Today’s New York Times features a lengthy article (more than 3,000 words) asserting that as the number of foreclosures grows, a small group of law firms and default servicing companies, who represent mortgage lenders, have been raking in mounting profits. These firms, according to the Times, assess legal fees and a host of other charges, calculate what borrowers’ owe and draw up the documents required to remove them from their homes. The only problem is, in a growing number of cases, the firms involved have not been following the the law.

In many cases, paralegals and “nonlawyer employees” do all the work, which only increases the chance of mistakes being made, and that’s just the tip of the iceberg, according to The New York Times’ investigation.

Of particular interest to FlippingFrenzy.com readers (courtesy of The New York Times)…

1. Law firms, paid by the number of motions filed in foreclosure cases, have sometimes issued a flurry of claims without regard for the requirements of bankruptcy law, several judges say.
2. Court documents say that some of the largest firms in the industry have repeatedly submitted erroneous affidavits when moving to seize homes and levied improper fees that make it harder for homeowners to get back on track with payments. Consumer lawyers call these operations “foreclosure mills.”
3. John and Robin Atchley of Waleska, Ga., have experienced dubious foreclosure practices at first hand. Twice during a four-month period in 2006, the Atchleys were almost forced from their home when Countrywide Home Loans, part of Countrywide Financial, and the law firm representing it said they were delinquent on their mortgage. Countrywide’s lawyers withdrew their motions to seize the Atchleys’ home only after the couple proved them wrong in court.
4. Joel B. Rosenthal, a United States bankruptcy judge in the Western District of Massachusetts, wrote in a case last year involving Wells Fargo Bank that rising foreclosures were resulting in greater numbers of lenders that “in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system.“
5. Last month, almost 225,000 properties in the U.S. were in some stage of foreclosure, up nearly 60 percent from the period a year earlier.
6. Fidelity National Default Solutions, a unit of Fidelity National Information Services of Jacksonville, Fla., is one of the biggest foreclosure service companies. It assists 19 of the top 25 residential mortgage servicers and 14 of the top 25 subprime loan servicers. Citing “accelerating demand” for foreclosure services last year, Fidelity generated operating income of $443 million in its lender processing unit, a 13.3% increase over 2006. By contrast, the increase from 2005 to 2006 was just 1 percent.
7. A recent analysis of 1,700-plus foreclosures across the country by Katherine M. Porter, associate professor of law at the University of Iowa, showed that questionable fees were added to borrowers’ bills in almost half the loans.
8. A generation ago, home foreclosures were a local business, lawyers say. If a borrower got into trouble, the lender who made the loan was often a nearby bank that held on to the mortgage. That bank would hire a local lawyer to try to work with the borrower; foreclosure proceedings were a last resort. Now foreclosures are farmed out to third-party processors who hire local counsel to litigate. Lenders negotiate flat-fee arrangements to try to keep legal bills down.
9. The September 2006 issue of The Summit, an in-house promotional publication of Fidelity National Foreclosure Solutions, another unit of Fidelity, trumpeted the efficiency of its 18-member “document execution team.” Set up “like a production line,” the publication said, the team executes 1,000 documents a day, on average.
10. The Texas law firm of Barrett Burke has come under intense scrutiny by bankruptcy judges. Overseeing a case last year involving James Patrick Allen, a homeowner in Victoria, TX, a judge examined the firm’s conduct in eight other foreclosure cases and found problems in all of them. In five of the matters, documents show, the firm used inaccurate information about defaults or failed to attach proper documentation when it moved to seize borrowers’ homes. The judge imposed $75,000 in sanctions against Barrett Burke for a pattern of errors in the Allen case.

In “Drinking the Cay Clubs Cool-Aid: Part 1,” I introduced you to Jamie and Joe Castagna — an ambitious and hard-working couple who became ensnared by some silver-tongued con artists pushing real estate investing in Cay Clubs Resorts.

Jamie was a loan processor at the time, who eventually 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.”

As Paul Harvey would say — here is the rest of the story.

We now had a $15,000 Reservation Agreement for a Membership in the Las Vegas Cay Club. We did not know what unit we were purchasing, what the sales price was, how big the unit was, or what the view was like, but according to Ricky Stokes we had secured our spot with another great investment.

On September 20, 2005 we wrote another $5,000 check payable to Clearwater Cay Club to reserve Unit #611. Prior to this time, we had received appraisals showing that our unit in Clearwater was worth OVER $150,000 more than what we had purchased it for. When Colin Brechbill gave us the chance to purchase another unit at the same price “per square foot” as our first unit, we jumped on it.

On October 21, 2005, we wrote another $10,000 check for the remainder of the deposit for unit #611 in Clearwater. After a few weeks, we began to realize that getting financing for unit #611 was going to be much more difficult. We asked Colin and Ricky if they would flip this $15,000 into another Las Vegas unit. They agreed, so we now had two Las Vegas Units reserved. Jamie was purchasing one unit, and her mother was going to purchase the other. The next step was to sit back and wait for the Las Vegas sales contracts to arrive.

We received the sales contracts about three months later, in December of 2005. One thing that always concerned me about Cay Clubs was the disorganization. We would receive contracts with many blanks, sales prices inflated to include the membership fees, no closing date, and so on. We never saw any addendums with the contracts to justify the inflated sales price, such as an addendum showing what the developer way paying. I always requested these sections to be completed, or I would fill them in myself, but it just seemed very unprofessional and bad business practice for a company to handle their legal documents so carelessly.

Once we had a fully executed sales contract, I started working to secure the financing for our unit in Las Vegas. I had contacted Colin Brechbill for his suggestions for who to use for a lender. He sent me an email with contact information for Jose Ramirez at Trans Atlantic. I called Jose Ramirez several times and never received return call, so I tried to obtain financing on my own through other lenders.

By May 23, 2006, I was still unable to locate a lender willing to finance the investment, so I emailed Colin again to see if he had any suggestions. He recommended Ross Pickard at Chase. I quickly made contact with Ross and sent him my loan application and the documents he requested. The appraisal had already been done by The Appraisal Team. My sales price was $296,022 (which included $7500.00 membership fee and $8,622 of seller’s concessions). The appraisal dated March 20, 2006 showed a value of $356,000 – almost $60,000 in instant equity, which represented an approximate 20-percent return, just as Ricky and Colin told us!

After working on this loan for six months, it was finally ready to close. We purchased our Las Vegas Cay Club Unit on July 13, 2006. The title company, Commonwealth Land Title Insurance Company was located in Las Vegas, so we did a mail away. I did not have a closer and had to go to my bank to get my loan documents notarized. We put 5 percent down and paid some closing costs on this property which totaled approx. $18,000 out of pocket.

We opted to have half of our leaseback checks in 2006 and receive the other half of the leaseback money in 2007, so approximately 60 days after closing, we received a check from CC704, LLC for the amount of $20,992.50 — half of our leaseback money.

At this time, we had no concerns about our Cay Club investments, as they both appraised for much higher than what we had paid for them, and we had enough money in the bank to make the payments over the next two years while the developer converted the properties into five-star resorts.

We kept in contact on a regular basis with Ricky Stokes and Colin Brechbill to stay on top of the status of what was going on with Clearwater and Las Vegas. Again, our strategy the entire time was to hold the property for a minimum of one year and one day or a maximum of 24 months. On May 16, 2006, I contacted Colin to let him know that I was interested in selling my unit. This was his response:

What was your original price and contracted price, and how much do you have left on your leaseback? The demolition on the strip mall begins end of next month, so this will create a tremendous buzz around the property, so you will be in an excellent position… of course the longer you can hold, the more capital return you will realize.

As always, Colin encouraged me to stay in the property longer, because the developers were beginning to build the amenities, and this would make the property appreciate even more.

On July 5, 2006 I submitted my first request for our $35,000 “refundable” reservation deposit. Ricky and Colin talked to us and convinced us that we would be giving up a great opportunity if we pulled out of this deal now. So a few more months went by, and we still did not feel comfortable with the project. Nothing was signed, no unit number reserved, and the price point seemed very high. So in October 2006, after requesting our money back again, I received an email from Colin stating: “I can help refund this but I need to put a replacement buyer in your position.”

On November 1, 2006, I was requested to fill out a cancellation form, which I did and sent back right away. A week later, Colin stated that there had to be another buyer that would come in with $35,000 before they could release my money. He tried to put us at ease by telling us that this was such a great deal that if another buyer didn’t show up Colin would personally take our place. A month later, we were still waiting to see if we would even be refunded our “refundable” deposit. Only after I threatened to get my attorney involved did I begin to see some action. Finally in January 2007, we received our $35,000 refundable deposit. Looking back, it was a big blessing that we requested this money when we did, as there are many owners who will never receive their refunds.

When we visited the property in September 2006, we did see some progress (the strip mall was being demolished), but progress was nowhere near what we had been led to believe. Again, I expressed my concerns and urgency to Colin to sell our Clearwater unit. This was his email response:

I may be able to move all your Clearwater Units and any family members you have in. The REIT we have been talking about is here and ready to take the units. I can place a certain amount into the plan for them to take down, this would be about $100 sq. ft. increase from what you paid. Let me know ASAP if and who you want in. I will need unit numbers and price they were in at.

Over the next six months, we waited patiently for the REIT to come in, buy our units, and for us to realize a profit of $100 per square foot (which in our case translated to: 1,140 sq. ft x $100 per sq. ft = $114,000). With that kind of profit hanging in the balance, I was willing to hang in there and keep paying over $4,000 per month even after my leaseback money had run out.

On November 16, 2006, I contacted Barbara Mills, a sales associate for Waterfront Resort Realty, to see what they could do to sell our unit. She kept brining up the fact that our leaseback was not up until May 2007 and that we should wait until then to sell the condo. She emailed me a breakdown of what the going price was ($425.00 per sq. ft., which was less than what Colin told us), an 8.5 percent broker fee, closing costs, etc. We then started to get concerned that the value was not what we thought it was.

In December 2006, we went over to the “office” — a doublewide trailer that Ricky Stokes and Colin Brechbill worked out – of and sat down with them face to face to express our concerns.

I had prepared a Microsoft Excel spreadsheet to show them that we were almost out of money; if we kept the property until the leaseback expired, we would have to pay an additional $24,409 out of pocket. I also brought the email that Barbara Mills had sent to me showing the going price per square foot to see what they had to say about it.

Colin and Ricky danced around every question and again made us drink more of their Cay Club Cool-Aid. Colin was still trying to sell us on another project out in Crested Butte, Colorado, and Ricky (the wise CPA that he is) kept throwing things back in our face, like did you write off all of the furniture package. He said that all you had to do was deed your property into a corporation, and it is a one time write-off, called a 1079. Luckily, we did NOT take his advice and sought the advice of our current CPA instead.

January 3, 2007, we received an email from Colin confirming that the REIT has been consummated and they would spend $250,000,000 over the next four years to purchase condos from Cay Club investors.

On January 16, 2007, Colin emailed me the following:

The REIT has been consummated at has made the initial offer of $1 Billion over the next 4 years, with the initial $250 Million to begin closing in March. The unit selection has not been released at this time as we are all eagerly awaiting this information. Once I receive, I will be sure to update you ASAP, so we can begin your exit of the Clearwater Cay Club.

The news started to get a little better, as we started to think that we did not need to make a big profit. Our main concern was to get out of this property. What we were being told and what we were seeing were not adding up.

In January 2007, we were suppose to receive a $20,992.50 check for the remainder of the Las Vegas leaseback from Cay Clubs, but only received $10,496.25. This came as a shock, because nobody had ever given us a heads up that we wouldn’t be receiving the full amount. It was like a big roller coaster with Cay Clubs, you never knew what to expect; you could only hope and pray for the best as we had close to $1 million on the line in our Cay Club properties.

March 2007 came and went with no sign of the REIT buying us out of our unit as Colin had promised us. We were now starting to realize that we had been drinking too much Cay Club Cool-Aid and that the blinders needed to come off. We had trusted everything that Colin and Ricky had told us. They were our point of contact, and they were in direct communication with Dave Clark, Barry Graham, and all of the other principals of the company. So, how were we to believe anything else?

By April 2007, Cay Clubs was in talks with Key Hospitality for them to acquire all of the equity of privately-held Cay Clubs. This seemed like a great thing for both us and Cay Clubs. The completion of the merger was not expected until the third quarter of 2007. We were forced to wait it out, as the property had not sold yet.

In June 2007, we decided to list our Clearwater property with an agent at Prudential Tropical Realty, as we had little to no faith in Colin Brechbill or Ricky Stokes at this time. She was very familiar with Cay Clubs, and had been around the complex since the time when the condos were apartments. We listed the property as low as we could to just break even. We never received one offer.

September 24, 2007, I received my last email from Colin:

I am in meetings still. It does not look well for Cay Clubs, we are doing all we can to get information but between us looks like they may be closing the doors soon. The lending industry is so tight they can not move any loans to close and this is stifling all payouts and construction.

I know Joe stopped by last week, but we have been doing everything we can to survive the market and save Cay Clubs. I wish there was more I could provide but this is literally all that I know. In my opinion (and only my opinion) I am letting my units go into foreclosure as I can not keep up the payments without any income coming in on these. We have not collected a payment from Cay Clubs since almost Nov. of last year floating this entire organization, they have literally bankrupted me. The SAC is still a 60% shot (this is the Public offering) but this is not until mid October which is just to far for us to continue hanging on.

We now knew that we were in BIG trouble. We contacted an attorney who was representing other Clearwater Cay Club owners and are currently involved in a lawsuit. We are now aware that there was a massive amount of fraud perpetrated in both the Clearwater and Las Vegas properties by Dave Clark and partners. During this time, we continued to pay on our “dead horse,” due strictly to the fact that we always had perfect credit.

In February 2008, after doing the research and seeing the fraud for ourselves in black and white, we made the difficult, life-changing decision to quit paying on our units. We now feel like we are on the right track and fighting back for what has been done to us. I hope that many other owners will come forward as we have to expose those who were behind this fraudulent scheme and bring them to justice.

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. Hopefully, we can team up with other investors to provide the honest investors with some financial relief and make Part 3 of this story a little less painful.

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Editor’s Note: Due to the personal and off-topic nature of some of the comments being left for this particular blog entry, one person’s privilege of being able to post comments to Flipping Frenzy blog entries has been revoked. As a reminder, comments that are intended as a personal attack or are abusive, harassing, or threatening will not be tolerated, will be removed, and may result in the offending commenter being permanently banned from commenting on this site.
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The FBI calls it the “latest scam on the block,” but for years now we’ve been warning people and reporting about scam artists who steal your identity and then your home. Now, after years of reporting and writing about this sinister act, the FBI is stepping up its efforts to make homeowners aware of the horrible connection between identity theft and real estate fraud.

Here’s how the scam typically works:

(Image courtesy of the FBI)

It can get even more complicated than this, as we can see from a fresh case out of California that the FBI investigated with the Internal Revenue Service. A Downey, California, real estate industry insider pleaded guilty this week to federal fraud and money laundering charges, and in doing so, admitting her role in a $12 million real estate fraud scheme that targeted homeowners in default on their mortgages and falsely promised them help. Martha Rodriguez, 35, pleaded guilty to one count of mail fraud and one count of money laundering in relation to the scheme that ran from May 2003 until November 2005.

By pleading guilty, Rodriguez admitted that she and several co-schemers located victim homeowners through computerized databases that list homes going into foreclosure. Rodriguez promised victim homeowners that their homes would get refinanced. However, instead of obtaining refinancing, Rodriguez and the other defendants charged in this case submitted loan applications in the names of straw buyers who were purportedly buying the property. In some cases, the straw buyers were paid for the use of their personal information. In other cases, the defendants used personal information of people without their knowledge.

The loan applications for the straw buyers–which always contained false information–caused a series of lenders to fund mortgages that otherwise would not have been funded. The loan proceeds were used to pay off the loan in default, and the remaining proceeds were skimmed off by Rodriguez and her co-schemers.

Even though they were promised that they would keep their homes, the victim homeowners lost title to their homes. The lenders suffered losses when the straw buyers failed to make loan payments and the second loans went into default. The scheme targeted commercial lenders and more than 100 homeowners across the the southern part of Los Angeles.

The scheme was operated through Rodriguez’s real estate and escrow agencies, Silvernet Properties in Downey and Bellasi Escrow in Seal Beach.

As a result of her guilty pleas, Rodriguez faces a maximum possible sentence of 40 years in federal prison. Rodriguez has agreed to forfeit to the government her interest in five homes, a truck and approximately $900,000 in cash that was seized by the government around the time of her arrest.

Rodriguez was indicted with four co-defendants. One of them–Cynthia Valenzuela, a 24-year-old Downey resident–pleaded guilty last Friday to mail fraud charges. Rodriguez and Valenzuela are scheduled to be sentenced by is United States District Court in Los Angeles on August 20.

Three remaining defendants are scheduled to go to trial on July 10:

• Vladimir Stefanovic, 35, of Lancaster, CA (Martha Rodriguez’s common-law husband)
• Edward Seung Ok, 40, of Huntington Beach, CA
• Maria G. Juarez, 36, of Diamond Bar

There’s no telling why the FBI chooses to highlight one real estate fraud bust over another, but buried deep within a recent report about Operation Homewrecker–an extensive mortgage fraud investigation by the FBI and IRS–was a very telling piece of information. According to Drew Parenti, Special Agent in Charge of the FBI’s Sacramento office:

“Mortgage Fraud has recently been elevated to the FBI’s highest financial crime priority, and we are attempting to address the numerous reports of fraud within the real estate industry that have occurred across the country.”

Parenti went on to say that the FBI is focusing more attention than ever on industry professionals, the insiders “who have manipulated the mortgage loan process for their own financial gain.”

Parenti’s comments come on the heels of one of the FBI’s latest real estate fraud-related indictments. According to Assistant U.S. Attorneys Laura Ferris, Rob Tice-Raskin, and Ellen Endrizzi, who are prosecuting the case, the charges are broken out into two separate indictments, “Head One” and “Head Two.”

Two days ago, the FBI announced the indictment of 19 individuals for mortgage fraud-related offenses under Operation Homewrecker. The leader of the nationwide scam was Charles Head, 33, of Los Angeles, California, who targeted homeowners in dire financial straits, fraudulently obtaining title to over 100 homes and stole millions of dollars through fraudulently obtained loans and mortgages.

According to the trio of Assistant U.S. Attorneys prosecuting the case, a federal grand jury returned the first set of charges in a 13-count indictment against 16 defendants with violations of mail fraud, conspiracy to commit mail fraud, conspiracy to commit money laundering and other related offenses. “Head One” involved a “foreclosure rescue” scam, netting approximately $6.7 million in fraudulently obtained funds taken from 47 homeowners, nearly all of whom were located in California.

From January 2004 to mid-March 2006, the defendants contacted desperate homeowners, offering two options allowing them to avoid foreclosure and obtain thousands of dollars up-front to help pay mounting bills. If the homeowner could not qualify for the first option, which virtually none could, they would be offered the second option. Under the latter option, an “investor” would be added to the title of the home, to whom the homeowner would make a rental payment of an amount allegedly less than their mortgage payment, thereby allowing the homeowner to repair their credit by having the mortgage payments made in a timely fashion.

Unfortunately all of this was a scam. The defendants would recruit straw buyers as the investors and oftentimes these individuals would in fact replace the homeowners on the titles of the properties without the homeowners’ knowledge. These straw buyers were often friends and family members of the defendants. Once the straw buyer had title to the home, the defendants immediately applied for a mortgage to extract the maximum available equity from the home. The defendants would then share the proceeds of the ill-gotten equity and rent being paid by the victim homeowner. When the defendants ultimately would sell the home, stop making the mortgage payment, and/or pursue an eviction proceeding, the victim homeowner was left without their home, equity, or repaired credit.

The following defendants were charged in the February 28, 2008 “Head One” indictment:

• Charles Head, 33, of La Habra, California
• Jeremy Michael Head, 30, of Huntington Beach, California
• Elham Assadi, aka Elham Assadi Jouzani, aka Ely Assadi, 30, of Irvine, California
• Leonard Bernot, 51, of Laguna Hills, California
• Akemi Bottari, 28, of Los Angeles, California
• Joshua Coffman, 29, of North Hollywood, California
• John Corcoran, aka Jack Corcoran, 52, of Anaheim, California
• Sarah Mattson, 27, of Phoenix, Arizona
• Domonic McCarns, 33, of Brea, California
• Anh Nguyen, 36, of Los Angeles, California
• Omar Sandoval, 32, of Rancho Cucamonga, California
• Xochitl Sandoval, 29, of Rancho Cucamonga
• Eduardo Vanegas, 28, of Phoenix, Arizona
• Andrwe Vu, 39, of Santa Ana, California
• Justin Wiley, 28, of Irvine, California
• Kou Yang, 32, of Corona, California

On March 13, the federal grand jury returned a five-count indictment in “Head Two” against seven defendants, including:

• Charles Head, John Corcoran, Kou Yang, each also charged in “Head One”
• Keith Brotemarkle, 42, of Johnstown, Pennsylvania
• Benjamin Budoff, 41, of Colorado Springs, Colorado
• Domonic McCarns, 33, of Brea, California
• Lisa Vang, 24, of Westminster, California

“Head Two” involved an equity-stripping scheme that netted approximately $5.9 million in stolen equity from 68 homeowners in states across the nation. While still targeting distressed homeowners and defrauding mortgage lenders through the use of straw buyers, this time Charles Head altered the scheme so that he would receive approximately 97% of the stolen equity, while his employees, and the other defendants, would receive either the remaining 3% of equity or a salary from the fraudulently-obtained funding.

Instead of recruiting friends and family members as straw buyers, as in “Head One,” in “Head Two” the defendants recruited strangers via the Internet. They also used referrals from mortgage brokers to identify and solicit new victim homeowners. Beyond advertising on the Internet, the defendants also would send blast faxes to mortgage brokers throughout the United States and generate mass emails to potential victims. Through material misrepresentations and omissions, victim homeowners would be offered what appeared to be their last best chance to save their homes. Unfortunately, as in “Head One,” these victims also were left without their homes, equity, or repaired credit.

Mortgage bankers, regulators, politicians, and economists act as though the mortgage meltdown and foreclosure epidemic were unforeseeable events. They feign ignorance and pretend that they were blindsided. The truth is, they knew. I’m not saying they should have known. I am saying they knew.

Back in September of 2001, HUD (U.S. Department of Housing and Urban Development) was working on its FR (Final Rule) 4615, “Prohibition of Property Flipping in HUD’s Single Family Mortgage Insurance Program.” On Thursday, May 1, 2003, HUD published FR-4615.

Illegal house flipping is only one of the manifestations of real estate and mortgage fraud. Con artists have invented numerous other schemes to rip off lenders and homeowners. By publishing FR-4615, the government demonstrated that it was well aware of the potential cataclysmic consequences of fraud on the housing and lending industries.

Approximately one year later, real estate and mortgage fraud, including illegal house flipping was still a growing problem. On March 11, 2004, I sent the following letter to President George W. Bush and to the governors of all 50 states, waving the warning flag that real estate and mortgage fraud posed a serious threat and resulted in skyrocketing foreclosure rates.

(Note: The red marking above covers my signature for the simple fact that I am not interested in having someone copy my signature for fraudulent acts.)

The government knew. The lenders knew, too. Unfortunately, the lenders also knew that they could simply pass the high cost of fraud onto the consumer. That worked for some time, until eventually, the overburdened consumer could no longer carry the burden and a bursting housing bubble exposed just how costly fraud really is.

How can I possibly claim that the lenders knew? Because everybody knew what was going on. In fact, about 80 percent of the fraud was facilitated by industry insiders–mortgage brokers, loan officers, appraisers, real estate agents, and a host of other professionals hungry for short-term gains at the expense of long-term pains.

We knew. They knew. The consumer didn’t know. Politicians, mortgage bankers, and real estate professionals have no right to act as though they’ve been blindsided by the current crises. Plenty of people were sounding the alarms. The people who could do something about it, however, refused to listen.

California’s Attorney General has shut down six companies, each of which is accused of predatory lending practices that pushed homeowners into illegal and unconscionable loans. “As the mortgage crisis worsens, a growing number of fly-by-night companies are employing utterly brazen tactics to push homeowners into illegal and unconscionable loans,” Attorney General Jerry Brown said. “The illegal sales practices of these companies, run by Eric Pony and his family, included psychological pressure, forgery, and outright lies.”

The six companies…

• Direct Credit Solutions
• Greenleaf Lending
• Lifetime Financial
• Nations Mortgage
• Olympic Escrow
• Virtual Escrow

…ran a complex predatory lending scheme using bait and switch tactics that victimized thousands of consumers in California, many of whom have since lost their homes.

Earlier this week, the Los Angeles Superior Court, at the request of the attorney general, froze all six companies’ real estate and bank accounts and enjoined them from engaging in further predatory practices. The freeze order also covered expensive cars and millions of dollars in private real estate owned by Eric Pony. The State of California is also seeking an estimated $20 million in penalties and restitution.

(above: San Bernardino County authorities announce arrests involving the mortgage fraud ring. With the prosecutors are photos of Eric Pony and his sister Paulette Pony… photo courtesy of Los Angeles Times.)

In the coming weeks, the state’s attorney general intends to bring additional legal actions, both civil and criminal, against other mortgage lenders and foreclosure consultants who are taking advantage of homeowners across California.

Here’s how the scam worked:

Lifetime Financial, Nations Mortgage and Greenleaf Lending operated predatory lending schemes to cheat homeowners by promising unrealistically low mortgage payments and then switching them to loans that do not match the original agreement. Telemarketers lure consumers by telling them that they are preapproved for a fixed rate loan of 5% to 6% which could lower monthly payments by hundreds of dollars.

Although the exact number of victims is unknown at this time, Eric Pony, the president of Lifetime Financial, claims to have arranged thousands of loans. During the investigation that led to the lawsuit, the California Attorney General’s Office took declarations from more than twenty people who had been scammed by these companies.

Lifetime Financial arranged loans with hidden fees of up to $20,000. In addition to these fees, homeowners end up with loans that have worse financial terms than their original mortgage. In some cases, homeowners were saddled with monthly payments that exceeded their entire monthly income. Many have either lost their homes to foreclosure or are facing foreclosure as a result of engaging in these transactions.

Telemarketers would initially request only a nominal payment for a home appraisal. Appraisers then inflated home values to qualify the homeowners for much higher loans than were necessary. The companies never provide copies of theses appraisal reports to consumers.

Next, a salesperson would show up at the victim’s house, sometimes as late as 11:45 p.m., with documents that were incomplete or contained terms that are vastly different from those originally promised. If the homeowners complain about the terms, the salespeople would tell them that there is a mistake but they should just sign the paperwork to keep the deal in place.

If a homeowner refused to sign the documents, company employees would simply forge the customer’s signature. In some instances, the forgeries are said to be so blatant that the victims’ names have actually been misspelled.

As a result of these tactics, the final mortgage documents always contained extremely unfavorable terms that are substantially worse than originally promised by the telemarketers. Other fraudulent and unlawful practices include the following:

1. Offering thousands of dollars in cash back without disclosing that the money would be used to cover high fees
2. Falsely promising to reimburse prepayment penalties from the victim’s current lender
3. Pressuring victims to sign inaccurate loan documents by promising to correct excessive fees
4. Failing to provide copies of signed documents
5. Forging victims names and signatures on loan documents
6. Falsifying income information on loan applications and creating fake references
7. Refusing to honor written demands to cancel loans

If a homeowner tried to back out of the transaction, the companies would promise to waive thousands of dollars in processing, application, origination and underwriting fees. If the customer agreed, sales representatives would provide a new statement but then resubmit the original forms, ultimately charging the same excessive fees.

Some of the key players involved in companies’ conspiracy to rip off homeowners include:

• Eric Pony, 25, a real estate agent until he surrendered his license in September 2007 following an investigation by the California Department of Real Estate.
• Paulette Pony, 23, Eric’s sister and a notary public for Lifetime Financial until her license was revoked in December 2007 by the California Secretary of State for felony conspiracy charges and failing to disclose a 2003 forgery conviction.
• Wilma Pony, 58, the pair’s mother, who also worked as a notary for Lifetime and is the President and CEO of Nations Mortgage, Inc. and Direct Credit Solutions, Inc., organizations which are also being sued by the attorney general.
• Eli Hassine, 25, who was appointed a notary public in January 2005.
• John Nielsen, a.k.a. Doo Hyun No, a licensed real estate broker for Nations Mortgage and Green Leaf Lending, Inc.
• Carol Pencille, 57, an escrow officer and the President and Chief Executive Officer of Olympic Escrow, a company involved in a kickback scheme with Lifetime whereby $2,700 in fees was taken from escrow proceeds through falsified amendments to loan documents.
• Sibpun Ampornpet, 31, an escrow officer, notary public, and principal of Olympic Escrow.
• Dean Storm, a licensed real estate broker until a California Department of Real Estate investigation led to the revocation of this license in September 2007.

At various times, Pencille and Ampornpet also worked for Virtual Escrow, Inc. and Olympic Escrow, companies that operated in Glendale, Encino and North Hollywood, California. The attorney general suspects that there are other people involved in these companies’ conspiracy to cheat homeowners and will amend the state’s lawsuit when these persons are identified.

If you’re wondering how the scam specifically impacted homeowners, wonder no further:

In 1996, Ron and Barbara Fitzgerald moved into their home in Lancaster, California. Ron is retired and his wife Barbara has been bedridden for several years due to a serious medical condition. In October 2006, Lifetime Financial offered the Fitzgeralds a 4.5% fixed rate with $800 monthly payments. The telemarketers offered to meet Ron at a nearby cafe to review paperwork.

During the meeting, Ron discovered that the paperwork did not conform to the terms that were discussed by the telemarketers. The sales agent told Ron that the paperwork was a mere formality and everything would be taken care of. Ron decided not to sign all the paperwork.

Later that month, the Fitzgeralds were stunned to find that their loan had been processed even though Barbara Fitzgerald did not, and could not have, signed any loan documents due to her medical condition. Investigators later determined that all the signatures and initials on the loan documents were forged.

The Fitzgerald’s mortgage went from $189,000 at an adjustable rate of 8.04% with monthly payments of $1,100, to now owing $244,000 at an adjustable rate of 8.5% with payments of $1,788.

Luis Garcia, a 75-year-old disabled senior from Peru, has limited understanding of English. Lifetime Financial contacted Garcia in Spanish and promised to refinance his mortgage into a low, fixed rate. Garcia agreed to a 50-year loan with $1,000 monthly payments and was shocked when he received a letter from New Century Mortgage stating that his new loan rate was 7.95% and his initial monthly payment would be $2,254. All the paperwork provided to Garcia was written in English.

With help from translators and family, Garcia discovered that Lifetime Financial had falsified almost all of Garcia’s information including his monthly income and work history. Garcia was unable to afford the extremely high monthly payments and ultimately lost his home.

California’s attorney general is seeking civil penalties of $2,500 for each violation and full restitution as well as a permanent injunction against operation the six businesses. Penalties and restitution are estimated to exceed $20 million.

While the vast majority of real estate industry professionals are honest and hard working individuals, real estate and mortgage fraud schemes continue to be orchestrated by some within the industry, including mortgage bankers/brokers, loan officers, Realtors, title/escrow officers, appraisers, and other industry related personnel. Since these fraudsters and schemers are said to have contributed significantly to the demise of the real estate market in Las Vegas, Nevada, the Las Vegas Division of the FBI has created a task force specifically designed to go after the bad guys.

The Southern Nevada Mortgage Fraud Task Force, which is housed in FBI’s Las Vegas office, is comprised of representatives of the following local, state, and federal entities:

• Las Vegas Metropolitan Police Department
• Internal Revenue Service-Criminal Investigation
• Housing and Urban Development
• Social Security Administration-OIGs
• United States Postal Inspection Service
• Nevada Attorney General’s Office
• United States Attorney’s Office

The very same day the Task Force went public–last Thursday, the 13th of March–a Las Vegas real estate broker and her husband were charged by a federal grand jury in Las Vegas with defrauding federally-insured financial institutions of millions of dollars through a scheme that involved inflated housing values, straw purchasers, and a series of bogus limited liability companies to run a massive real estate fraud scheme.

Eve Mazzarella, 30, and her husband, Steven Grimm, 45, were indicted last Wednesday, and charged with six counts of Bank Fraud, one count of Money Laundering, and Aiding and Abetting. Grimm was arrested on Thursday morning in Las Vegas by agents and officers of the newly created fraud task force. At last check, Mazzarella has not yet been arrested.

As we all know, it is a violation of federal law for anyone to make a false statement regarding their income, assets, debt, or matters of identification, or to willfully overvalue any land or property in a loan and credit application for the purpose of influencing in any way the actions of a federally-insured financial institution. Well, Mazzarella and Grimm controlled and operated numerous limited-liability companies designed specifically to defraud federally-insured financial institutions in order to benefit themselves and no one else.

Here’s how the scheme worked:

1. Mazzarella and Grimm recruited individuals (straw buyers) to make offers to purchase homes in Las Vegas at substantially above the seller’s asking price.
2. Once the purchase was negotiated, the straw buyers applied for mortgages from financial institutions.
3. Mazzarella and Grimm placed, or caused to be placed, false information regarding the straw buyers’ places of employment, income and assets on the mortgage loan applications in order to ensure that the straw buyers could qualify for the loans.
4. They then required the straw buyers to transfer title to the property to a designated limited liability company controlled by the defendants.
5. Mazzarella and Grimm typically used the straw buyer’s first initial and last name to name limited liability companies, and did not pay the straw buyer his/her fee until the property was transferred to the limited liability company in question.
6. After the mortgage loans were funded, Mazzarella and Grimm caused title and escrow companies to disperse a portion of each loan to one of their limited liability companies.
7. Once they obtained control over a property, they would again sell the same property to another straw buyer at an inflated price.

What a racket!

Mazzarella and Grimm engaged in approximately 432 straw buyer transactions, and obtained control over more than 225 properties with a total purchase price of over $100 million. They defaulted on mortgage payments on many of the loans which caused the properties to go into foreclosure, and more than 115 of the approximately 225 properties purchased by Mazzarella and Grimm have since been been sold in foreclosure, causing losses to the banks of more than $15 million.

If convicted, which is almost a certainty, Mazzarella and Grimm face up to 30 years in prison and a $1,000,000 fine on each bank fraud charge and up to 10 years in prison and a $250,000 fine on the money laundering charge.

Another defendant has been sentenced to federal prison in a real estate flipping scheme that involved properties in Springfield and Decatur, Illinois. Frank Kelly Ciota, 47, of Riverton, Illinois, pled guilty last week to one count of bank fraud, one count of wire fraud, five counts of mail fraud, and one count of conspiracy to commit money laundering, and has been sentenced to a term of eight years and one month in federal prison.

Frank Ciota was involved in the real estate scheme with co-defendant Gary Knox, 61, of Decatur, who was sentenced the week before last week nearly 20 years in federal prison. A third defendant, Dennis Wiese, Jr., 39, of Belleville, Illinois, who performed real estate appraisals, is scheduled for sentencing on May 2, 2008.

The three defendants each pled guilty to their respective roles in the scheme which involved more than 150 fraudulent real estate sales and financing transactions of more than $8 million from 1999 to 2005 in Springfield and Decatur, Illinois. Gary Knox represented himself and his business, Central Illinois Management and Development Company, as being in the business of buying, selling and managing real estate; however, he was not a licensed real estate broker or salesperson. Knox and Ciota obtained more than $3 million for their personal use and to promote the ongoing scheme while Wiese received fees of $350 to $450 per appraisal.

The three men admitted engaging to illegally flipping homes, which involves making false representations–including fraudulently inflated real estate appraisals–which were used to entice owners to sell, buyers to purchase, and lenders to finance rental properties that were sold at substantially higher prices than their reasonable value.

Frank Ciota, who was not a licensed real estate broker or salesperson, admitted that his own relatives were among his victims whom he advised of investment opportunities in rental real estate. Ciota falsely represented to one couple that they qualified for financing to purchase 12 to 20 houses. As a result, the couple became unwitting buyers of 12 properties, including four that were purchased within a three-day period in November 2002 for a total of $229,500. Three of the properties–830 S. 12th Street; 1320 S. 13th Street, and 1305 South Grand Avenue East–were purchased by the couple, without their knowledge or approval, on November 5, 2002. The fourth property, at 821 S. 14th Street, was sold to the couple on November 8, 2002, also without their knowledge or approval.

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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 weekends.
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The U.S. economy is suffering from a serious illness. The “doctors” in charge of treating this illness – Federal Reserve Chairman Ben Bernanke, Secretary of the Treasury Henry Paulson, and other economists and experts – are throwing every treatment imaginable at this illness in an attempt to cure it. Unfortunately, in the process of trying to cure the patient, these doctors may be killing it. In an attempt to do something, they may be doing too much.

They need to take the Hippocratic oath and pledge first to do no harm.

The truth about the current mortgage meltdown and foreclosure epidemic is that these problems are merely symptoms of a serious and life-threatening illness. The illness is more systemic than the experts are willing to admit. The problem is that the U.S. has been living far beyond its means for far too long. It simply can no longer sustain the fraud, corruption, and overspending that has become endemic to this great nation. Here are some of the deeper problems that the current solutions are failing to address:

• Loss of jobs with decent wages: In an attempt to boost business profits and keep inflation low, government policies rewarded companies for moving operations (and jobs) overseas. How can you have a consumer-driven economy if the consumers have jobs that don’t even provide them with enough income to pay for housing, groceries, medical care, and education?
• Increasing cost of healthcare and insurance: Fewer and fewer U.S. citizens can afford health insurance, and for those who can afford some sort of insurance, the coverage these policies offer is almost laughable. People are essentially paying thousands of dollars a year so the health insurance company can send out explanations of why their claims were refused. One serious illness is enough to send most families into foreclosure and perhaps even bankruptcy.
• Commissions-based compensation for loan originators: In the lending industry, brokers, loan officers, and sales executives at the banks were often compensated based on the number of loans they approved, not necessarily the number of good loans.
• Rampant fraud: Everyone seems to be ripping off the system nowadays – illegally flipping homes, arranging cash back at closing deals, falsifying information on loan applications, hijacking homes using counterfeit deeds, and so on. Some estimates show that over 80 percent of fraud involves industry insiders – people who should know better and who should be dedicated to the well being of their industries.
• Loss of home equity: In an attempt to stimulate the economy, the U.S. government inadvertently manufactured a housing bubble. Homeowners were tripping over themselves to buy bigger, more expensive homes and to cash out the equity in their homes, thinking that their property values would continue to appreciate forever. When the bubble burst, the equity went “poof.” No matter how much money the government pumps into the system, it can’t force that equity to magically return.
• Alt A and Subprime loans: With rapidly rising home prices, people were soon unable to qualify for traditional qualifying conventional loans. Instead of accepting this fact and possibly denying people loans, banks and other lending institutions “helped” people qualify by lowering the qualification standards and offering mortgages with low teaser rates. Borrowers could qualify for loans at the lower rates, but as soon as the rates adjusted up, many people could no longer afford the payments.
• Speculative buying: Some investors who mistakenly believed that property values would continue to rise forever purchased multiple properties at a time, hoping to flip them and score some quick cash. Some companies encouraged the speculation by offering condo conversions and hotel condominiums as low-risk, no-hassle investment opportunities. Banks and other lenders also encouraged this by offering easy qualifying programs with little or no cash needed.
• Rising fuel and food costs: Fuel costs have doubled and nearly tripled in a very short period of time, and nothing indicates that they will drop anytime soon. In fact, with demand growing from China and other developing countries, fuel prices are almost guaranteed to rise. And when fuel prices rise, so do the prices of just about everything else, including a gallon of milk and a loaf of bread.
• Deepening national debt: We have a national debt of over $9 trillion. The recent federal budget called for $3 trillion in spending. Where’s this money coming from? Other nations. As a result, the dollar is quickly losing its value and its purchase power, and this is happening at a time when the American worker is seeing very modest gains in pay.

Up to this point, the government has attempted to treat only the symptoms of the disease in an attempt to prevent owners from losing their homes and keep the banks open. Although some of these moves have had positive short-term results, most of them are very short sighted.

Here are some of the solutions the government has enacted:

1. The FHA (Federal Housing Administration) was given more flexibility to assist homeowners who have subprime mortgages.
2. FHA increased its loan limit to $271,050. In some counties, the limit can be as high as $729,750.
   Fannie Mae and Freddie Mac temporarily increase their loan limits – up to $729,750 in very few select markets.
3. Qualifying homeowners do not have to pay income tax on any debt that the lender chooses to forgive the homeowners as part of a short sale agreement.
4. The Federal Reserve has lowered the prime interest rate – the rate it charges banks to borrow money.
5. The U.S. government along with other central banks in Europe is going to exchange up to $200 billion in US Treasury securities for other debt including mortgage securities.

All of these solutions fall short, because they fail to treat the underlying problem – for various reasons, the U.S. is living beyond its means. Some of these solutions are very likely to cause additional problems. For example, any attempt at making loans easier to come by is going to facilitate fraud, irresponsible lending, and irresponsible borrowing. Having FHA, Fannie Mae, and Freddie Mac increase their loan limits selectively goes against reason – why not increase loan limits to allow more to refinance and save foreclosure. The current plan applies to 25 percent of homeowners in trouble.

In addition, some of the actions the government is taking are fiscally irresponsible. For example, lowering the prime interest rate simply cuts the government’s return on its investment to the benefit of the banks that caused much of the problem in the first place. The government is rewarding banks for their bad behavior. These banks are not passing the savings along to the consumer. In fact, as the government has cut the interest rate it charges banks, banks have been increasing the interest rates they charge customers. This is nothing other than a subtle way for the government to bail out the banks.

Also, as a taxpayer, I would like to know where a government that has a $9 trillion national debt and a $3 trillion annual budget is getting $200 billion to buy mortgage-backed securities. This kind of irresponsible spending is going to lead to massive inflation, further eroding the purchase power of the dollar.

I think we will recover from the mortgage meltdown and foreclosure epidemic, but we need to follow the Hippocratic oath and first do no harm. Throwing money at the problem is what drove us to this point. Easy money fuels greed and fraud and depletes our resources. The current treatments haven’t worked. We need a holistic treatment that cures the disease and adds real strength to our economy – not the smoke-and-mirrors illusion of strength we have bought into over the past decade.

The Mortgage Bankers Association (MBA) yesterday announced that the Mortgage Asset Research Institute (MARI) has completed its 10th Periodic Mortgage Fraud Case Report to MBA. The report examines the current state of residential mortgage fraud and misrepresentation in the U.S. based on participating subscribers’ reports to MARI.

The report, which sites Florida as topping the MARI Fraud Index list for the second consecutive year and Nevada climbing to the No. 2 ranking, was released during MBA’s annual National Fraud Issues Conference in Chicago.

Clearly, the current market conditions, compounded by mortgage fraud, are having a detrimental impact on our entire national economy. The MARI report provides critical insight for those in the real estate finance industry to better understand the factors contributing to these circumstances so that our communities are better protected.

According to the Mortgage Fraud Case Report, “The conditions in the mortgage industry for the last half of 2007 made the year one for the record books.” Overall, 2007 marked the lowest volume of mortgage loan originations since 2002, the highest number of delinquencies and foreclosures, rapid and near complete shutdown of the non-conforming secondary market and hundreds of announced closures of mortgage originators.

Highlights in the Mortgage Fraud Case Report include:

• In addition to Florida and Nevada, the remainder of this year’s top ten (in order): Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota
• Colorado showed the greatest improvement from prior years’ rankings, dropping out of the top ten for the first time in five years
• The most common types of fraud found in 2007 originations continue to be in the areas of employment history and claimed income
• The continuing unsettled state of the mortgage market as a whole does not bode well for any improvement in avoiding fraud in the coming year

The complete Mortgage Fraud Case Report is available both on the MBA Website, and MARI’s Web site.

The Secretary of the Treasury, speaking on behalf of the President’s Working Group on Financial Markets (PWG-FM), today called for sweeping changes in the way the nation’s mortgage professionals operate. According to Treasury Secretary Secretary Henry M. Paulson, Jr., the PWG-FM has carefully reviewed the weaknesses in markets, institutions, and regulatory and supervisory practices that have contributed to financial turmoil and has developed recommendations to address those weaknesses. In developing its recommendations, the PWG-FM is said to have sought to avoid exacerbating the current strains on markets and institutions or risking unintended consequences.

In general, the recommendations include measures to be implemented by government authorities or market participants that will:

1. Reform key parts of the mortgage origination process here in the United States.
2. Enhance disclosure and improve the practices of sponsors, underwriters, and investors with respect to securitized credits, thereby imposing more effective market discipline.
3. Reform the credit rating agencies’ processes for and practices regarding rating structured credit products to ensure integrity and transparency.
4. Ensure that global financial institutions take appropriate steps to address the weaknesses in risk management and reporting practices that the market turmoil has exposed.
5. Ensure that prudential regulatory policies applicable to banks and securities firms, including capital and disclosure requirements, provide strong incentives for effective risk management practices.

With respect to the recommendations for reforming key parts of the mortgage origination process, Paulson and the PWG-FM are calling for:

• States to implement strong nationwide licensing standards for mortgage brokers.
  
  Editor’s Note: As a first step, the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) have already created a nationwide licensing system and database for mortgage professionals; seven states began participating when the system was initially started, and dozens more committed to participate over time.
• Federal and state regulators to strengthen and make consistent government oversight of entities that originate and fund mortgages and otherwise interface with customers in the mortgage origination process.
  
  Editor’s Note: One key step that already has been taken is that the CSBS issued principles-based underwriting guidance on subprime mortgages in July 2007 that was nearly identical to guidance issued earlier by federal supervisory agencies. In addition, a group of supervisors has launched a pilot program to review the underwriting standards and senior management oversight of risk management strategies for ensuring compliance with consumer protection laws and regulations at selected nondepository lenders with significant subprime mortgage operations. The results of these reviews should be analyzed in order to determine whether to continue the project and, if so, how to focus future reviews.
• States to work towards adopting the principles set forth in the guidance developed by the federal regulators for nontraditional and subprime mortgage lending and ensure that effective enforcement mechanisms are in place to deal with noncompliance with such standards.
  

• The Federal Reserve to issue stronger consumer protection rules and mandate enhanced consumer protection disclosures, including disclosures that would make affordability over the life of the mortgage more transparent and that would facilitate comparison of the terms with those of alternative products. State and federal authorities should coordinate to enforce the rules evenly across all types of mortgage originators.
  
  Editor’s Note: To this end, the Federal Reserve is currently engaged in a review of the Truth in Lending Act (TILA) rules for mortgage loans, including consumer testing, and plans to propose new mortgage disclosures based on the results. The Federal Reserve has already proposed changes to the TILA rules to address concerns about incomplete or misleading mortgage loan advertisements and solicitations and to require lenders to provide mortgage disclosures more quickly. Those changes should be enacted once appropriate account has been taken of feedback received over the 90-day comment period. In December 2007, the Federal Reserve used its authority under the Home Ownership and Equity Protection Act (HOEPA) to propose new rules that address abuses related to prepayment penalties, failure to escrow for taxes and insurance, stated-income and low-documentation lending, and failure to give adequate consideration to borrowers’ ability to repay. These rules should be enacted once appropriate account has been taken of feedback received over the 90-day comment period.

In most cases, policy makers’ efforts to promote implementation of these recommendations will require domestic or international regulatory cooperation–and if adopted and implemented–appear to offer valid steps to improve market transparency and disclosure, which ultimately should impact the high levels of real estate and mortgage fraud plaguing consumers and the industry.

I’m not sure how this factoid slipped past us but the Financial Crimes Enforcement Network (FinCEN) last month issued a report stating that Suspicious Activity Reports (SARs) filed through the first six months of 2007 related to Mortgage Loan Fraud increased 35% from the corresponding six-month period in 2006. FinCEN, which is housed in the U.S. Department of the Treasury, is preparing a more comprehensive analysis of real estate and mortgage fraud to be released in the near future.

Structuring/Money Laundering continues to be the predominant characterization of SARs filed by depository institutions, at 48%. However, Check Fraud (10.5%), Counterfeit Check (4.9%), Credit Card Fraud (4.8%), Mortgage Loan Fraud (3.9%), Check Kiting (3.3%), Identity Theft (2.4%) and other types of fraud are consistently represented.

Since the inception of SAR filing requirements for money services businesses in 2002, along with the addition of requirements for other covered industries, SAR filings by non-depository institutions have grown to represent approximately 42% of all SARs filed.

In addition to use by FinCEN analysts, SARs are made available to federal, state and local law enforcement agencies and regulators. Law enforcement uses SARs both reactively to support existing investigations of fraud and money laundering, and proactively to initiate new investigations. There are over 80 SAR review teams located across the United States which consist of experts trained to conduct complex criminal financial investigations.

A 52-year-old man will spend nearly 22 years in jail for his role in a string of real estate and mortgage scams in Texas. Dallas business Charles Cooper Burgess, was sentenced last week by a U.S. District Judge to 262 months in prison and ordered to pay more than $3 million in restitution. Burgess pled guilty in January 2006 to his involvement in two fraudulent schemes, one involving mortgage fraud and one involving defrauding individuals who invested in golf course property in Arkansas. In November and December 2006, Burgess testified against two co-defendants involved in the mortgage fraud case, Mark Manners and Andrew Siebert. At the conclusion of that trial, both Manners and Siebert were convicted of their role in the mortgage fraud scheme.

At last week’s sentencing hearing, the judge told Charles Burgess that he lied during the Siebert’s and Manners’ trial and had no credibility within the court system. U.S. District Judge Barbara Lynn called Burgess a “slick talker, liar, con and cheat.” Judge Lynn also made a point of saying that Burgess’ fraudulent conduct was so horrible he is in the “top five” of the worst defendants she had ever sentenced.

Relating to the mortgage fraud scheme, Burgess admitted to recruiting 20 straw buyers with good credit but limited funds to sign loan and closing documents to purchase homes. As part of a signed investor management agreement, Burgess promised to provide a down payment at closing as well as make all mortgage payments. Burgess, along with Manners and Siebert, paid each of the 20 straw buyers between $5,000 and $10,000 for the use of their credit after the closing. When Burgess’s company–Better Homes of Dallas–ran out of funds for the down payments on the loans, Siebert agreed to release escrow funds to Burgess for the borrowers’ down payment. Burgess testified that Siebert would only agree to fraudulently release these escrow funds if Burgess agreed to pay Siebert $5,000 from each closing as a kickback payment. Evidence at trial showed that Siebert fraudulently released escrow funds on 20 separate loans.

According to court documents, Siebert fraudulently released lender funds held in escrow to Manners prior to closing so that he could purchase a cashier’s check in the name of the straw buyer. When Siebert received the cashier’s check back from Manners, Siebert would complete the transaction, falsely certifying to the lender on the settlement statement that the down payment came from the borrower. On the settlement statement, Siebert also fraudulently accounted for disbursements to Burgess’ company by falsely listing the expense as a phony lien pay off, or as a marketing and relocation fee due to Burgess’ company–Better Homes of Dallas.

Eleven different lenders testified at trial that Siebert falsified the settlement statements to conceal his wrongful and fraudulent release of lender escrow funds. Each lender testified that the loan would never have been funded if the lender had known about the fraudulent use of lender escrow funds.

From December 2002 through March 2004, Siebert fraudulently released a total of $1.6 million in lender escrow funds as part of the fraudulent scheme. As a result of Siebert submitting false certifications on settlement statements for each of these 20 loans, Siebert and Manners fraudulently induced the disbursement of loans totaling more than $7 million. Losses to lenders from foreclosures on the properties exceed $2 million.

Ex-Utah mayoral candidate charged with real estate fraud: The Utah Attorney General’s Office charged a former Eagle Mountain mayoral candidate with fraud on Wednesday. Richard Culbertson, 55, and his wife Kathleen Culbertson, 51, were charged in a mortgage fraud case in which they allegedly used their daughter and son-in-law’s names to buy a home. According to the Attorney General’s Office, the Culbertsons used someone else’s names to obtain multiple home loans and also inflated their income on applications by more than $10,000 per month. One loan was earmarked for remodeling and landscaping work, but the $59,324 was pocketed by Richard Culbertson instead.

Squatters, scams plague foreclosures: Call them signs of a tattered economy - indicators that something’s amiss including in the San Fernando Valley: squatters inhabiting foreclosed homes, a record number of cars being repossessed, a growing number of family heirlooms being left behind at local pawn shops. With more than 80,000 foreclosures in California during the last quarter of 2007 setting a state record - up 115 percent over the previous year - property owners have struggled to keep squatters and thieves off their vacant properties.

Sacramento realty fraud unit’s funds decline; complaints rise: The funding for real estate fraud investigations and prosecutions has dwindled to the lowest level since 2001 in Sacramento County, even as the two detectives who investigate the crimes say they’re fielding a mounting number of complaints. In real estate fraud units, investigators’ and prosecutors’ salaries are funded with $2 fees paid each time certain deeds are filed in the county recorder’s office. The real estate downturn corresponds with a nose dive in the recording fees. In fiscal 2001, the county collected $460,000 in such fees, but is now on track to collect only about $400,000 by the time this fiscal year ends in June.

Pennsylvania official pushes mortgage reforms: The state’s top banking regulator is pushing a slate of reform measures to end predatory lending, staunch mortgage fraud and foreclosures across the state. “We’re hoping the (reform) package will be completed and become law sometime this year,” said Steven Kaplan, secretary of banking. “Pennsylvania consumers need more protection from mortgage fraud.” Mortgage fraud in the Pittsburgh area was highlighted a month ago when 24 people were charged with operating lending scams by the U.S. Attorney General’s office here. It is conducting more than 50 mortgage-fraud examinations as part of its newly formed Western Pennsylvania Mortgage Fraud Task Force.

New York politicians offer a good first step: It’s too soon to declare New York’s subprime mortgage crisis over and done with - an estimated 28,000 New Yorkers statewide remain at risk of losing their homes to foreclosure - but Gov. Spitzer and Attorney General Andrew Cuomo this week announced reforms that will make it much harder to repeat the abuses of recent years. At the root of the mortgage crisis was the tendency of bankers, brokers, appraisers and other real estate professionals to bend lending rules and home price estimates to the breaking point in order to book loans and walk off with lucrative fees. In many cases, people without sufficient income to repay a loan ended up with mortgages - only to fall behind on payments and lose their homes.

Indictment names four Texans in mortgage fraud case: A federal grand jury in Houston has indicted four people in connection with a $15 million mortgage fraud scheme carried out over four years, the U.S. Attorney’s Office said Wednesday. According to the indictment, Carlos Paul Gonzalez and Ken Russell Browder, who ran Advantage C&R Funding Group and First Advantage Funding Group, would find people with good credit to pose as home buyers and apply for mortgages. Though the borrowers didn’t qualify for the loans and didn’t plan to live in the homes, the applications were doctored to gain approval from lenders, the indictment alleges. The homes were spread throughout the Houston area, according to the indictment.

Real Estate and Mortgage fraud is funding crime in the United Kingdom: The UK’s Association of Chief Police Officers (ACPO) says property sales are also being used launder money made from drugs, trafficking and prostitution. Average UK mortgage fraud losses are £700m a year and the figure is growing. False valuations and bogus applications were among the methods used, said the intelligence report being sent to the financial industry and police forces.

Michigan AG’s ties to mortgage firms may explain inaction on foreclosures: Evidence is surfacing that home loan institutions have, based on demographic studies, steered minority homeowners into high-risk subprime mortgages. That opens the door to possible prosecution of civil rights violations in addition to the abuse of fair lending laws. With calls increasing for state attorney generals to sue guilty lenders, Michigan Attorney General Mike Cox may be compromised. His list of campaign contributors includes a number of mortgage interests.

Over the past decade, I have seen fraud rot the very foundation of our industry, but what upsets me most is that 80% of fraud involves industry insiders–professionals who earn their living from this great industry. Every day, I see cases in which real estate agents, loan originators, mortgage brokers, appraisers, and other industry insiders play an active role. But the people who could stop it often choose to look the other way.

Anyone can see the fallout from this greed; fraud has hurt everyone. The value of the dollar has plunged, global stock markets are fluctuating wildly, the U.S. is on the brink of one of the worst recessions since the Great Depression, our neighborhoods are crumbling under the weight of foreclosure, and economists are warning of a global recession.

Yet, the people committing fraud have not curtailed their activities. If anything, they have ramped up their efforts to cash out before nothing is left. And all the while, far too many honest citizens and real estate professionals continue to look the other way.

In order to stem the tide of real estate and mortgage fraud (the fastest-growing, white-collar crime in America), we need to realize that those committing fraud threaten our very livelihoods. The crimes that a minority of professionals in our industry are committing fuel distrust among consumers, tarnish our reputations, and undermine our integrity. We need to pledge allegiance to the American dream of homeownership and fight back.

To regain control of our industry, we must first pledge to not go along with questionable transactions. This is tough. When the guy or gal down the street is willing to go along with a scam in order to earn the commission, acting with integrity can hurt your short-term business. This is why the second pledge is so important: to report suspected incidents of fraud.

When you see the asking price for a home that has been sitting on the market for six months suddenly shoot from $350,000 to $500,000, and then sell the next day, you should become more than a little suspicious. Do not look the other way. Call your local FBI office and report it (to find the number for your local FBI office, visit the Report Real Estate Fraud page here on Flipping Frenzy and choose your state from the pull-down menu in the left hand column).

If something suspicious occurs at the closing, ask to speak with the manager of the title company. Explain what you are concerned about and request the phone number for the lender. Every closing packet has a phone number to call for funding approval that will get you in contact with a real person rather than an automated system. Call the number and explain what’s going on.

Do your part to clean up the industry. Spot the signs. Stop the fraud.

Federal Reserve Chairman Ben S. Bernanke told a gathering of members of the Independent Community of Bankers of America (ICBA) today that they need to do more to help distressed homeowners, especially those facing foreclosure. Bernanke told the audience of ICBA-affiliated bankers that it’s time for a “vigorous response” to help stem the tide of rising home foreclosures, essentially saying that banks and lenders could do a heck of lot more to help ease the U.S. housing crisis and keep more American’s in their homes.

Bernanke’s remarks, which can be read in their entirety here, are very much in line with what Flipping Frenzy Guest Blogger Larry Rubinoff asked here on FlippingFrenzy.com this past weekend… namely, what’s the point in forcing people out of their homes when they can afford to pay their pre-ARM payments.

At the end of the day, if the bankers chose to respond vigorously, more of us will win. If they do not, Bernanke’s 3,175-word speech will have been for not.

New York’s Attorney General, Andrew Cuomo, today announced that the nation’s two largest purchasers of home loans, Fannie Mae and Freddie Mac, have entered into cooperation agreements requiring them to only buy loans from banks that meet new standards designed to ensure independent and reliable appraisals. The new rules prohibit mortgage brokers from selecting appraisers and lenders from using their own staff to conduct valuations for any home loans Fannie Mae and Freddie Mac purchase. The agreements–which were signed by the New York Attorney General, Fannie Mae, Freddie Mac and their federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO)–also create an independent organization to implement and monitor new home appraisal standards.

With the agreement now in place, Fannie Mae and Freddie Mac have positioned themselves to become leaders in transforming the mortgage industry. Now, national banks have a clear choice: immediately adopt the new code and clean up appraisal fraud in the real estate industry or stop doing business with Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac, which purchase roughly 60% of all home loans originated in the United States, have agreed to the following:

1. Establishment of the “New Home Valuation Protection Code,” which creates requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other reforms. Under the new Code:

• Mortgage Brokers will be prohibited from selecting appraisers
• Lenders will be prohibited from using “in-house” staff appraisers to conduct initial appraisals
• Lenders will be prohibited from using appraisal management companies that they own or control.

2. Banks will be required to adhere to New Home Valuation Protection Code. Beginning January 1, 2009, Fannie Mae and Freddie Mac will require that lenders represent and warrant that appraisals related to mortgage loans originated on or after January 1, 2009 conform to the code or they will not be purchased.
3. Formation of the “Independent Valuation Protection Institute,” a new organization which will implement and monitor the New Home Valuation Protection Code. The Institute, which will be funded with $24 million from Fannie Mae and Freddie Mac, will also:

• Establish a complaint hotline for consumers nationwide to call if they believe the appraisal process has been tainted or if they have been harmed by appraisal fraud.
• Serve as a contact for appraisers themselves if they believe their independence has been compromised. These complaints will be handled confidentially to protect appraisers from retaliation. The Institute will mediate complaints, or can forward them to the appropriate federal or state law enforcement agency or regulator.
• Report publicly on its activities to the New York Attorney General and OFHEA on a bi-annual basis.
• Appoint a Board of Directors which must be approved by both the New York Attorney General and OFHEO.

As everyone hopefully knows by now, the integrity of the mortgage system largely depends on independent appraisals. Again and again, investigations find that real estate industry insiders put pressure on appraisers to drive up the value of loans just to make a quick buck. The new standards, and the new independent monitor, can begin to erase the problem from the industry.

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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 weekends.
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Last weekend–in my guest blog entry here on Flipping Frenzy titled “Taking the Foreclosure Crisis Personally,” I posed the following question:

Would it not be better to freeze a [interest] 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

Now, U.S. House of Representatives member Barney Frank (Massachusetts) has outlined a $15 billion plan to buy distressed mortgages from lenders, saying the “cascade of foreclosures will continue” without government action. Frank, who chairs the House Financial Services Committee, is also said to be working on another plan to provide as much as $20 billion in loans and grants to purchase foreclosed and abandoned homes at or below market value to stabilize home prices.

While I do not agree with some of his proposals, I do agree with this (courtesy of National Mortgage News Online:

Under Rep. Frank’s plan, the existing holder of a mortgage would be required to write down the loan to a level the homeowner could afford. The write down requirement would not apply to investor-owned and second homes.

Just as I was saying last week, let the banks and lenders take action on their own, give back some of the windfall profits they made, reduce the rate of foreclosures, and allow more people to keep their homes. Logically, what choice do they have? Kicking people out of their homes and writing off the debt is not a sustainable strategy. Keeping performing loans on the books and maintaining property values makes a heck of a lot more sense.

Win-win versus Lose-lose; that the decision we’re faced with. And with an estimated 1.8 million new foreclosures projected for 2008, what are government and the private sector waiting for?

With a recession looming (I believe it’s already here but the so-called “experts” say it’s too soon to tell), the dollar weakening in world markets, and inflation threatening the basic survival of the average American family, I say corporate American needs to actively participate in the downturn as much as it did in the upturn.

If the lenders/mortgage note holders want to offer solutions to borrowers, they can. To Bank of America–which itself is facing billions of dollars in loses to foreclosure–and to the other financial services organizations that members of Congress (like Barney Frank) have been talking to about the crisis, why must it take an act of Congress for you to make such an easy decision? Each and every day you wait, thousands of people lose their homes and face the prospect of a very uncertain future.

What solutions do you–the readers of Flipping Frenzy–have? Maybe we can compile them in the Comments area of this blog entry and send them to Rep. Frank!