & Buy program.

Take our bus rides to the investment projects. Come earn, come learn that is what IAI is all about.

Happy New Year

Don

What I find most disturbing about this letter is that Burnham uses the old caveat “past investment results are not necessarily indicators of future investment performances,” to warn investors, but throughout the letter, he uses past investment results to pump up the prospective investor’s expectations of future profits! This only goes to prove what has been said time and time again, “If it sounds too good to be true, it probably is.”

Daniel Mann of Arnold, Missouri, was sentenced to 15 months in prison today for his role in a mortgage fraud scheme that previously netted his partner-in-crime a three-and-a-half-year jail term. Mann pled guilty to a one-count information filed by the U.S. Attorney for the Eastern District of Missouri in November of 2007. At that time, he admitted to participating in a mortgage fraud ring headed by Dack Daugherty of St. Louis. Daugherty was sentenced last month and ordered to pay more than $576,000 in restitution.

Mann admitted to teaming up with Daugherty on several properties for a scheme that involved lining up properties from distressed sellers who were willing to take a below-market sale price for a property and matching them up with willing buyers (in and of itself, there’s nothing wrong with that). Daugherty and Mann, however, arranged 100% financing for the buyers by means of false mortgage applications, which typically included lies about a buyer’s finances and intention to occupy a property. Buyers were also promised cash payments after closing that were not disclosed to the lending institution (can anyone say, illegal cash back at closing). In all, the scheme involved more than 60 properties, mostly in South St. Louis, that ran from 2005 through 2006.

Mann’s 15 months sentence was accompanied by an order to pay $84,820 in criminal restitution to six mortgage companies defrauded by his actions.