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JPMorgan Chase: Preying on Cay Clubs Investors
If you’ve been following the reports on the Cay Clubs con, you’ve probably met Carisa and Craig Urban — two investors who got burned by Cay Clubs and one of its property managers, Phil Graham.
On Thursday, March 27, The Oregonian ran an article entitled “Chase mortgage memo pushes ‘Cheats & Tricks’,” in which reporter Jeff Manning exposes an incriminating memo that was being circulated amongst loan officers at JPMorgan Chase. The memo, called “ZiPPY Cheats & Tricks,” encourages loan officers to fudge facts and figures on loan applications, if necessary, to gain approval for loan applications that otherwise would be rejected by the bank’s automated underwriting system, ZiPPY.
(click above to see memo)
The main problem with this practice–in addition to being illegal–is that it deceived loan applicants into believing that they could easily afford payments on the loans for which they were applying. After all, most borrowers assume, “the bank certainly wouldn’t approve a loan if I couldn’t make the payments.” This is exactly what happened to Cay Clubs investors Carisa and Craig Urban, as they relate in their own words:
We are approaching the one year anniversary of our investment in a Las Vegas Cay Club condo, but there’s not much to celebrate. We have sunk into the real estate and mortgage fraud abyss like so many others. It has been a long and grueling process to find someone who will listen to our story, believe what we have said, and assist us in seeking justice.
We purchased our first investment property during the era of the “mortgage meltdown,” when mortgage fraud was on the rise. Recently, we came across a disturbing memo that has been linked to a former Chase Account Representative, Tammy Lish. According to JPMorgan Chase, this is not an official company memo, they do not condone the practices recommended in the memo, and they fired the Account Representative as soon as they discovered who was responsible for it. We don’t doubt any of these claims. From our experience with Chase, however, we do believe that the recommendation in this memo were common practice.
The memo provides detailed information on how to work around the company’s automated underwriting system – a system designed to function as a gatekeeper, rejecting loan applications when borrower do not meet the minimum requirements. Here are the recommendations that the memo contains:
- Always select “ALTERNATE DOCS” in the documentation drop down.
- Borrower(s) MUST have a mid credit score of 700.
- First time homebuyers require a 720 credit score.
- NO! BK’s OR Foreclosures, EVER!! Regardless of time!
- Salaried borrowers must have 2 years time on job with current employer.
- Self employed must be in existence for 2 years. (verified with biz license)
- NO non-occupant co borrowers.
- Max LTV/CLTV is 100%
The memo also provides step-by step instructions on how to gain favorable SISA (Stated Income, Stated Assets) findings; in other words, how to make an applicant’s income and assets look good on paper:
- In the income section of your 1003, make sure you input all income in base income. DO NOT break it down by overtime, commissions or bonus.
- NO GIFT FUNDS! If your borrower is getting a gift, add it to a bank account along with the rest of the assets. Be sure to remove any mention of gift funds on the rest of your 1003.
- If you do not get Stated/Stated, try resubmitting with slightly higher income. Inch it up $500 to see if you can get the findings you want. Do the same for assets.
We find it interesting that there were so many similarities between what the memo stated and what our loan officer from Chase Bank, Ross Pickard, actually did to us and numerous other investors who purchased Cay Club properties. Ross Pickard simply followed the #3 recommendation and plugged in inflated numbers for our income and assets to get the loan approved. That’s mortgage fraud, plain and simple.
He also labeled our purchase as a second home instead of an investment property. When we questioned him about it he said, “We can label it as a second home because with the Cay Clubs lease back agreement you would have possession of the property 2 weeks out of the year.”
In talking with other professionals, we have since come to question many aspects of this transaction. At the time, however, we believed we were working with a legitimate developer and a legitimate loan originator and lender. After all, JPMorgan Chase is no mom-and-pop operation. We approached the transaction believing we could trust these professionals. Cay Club Resorts also offered to waive our first year of HOA fees if we used their preferred vendor, Ross Pickard. I guess this shows our naivety and inexperience as first time investors.
As a result of this fraud, many of us are left struggling to pay mortgages we cannot afford–mortgages that no lender would have approved if it had been given accurate facts and figures. Moreover, we now owe mortgages on properties that are worth less than we owe on them. We can’t even refinance or sell our way out of trouble.
We know that an employee in the loss mitigation department from Chase Bank has been assigned to deal with Las Vegas Cay Club loans, but many owners do not qualify for deed in lieu of foreclosure or a short sale, which would enable us to get out from under these properties without losing any more money.
So where does that leave us? Stuck in the mortgage fraud abyss! The ZiPPY Cheats & Tricks memo is blatant proof that shady transactions were going on behind the scenes.
There is a task force currently looking into Ross Pickard’s bad practices, and it is only a matter of time before the truth comes out. Chase played a major role in the acts committed. Now it is time for Chase Bank to right its wrongs and the deceptive practices of its loan officers.
~ Carisa & Craig Urban
Fortunately, when fraud can be proven to have been committed on a loan application, the borrowers can file a RESPA (Real Estate Settlement Procedures Act) complaint and actually force the lender to renegotiate the terms of the loan. Carisa and Craig Urban have an open and shut case, proving that fraud was committed in approving and processing their mortgage loan.
Our fraud busting team is currently working with the Urbans’. We have carefully audited their loan application and highlighted the specific incidents of fraud that were committed and are in the process of filing a RESPA complaint on behalf of the Carisa and Craig. We fully expect justice to be served and the Urbans’ to receive some long awaited relief.
Filed under: Cay Clubs Resorts,Mortgage Fraud,Mortgage Meltdown,Real Estate Fraud
A Ralph Roberts Site, Copyright 2005-2008 |
So the question would be why did the Urbans or any others sign the application if it wasn’t true? Does the fraud busting team make the people reread the disclosure above their signature attesting to the information on the app? Sorry, but the excuse of “they are the expert” doesn’t work. It doesn’t even hold up in court when someone in the military does something illegal and they say they were just following orders. So I don’t think “the mortgage broker made me do it” will work either. If they knew the info was false then it shouldn’t have been signed, and since it was, they are as much or more at fault. Funny that it wasn’t an issue with the Urbans until they faced the negative consequences of their going along with the supposed “open and shut fraud”.
Seems everyone nowadays try to save face by blaming the mortgage broker because it is convenient.
Comment by John — April 2, 2008 @ 8:13 am
Would RESPA apply to title companys?
Comment by Bob McNeilly — April 3, 2008 @ 10:53 am
John
It’s easy to flip the coin and tell us that we’re equally or even more at fault when you only have a tiny glimpse of our situation through a short blog.
We are not blaming the mortgage broker because it is convenient. Ross Pickard is just one of the many that was involved in an intricate scheme to commit fraud against us. Our story about JP Morgan Chase and one of their loan officers, Ross Pickard, is just one piece of the puzzle.
As for your statements, “Funny that it wasn’t an issue with the Urbans until they faced the negative consequences of their going along with the supposed “open and shut fraud”…this is simply not true. Several months after the purchase of our property, we discovered that many other Cay Club condo owners had been scammed by Cay Club Resorts. Once these negative facts began to surface, we started looking deeper into the paperwork and people associated with the purchase of our condo. With the help of experts, discrepancies were uncovered that indicated improprieties. Also, why would we have turned all of our documents over to multiple authorities (knowing the scrutiny and investigations that would take place) if we weren’t being truthful and had something to hide?
We submitted our story to Ralph because we wanted to alert others that this type of fraud can happen to anyone. We also wanted to let people in similar situations know they are not alone, help is available, and not to give up in their quest for justice.
We expected people to judge us when this story was posted. Our family and close friends who know us best, truly know what type of people we are and at the end of the day that is all that matters.
Comment by Craig & Carisa — April 11, 2008 @ 12:00 am
:::We also wanted to let people in similar situations know they are not alone, help is available, and not to give up in their quest for justice.
We expected people to judge us when this story was posted. Our family and close friends who know us best, truly know what type of people we are and at the end of the day that is all that matters.
:::
Good for you. I feel the same way – it’s not easy to admit you’ve been gullible or screwed up. If you can turn your experience into a lesson for others, it helps ease the sting, in my experience.
I made major mistakes and bad decisions which left us open to exploitation by a conniving fraudster. Do I share in the blame? Absolutely. That does not, however, negate my experience or absolve the guy(s) who ripped me off.
Comment by Dawn — April 11, 2008 @ 8:02 am
As a mortgage lender, one of the things that most consumers do not understand is how automated underwriting works. In the old days before automated underwriting, you would submit your documents, income, assets, job history, etc to a real human being who would verify everything, i.e. full documentation. If your ratios for housing expenses, other obligations, credit history, down payment, etc did not meet the investors guidelines, you were turned down or offered a different loan program with a higher interest rate for the risk.
Once automated underwriting became prevelant, the models done by computers said if you had a great credit score, were putting money down, were a salaried employee, etc. then you were less of a risk and you were only asked to provide a limited amount of documentation. The automated underwriting made it quicker and cheaper for the borrowers to get a loan.
As for stated income, no verification of assets, no doc type loans, called ALT-A for good credit borrowers and Sub Prime for less than perfect credit borrowers, you paid a risk premium for you loan. The bank said hey, if you want to do a stated income loan because you are self employed, then fine, the normal interest rate today is 6%, yours is 6.5% or you have to pay us points upfront to get the 6%. This risk based pricing is the same as what insurance companies do if you have more tickets, a DUI, etc. You pay more for that. The bank was willing to give you a NO DOC loan or a stated income loan if you were willing to pay the premium. The banks assumed that if you had good credit and had always paid your bills on time, maybe you are self employed like millions of people and you cannot always document your income. Think about a bartender or someone in the food service industry. They make $2.85 an hour plus tips. Would any of them every qualify for a home with tradional underwriting, the answer is no. I have done loans for waiters and waitresses and bartenders that do make 50k a year, but their W2 said $1500 a year. They all had good credit and were paying $1200 a month in rent, so scenarios like this is where ALT-A programs came in place.
If you are doing a stated income/no doc loan, you paid the price to the bank to do that. What happened is that the banks went a little crazy and started doing 100% financing to people that should never have been offered a loan, i.e. someone 1 day out of bankruptcy that was self employed and had never made a payment on anything in their lives. Those borrowers should have never been given a loan, but the transaction was between a company willing to lend them their money and a borrower willing to sign and promise to pay. Neither party had a gun to their head. They were both willing participants.
As for blaming the mortgage broker, granted their are some unscrupulous mortgage brokers just as their are unscrupulous realtors and unscrupulous people in any profession, the mortgage broker is given a set of guidelines by the bank. The bank says if your borrower can meet condition A,B,C, and D, then we will extend them a loan. The banks made the rules. The investors on wall street and elsewhere invested money in the banks that made the rules. Most of these rules where made by Fannie Mae and Freddie Mac lending standards and if they were not, then the risk based premiums were applied.
The so called “collapse” if one can call it that, I beleive the last number I say was 98% of the mortgages in the country were being paid on time, is in my opinion caused by several factors. 1. An upcoming election where the media does everything in their power to say how bad the economy is to help change the outlook of the election. Look at all the past elections and you will see that pattern. The economy is generally good until we get to a year within a presidential election, then no matter what party is running, the economy is going to be bad and they can fix it.
2. A bunch of investors trying to make money, this group here included. You as an investor were willing to reap huge rewards, but anytime there is the promise of huge rewards, there is also the risk of huge losses. I have found that the potential for huge rewards comes the potential for huge losses. If you are looking for little risk and little rewards, invest in T-Bills, not real estate.
3. The banks lending money to people who should have been renting. They relaxed their lending guidelines to a. make money as always a banks primary motive and b. to help people have a part of the American dream (which is BS) but banks do this to do their civic duty.
4. The media blowing the ‘collapse’ out of proportion to make headlines. If there were 2 foreclosures in your city last year and this year there are 4, the headline is “FORECLOSURE RATE DOUBLES IN YOUR HOMETOWN”. Wow, we went from 2 to 4, but people on read FORECLOSURES DOUBLE. It really is double, but a headline that says YOUR CITY HAD 2 MORE FORECLOSURES THAN LAST YEAR, wouldn’t sell as many papers.
5. The law of what goes up must come down. The market sets the price. Until you live in a communist country, then you are at the risk of prices going up on some things and going down on others.
Businesses fail everyday in this country for one reason or another. If you are buying real estate for anything other than to live in, you are running a business. If you lose money, it is your bad business decision or some bad luck. If you truly got scammed then again, that is most probably your fault for not reading the paperwork or allowing someone to take advantage of you. If you got involved in this “business” to make money and you got in at the wrong time or place, then that is just dumb luck. Take your losses and move on. There are plenty of other opportunities.
If you bought a house at an inflated price to live in, remember, you do not lose anything until you sell. Then even if you lose on your current house, you will probably be able to buy another house at a lesser price too. It is all relevant.
Mike Trahan
mike@t1nl.com
Comment by Mike — May 4, 2008 @ 2:11 pm
As a mortgage broker/loan originator who has worked extensively with Chase as well as hundreds of other lenders, I have to comment on the blatant misread of the memo “Zippy Cheats and Tricks.” This was a memo intended for people in the mortgage business, and is being misread and misused by The Oregonian and by this blog.
Virtually ALL lenders today use some form of Automated Underwriting System (AUS.) The majority of loan applications are run through the AUS multiple times, each time tweeking some of the parameters of the loan application in order to get a loan approval. For a mortgage originator, it’s helpful to know the quirks of the AUS, what parameters, when tweeked, will help get SISA findings. There is nothing illegal or fraudulent about selecting Alternative Docs, or about showing all the income as base income, rather than breaking it out into bonuses and commissions. This is not “encouraging loan originators to fudge facts and figures.” This memo was just a guide on how to work with Zippy.
The seemingly most offensive comment in the memo is “if you don’t get Stated/Stated, try resubmitting with slightly higher income.” Even Chase management needed to publicly deny that this was company policy. But let’s be honest: everyone in the mortgage business (including Chase management) knows that this is the very nature of a Stated Income loan: it’s not necessary to document income, as long as the income stated is reasonable for the employment. If a borrower could document income level, it would be a Full Doc loan, why go Stated Income?
Realize that not too long ago, Stated Income loans accounted for almost 2/3rds of all loans originated in the USA, at every lender from Chase to Wells Fargo to Bank of America. For spectacle, you may want to say that Stated Income loans are “illegal” and “mortgage fraud,” but none of this is true.
It’s ironic to me to hear a complaint about qualifying for a loan with a Cay Club condo as a second home? Buyers are generally after the best financing that the market can provide, the smallest downpayment, the best interest rates. The truth is that your loan officer did you a favor by getting you a loan as a second home, because if it were an investment property, you would have had a higher down payment, and a higher interest rate. Similarly, he probably could not have gotten you a Full Doc loan at all, he got you the best loan possible for your circumstances, i.e. a Stated Income loan.
Laying blame on the mortgage lender for a mortgage you can’t afford is just silly. At the very least, YOU know what your income is, and what mortgage payment you can afford. You chose to purchase the property; the mortgage lender just helped with financing.
Buyers in the Las Vegas Cay Club probably have legitimate issues with the Cay Clubs, there probably was fraud. But the lender? You’re just looking for a scapegoat, blame it on the evil mortgage lenders?
Focus your blame where it belongs: on the Cay Club.
Comment by John — May 18, 2008 @ 2:19 am
Cay Club went out of business because sales stopped. Unless you are a public company getting stock dollars to carry you through or you have a multi million dollar private investor partnership or even a multi-million dollar family willing to help you out, you will fail as a developer in this market. Many have and many more will- all a matter of time and financial ability. Are they fraudsters? Most likely that wasn’t their intent. They or the people running it had been developing and selling for over 20 years.
Comment by Truth — May 22, 2008 @ 10:25 am
It’s clearly apparent how those whom make their money from the mortgage/home loan industry justify what they do to increase their income by reading the responses made by those persons working within that industry in this post.
O.K. Mr. Broker, explain away this, if you can….
My wife and I sought to take advantage of the lower interest rates being advertised by refinancing our first home loan/mortgage for a property purchased in 2000, for a price of $135,000, of which we’d paid $10,000 as a down payment. In April, 2005, after having an impeccable payment history for the preceding five years, we were tricked and deceived by unscrupulous broker into signing a contract that raised our principle to $162,000, and the over all indebtedness to nearly half a million, if paid over the projected life of the loan.
This particular broker had a penchant for comparing apples to oranges, when questioned about the meaning of this term or that clause, and would never provide a clear and direct answer to any inquiry.
We’d been given no less than three different Good Faith Estimates, none of which jibed with the actual facts and fees shown on the HUD Settlement disclosure at closing.
In addition this, the broker’s fees went from .05% of the total principle amount to 3% of the same, with 1/3 of that having been paid to him by the lender outside of closing. The total amount of fees at closing was nearly $9,000! Does this seem just a little high to you? Duh?
Needless to say, after being rushed through the signing of the thousand documents at closing we’d gone over them and discovered much to our disliking, so we’d sent written notice of rescission on the third day after closing.
Only one minor problem…
The one copy of the notice of right to rescind that we’d received was blank as to where the rescission was to be sent!
…. And, the documentation that we’d received from the broker had specifically stated that the brokers employer was the lender…
So, naturally, we’d sent our notice of rescission to the broker via email and fax…
Only to find out later the next week that the lender was actually someone else!
Nevertheless, the violation of TILA and RESPA by the one blank right to rescission form, alone, gave us the extended three years to rescind in, as did numerous other violations and non-disclosures!
This was in 2005, mind you, today, May 23, 2008, we are being forced to leave our home after being evicted, after the subsequent assignee of the contract, the JP Morgan Chase Manhattan Bank, by and through their servicer, Homecomings Financial, having declared us in default…. AFTER… we’d rescinded… and… AFTER… we’d made the required payments… despite the fact that we’d rescinded…. whilst we’d tried to determine just how to go about enforcing our rescission, and just to be on the safe side….
…And, they’ve managed to manipulate the entire system, including the judicial, in such a manner that every action and request we’ve made or taken has fallen on deaf ears and invoked no acknowledgment or response. The attorney general’s office of our state has refused to help us. Our State senator has refused to help us… We’ve re-rescinded multiple times, and no one will acknowledge our demands. This entire scenario has been ludicrous and the entire sequence of events a total nightmare and the concept of justice has proven to be a fantasy and a farce.
Furthermore, what I’ve said here is only the very tip of the iceberg, so to speak…
So, you tell me, that there’s no one defrauding anyone, and that everything is on the up and up….
…And I’ll tell you that you’re either brain-dead, brain washed, or completely deluded!
…And the very worst part of all….
…Is that we’re seniors, and we don’t have any money left, no where to go… and no one who gives a damn!
You may think that I’ve made all of this up, or imagined it… But I’ve got news for you… we’ve got the documentation to corroborate every allegation I’ve made, and then some!
And, If I sound like some incoherent lunatic, then I guess I’m on the wrong planet. I’m entirely and totally sane and lucid, although I can now understand why people go “postal”. In fact, the concept does have a certain appeal to it. Provided, of course, that one’s targets were only those culpable for such abuses and crimes!
The bottom line is: We didn’t go looking to buy more home than we could afford. We only sought to save some of our hard earned money. Instead, we’ve lost everything that we had… all due to fraud on the part of greedy scum in the home loan/mortgage industry!
Comment by Michael — May 24, 2008 @ 11:13 am
This thread is getting very interesting. It has been sometime since the original post and I hope others are finding it as well.
Mike Trahan and John make some very good points. There may be some “truth” in what Truth says as well.
As to Automated Underwriting (AU), Fannie Mae through Desktop Underwriter (DU) and Freddie Mac through Loan Prospector (LP) still function much the same as does the Zippy AU at Chase. In fact, let us not forget that Fannie and Freddie were the FIRST to introduce AU.
AU IS a computerized calculation of risk based on thousands if not millions of data bits over many years. I was told at the inception of DU by Fannie that it incorporated 30 years of mortgage data to arrive at the risk based underwriting.
Now as to Michael’s comments. Michael, there are several points I would like to make and perhaps they will answer some of your questions. Let me preface my statements with saying that it does appear there were improprieties, RESPA and possibly TIL violations. I also concur with you as to the almost impossible task of trying to fight against the “big boys”. Many of the problems we are having in the industry today began at this top level. But we – the government reward these companies. The largest reward todate is the $60 Billion given to JP Morgan Chase. To me this almost seemed like a bribe. Either the government puts up those billions or they WOULD NOT buy Bear Stearns – even at the bargain basement price, almost nothing, they are paying.
I must bring note to a clip of Pres. Bush shown on the Showtime Documentary, “Maxed Out” where he announced that he is going to make it possible for ALL Americans to realize the American Dream. Sounds to me like he convinced the banks/lenders to ease the credit requirements drastically. Hmmmm, I wonder!
Michael, you state, “…..we were tricked and deceived by unscrupulous broker into signing a contract that raised our principle to $162,000, and the over all indebtedness to nearly half a million, if paid over the projected life of the loan.
Larry: How can you be tricked and decieved. If you know the new loan amount was going to be $162,000 and was not comfortable with that – you simply SHOULD NOT have signed ANYTHING. Now, I say this not as a put down to you as I do understand how sometimes in the “heat of the moment” we do things. I simply point this out in the spirit of letting others know that they can decide to sign or not to sign and if they do not feel comfortable, don’t sign and seek other advice. The deal that is here for you today will be there tomorrow.
You go on to say, “….broker had a penchant for comparing apples to oranges, when questioned about the meaning of this term or that clause, and would never provide a clear and direct answer to any inquiry.
LARRY: Again, if you do not get a “clear and direct” answer, DO NOT SIGN until you do.
Further you say, “We’d been given no less than three different Good Faith Estimates, none of which jibed with the actual facts and fees shown on the HUD Settlement disclosure at closing”.
LARRY: Here again, a lesson to everyone. If the HUD Settlement Statement differs from “your last received Good Faith Estimate, you should stop, question and walk away from closing if you do not get satisfactory answers. Again, this is sometimes difficult to do especially if you are anticipating cash out as it appears was the case here (hence the reason for the increased loan amount).
Now the rest of the story is where I believe you were victimized and caught up in a “system that is broken” and biased against the borrower in favor of the bank. I also feel there should be some liability on the closing agent/title company here as well.
The Three Day Right to Rescind should have been had 4 copies, one you would sign or initial as acknowledgment that you received it and 3 copies that you should have actually received. Also, giving that notice to the broker within the alloted time should have been sufficient notice. If nothing else, the broker/lender should have forwarded a copy to the lender AND the title company.
Getting past all of the above, your three year battle ending in your loss is the real irony of this whole mess. Here is where I blame the banks/lenders and most of all the servicers who service your loan. They are not cooperating nor are they dealing fairly and honestly with the public. If they did, much of the foreclosure problems out there could be resolved to benefit everyone and our economy.
I appreciate your coming forward with your story, even if it is only the “tip of the iceberg”. You are not screeming fraud, as many are doing today when they can’t make their payments. You are claiming what seems to be legitimate legal arguments and points.
Comment by Larry Rubinoff — May 27, 2008 @ 7:02 pm
Mr. Rubinoff, thank you for the educated insight. I’m interested in your thoughts on Clearwater Cay Club. I’m an investor that qualified for a loan and can still afford my property. My concern and frustration is finding out that the appraissals used for my property and all others in the development where based on an initial fraud. It has been uncovered that Dave Clark, the developer, and an associate worked with an employee of fifth thirds bank to artificially inflate values and approve the initial loans.
This initial fraud set the table for all that followed. Lenders following the appraisals to justify loans, a marketing plan guaranteeing a resort investment, etc..
The developer took money out as values rose and now that everything is failing because of false promises and the initial fraud Mr. Clark is auctioning off his remaining holdings. Unfortunately contributing to the submarining of values.
I can’t see anyway that the actions of Cay Clubs can be defended as unqualified investors overreaching.
Shouldn’t the ‘big boys’ be seeking justice from Dave Clark, fifth thirds and those who perpetrated the initial fraud and in the meantime work with investors to revalue these loans?
Comment by Billy Tullis — May 28, 2008 @ 11:08 pm
Mr. Tullis, you raise some very good and interesting questions. I am not sure I can answer them completely in limited space here. I believe you can click on my name and it will link you to my web site where you can email me and I can respond in more detail.
But for your benefit and those of other readers here let me address your questions as best I can.
First I am pleased to hear that you are able to afford your unit and can continue to make your payments. But the dilemma you face is the same many nationwide are facing even where no fraud was involved-that of declining real estate values. In your case you may be getting hit numerous times.
To begin, I do not have evidence of Fifth Third Bank having inflated the appraised values in an effort to make loans. Typically the bank cannot internally do so. When they do a review appraisal they will use the lower value of theirs or the initial appraiser.
Often a developer can increase values by arranging for cash purchases of units at higher prices which then establish value and the transaction is transparent to the appraiser.
When everyone else, like you, purchase a unit, your appraisal will justify. It is not until market conditions change that values change. That is why foreclosures and bargain basement “bailout” prices lower values which is what is happening at Cay Club and will happen to an even greater extent when the auction is over as some units are selling at absolute price, meaning there is no starting bid and the highest bid wins even it it is one dollar (which is highly unlikely).
As to your comment on “unqualified” investors, yes, there were many. The real fraud occured when the “cash back”-no matter how it was disquised-was given. This was the inducement for many to purchase believing that is the money they would use to make payments. Without that “cash back” many could not afford to make payments as you can. Of course there were many other inducements as well furthering the scam and fraud.
The “big boys” should and probably are seeking justice form the developers to what evere extent they can recover. Again, your reference to Fifth Third being a perpetrator of the fraud is unknown. There were other banks and loan originators involved as well, and probablly fraud going all the way up hill as a “blind eye” by a lender underwriting and funding falls into the fraud catagory as far as I am concerned. But again, every case has to stand or fall on its own merits and details.
As to writing down loan amounts to current market values, I as well as several of our Senators and Congressment feel they should. By doing so, they can begin to stabalize values, retain more performing loans and drastically lower the rate of foreclosures which just intensifies the problem. Will this happen? So far only in a few very isolated cases. There still seems to be a reluctance to this but again, “big boys” are trying to protect and mislead their financial conditions. Taking these write downs for many would spell disaster for them. But again, what is right for the people of this great nation and to what extent should we suffer so that “big boy” survives and thrives.
If you or anyone wants to go into more detail, visit my site and email me from there.
Comment by Larry Rubinoff — May 29, 2008 @ 7:38 pm
Mr. Rubinoff,
Please research “optional lease back after closing”. Many of the best SEC as well as real estate lawyers in the state gave the developers and salespeople the go-ahead for that situation. If you research it extensively, you will, too, see in several cases where it is done legally. It is an optional rental arrangement, handled weeks after closing. Many of the buyers’ banks forbid it, though- though they (the buyers) didn’t let anyone know that after closing. Many of their banks forbid any type of rental-for-income arrangement as most of the buyers never stated it was investment property. That was up to the buyers to alert their sales person to, which they didn’t- it took lots of research to find which ones went around that issue for their own benefit- yet it is those very people screaming fraud on this site.
I understand the things people are stating, but please also understand that there were many people involved to make a vision a reality- as they had for many years (decades). The market crashed, lenders would not fund anything further because of the situation and the press (and blogs, of course) further crippled the situation, scaring away all potential financial backers. Insurance rates doubled, buyers stopped buying everywhere and everything fell apart. It happens in this economy/market in the best and strongest companies (WCI stock is now down to $1 (down from $75 a year ago) and Tousa, Cortex, Centex is basically bankrupt- as well as most, if not all).
Banks and consumers have all information on any transaction- people cannot and do not have secret inside ability to create corruption and secrecy- public records on the internet are quick and easy. You are correct in stating that people are losing everywhere, as many did in this case. There were very motivated sales people- and what they did obviously sent many consumers, throughout the nation to line up and buy “investment real estate” not just with Cay Clubs, but everywhere. Looking back on it now it’s obvious to see that they were lending to anyone with a heart beat and most of the potential buyers (with heartbeats) did just that (or went way overboard- trying to do what people do to make a buck)- which is in actuality mortgage fraud (if they stated they made more than they do- or they could afford more than they knew they could).
Now everything is crashing- everyone is losing. To assume the salespeople and the developers are crooks is disappointing, their efforts in all other times (besides the last few years) worked out for everyone. Let your potential clients know they are as destroyed financially and personally as they are- so that at least they can get something for their anger and resentment- peace knowing it isn’t just them.
Comment by not exactly — May 30, 2008 @ 9:31 am
If I recall correctly, the varoius Cay Clubs pitches I heard essentially boiled down to this:
-Discounts of 15% to 20% off of current as-is value.
-Markets that have 20% or higher Appreciation Rates.
-Guaranteed Developer Leaseback – up to 2 years lease back paid up front as a one time 15% payment within 30-45 days of closing.
-Developer investing $30,000 – $50,000 in high-end remodeling during the Leaseback – at their cost (Plasma TVs, Granite Counters, etc.).
- Develper investing who know how much in new/upgraded amenities of various type, size, scale and description depending on the club location.
I estimated the developer’s average acquisition cost per unit (to be around $150,000 to $200,000 (including the “high end remodeling”).
Remember, these were just residential apartment complexes they bought, many quite old in condition if not years based on the fact that buildings do not age well in Florida.
Units had to be furnished to support the developer’s wholly owned “national rental” business which worked for the owner’s association and was the source of the income model for the buyers in this “investment.” I don’t remember who paid for the furnishings. I think they were thrown in somewhere in the deal, – perhaps if you agreed to developer’s preferred lender or joined the rental program? Or maybe it was always up to the buyer to furnish – I can’t recall.
Units sold for $450,000 to $800 or $900,000. For a gross margin of around $200,000 – $600,000 per unit, depending on unit size and furnishings.
Aside from the record high prices per square foot that buyers were being asked to pay, the developer’s vision was compelling.
Aside from the assumptions on everybody’s part (developer, buyer, lender alike) regarding appreciation rates, room night rental rates, and the performance of the rental service in achieving high occupany rates especially in the non-tourist locations of some of the Cay Club micro markets/neighborhoods, the basic business model of creating rental condos in vacation markets was sound although like any real estate investment it did contain some risk.
That risk has obviously been borne out, probably in all areas of the deal – product quality, market demand/appreciation, rental market demand, and rental value, creating a “perfect storm” of reduced appreciation (no opportunity to flip before adjustable rates reset), little or no income to offset huge COA fees, etc. If buyers are defaulting then even the COA fees may be rising due to some owners not paying their fees.
I imagine the depreciation and mortgage interest deduction still are valid for the buyers though which should offset some of the downside. But almost certainly there will be a higher negative cash flow than anyone expected when going into the deal, especially when the 2 year leaseback period expires. Ouch!
On the other hand, I can’t imagine any investor with even a single previous complete real estate investment experience (buy, hold, sell) under their belt would ever have seriously considered buying one of these for investment since the retail price per square foot and accompanying carry costs including COA fees would scare them away. This was a product designed for a speculator and a first time speculator at that.
Comment by NoNamesPlease999 — June 21, 2008 @ 11:55 am
Jp Morgan Chase closed with a zippy with me on a new construction loan chase closed without a certificate of occupancy while the broker got an email from Chase rep Linda Henley that they would not close one. Well after I was supposed to move in I was locked out of the house for over 4 months. Chase included a right of recession and I faxed it back and talked with Curtis Winder and he said they would not fund. Lies Lies Lies they finded anyway. I lost the sale of my other house because I could not move. I recently found out that Chase only had 1 appraisal when over 1 million requires two. I recently found out that the house was appraised over 250k more than what it was worth. Chase insists they funded the loan in good faith. I have worked with Kelly Wogan at the office of the president. What a joke. They have broken Truth in Lending come after me instead of the title company and builder. I have contacted some of the people who have closed this loan from Chase. Their underwriter must have been doing drugs that day. This case will be heard in Broward county Florida. I was tolld by the account rep that they new about no co but my lock was running out and they needed to make their quota for the month. Well guess what Chase you goofed big time your threats to me will be heard in court. I plan to go all the way with this one. Any comments can go to allancohara@hotmail.com
Comment by allan cohara — July 18, 2008 @ 8:07 am