Updated 5/29/08 — 9:04 a.m. PT
Corrected 8/6/08 — 2:44 p.m. ET
Corrected 9/18/08 – 9:35 p.m. ET

The American dream of homeownership and the promise of legitimate real estate investment opportunities has long been under siege by a growing army of con artists, wannabe real estate professionals, and ill-informed homeowners and investors who honestly believe in the credentials of some so-called real estate professionals (real estate professionals, mind you, who regularly take no hostages—including banks—when they commit their bad acts).

Wannabe real estate professionals and opportunists like them are chipping away at the very foundation of homeownership and honest investment wealth in America. Their actions have fleeced honest homeowners and investors out of billions of dollars, artificially inflated housing prices and property taxes, made homes less accessible to honest citizens, and continue to drive homes into foreclosure at alarming rates.

Recently, a FlippingFrenzy.com reader from California contacted me to share her family’s allegations and suspicions about a potentially fraudulent real estate investment scheme that she believes involves a bank employee, an investment company, a rehab operation, and a so-called real estate management firm, all in Atlanta, Georgia. After participating in an expensive real estate investment seminar offered by the Trump organization, Dianne and Rob Alexander decided to take what they learned and invest in what they thought was a reasonable and honest out-of-state real estate investment. What they allegedly encountered is a different story.

In their own words (reprinted with Dianne and Rob Alexander’s permission):

Back in January of 2007, my husband Rob and I invested about $6,000 - $8,000 into Trump Real Estate Training. We decided that we wanted to be educated and become real estate investors. We attended two three-day weekends (six days total) of intensive training from the Trump organization on how to find, buy, rehab, and sell foreclosures. Trump’s trainers stressed the importance of having a whole team in place–from a banker you can trust to a skilled rehab team.

After doing some initial research, Rob and I decided that we wanted to make our first purchase in the Atlanta, Georgia area because the foreclosure properties there are so much less expensive than those in California where we live. Rob and I visited Atlanta in March of 2007 to see what was available. While we were there, we met Greg Patten from Omni National Bank - Atlanta to apply for a hard money loan in order to make our first purchase. We met in Greg Patten’s office and filled out an application. He took a copy of our driver’s licenses and social security cards. He ran our credit and approved us on the spot. (While in his presence, Greg discussed how Omni National Bank had been burned many times in 2006 by out of state investors and how he was reluctant to do business with non-Georgia resident investors again. However, my credit score was 809, so Greg said he would take a chance with us.)

(Greg Patten of Omni National Bank)

Greg Patten told us there would be a 15% down payment required on the first two homes we buy. Then, once we get “in and out of two deals with no problems” (Gregg’s words, not ours), we would no longer need a down payment.

After we returned home to California, we used the Internet to research specific homes available for purchase. We contacted Greg Patten by phone and showed him one home that we were interested in purchasing (on Dunning Street in Atlanta). It was a duplex that was built in 1965, and had an asking price of $115,000. The comps in that area of town were showing similar homes selling for around $170,000, and with a new sports stadium nearby, Dunning Street seemed like the perfect investment.

When we discussed the opportunity further with Greg Patten, he told us that Omni National Bank - Atlanta would only fund deals with out of state investors who went through someone named Delroy Davy (of DNK Investment Group), because Davy—according to Patten–was in and out of 17 deals with Patten/Omni National Bank without a single problem. Patton explained to us that Delroy Davy only bought and sold newer homes, which he said meant they never needed much rehab work. He also said that Davy had his own experienced and exclusive rehab team comprised of master carpenters from Romania. That was the first time that we heard of Delroy Davy or his rehab crew.

Editor’s note: Omni National Bank has informed Flipping Frenzy that although Omni does require a local presence before it will loan to out of state investors, it does not require any investor to work with Delroy Davy or other contractors specifically.

(Delroy Davy of DNK Investment Group/(c)2006 JiMiFLiX!)

I contacted Mr. Davy via email, and he immediately started sending us homes to look at as possible investment properties. (Note: As a result of Greg Patten’s demand that we work through Delroy Davy, we decided against purchasing the Dunning Street property). Davy’s assistant, someone named Dee Bryant, sent us pictures and comparables for several of Delroy’s recommended homes. He said they were all new homes, built after the year 2000, so they would not need much rehab. Compared to the homes Rob and I saw when we were in Atlanta on our own (including the Dunning Street property), Delroy’s recommended homes were perfect. They were newer and just as his assistant said, they did not require much work.

Based on Delroy’s information and Greg Patten’s instance on using Delroy, we decided to buy two homes from Davy: 1059 Garibaldi St. and 940 Eugenia Place, both in Atlanta.

(1059 Garibaldi St.)

At this point we convinced my cousin and her husband, John and Cheryl Beech, who were about to attend the same Trump workshop we went to back in January, not to attend the Trump training (which cost around $6,000); we instead told them that we had a real estate investment program that was awesome and well worth their time and money. We also talked another friend of ours, Rick Matthew, into considering investing with Delroy Davy.

Interestingly, when we talked to Delroy Davy about others wanting to buy homes from him as investment properties, he said he charged $15,000 one time to do business with anyone else. He said that the $15k would include airfare and a two-night hotel stay to fly the prospective investors to Atlanta to see his homes, meet with Greg Patten at Omni National Bank, and to get approved for loans. This was a one-time initiation fee, according to Davy (the new investors would never have to pay this fee again for any other homes they bought). Even more interesting, Delroy said he would split that fee with my husband and I just for finding these new investors. After we took the airfare and hotel stay out of the proceeds, we split $6,500 with Delroy.

Greg Patten and Omni National Bank - Atlanta approved the new investors for loans and even managed the appraisals (the appraisals yielded values of over $250,000 per home). Based on these appraisals, we all bought investment properties from Delroy Davy.

Rob and I flew out separately to meet with Delroy, pay our down payments amounting to $23,000, open Omni National Bank checking accounts, and sign closing documents. John Beech and Rick Matthews did the same. We each spent the weekend at a nearby hotel, and we all met with Delroy Davy and his partner Charles Bonney for two solid days. Davy and Bonny showed each of us several of Davy’s personal high-end homes (most were under construction at the time), then we went to see our homes. Davy and Bonney explained that the same crews who were building Delroy Davy’s $2 million personal homes were also doing the rehab on our homes. Delroy said he had his “A Team” working on these homes and his “B Team” working on our smaller properties, but he called his “A Team” down when he needed them. Rob and I felt like our rehab team was solid. Delroy Davy’s own homes were absolutely amazing, like dream mansions.

(Delroy Davy’s home in Atlanta / (c)2006 JiMiFLiX!)

On my trip, Delroy Davy took me to Bank of America to open a home equity line of credit (HELOC) since there was “so much equity” in the Garibaldi Street home. Mr. Davy said that he was taking 30% of my HELOC for finding me this home.

At Bank of America we met with Tamir Morris who did a desktop appraisal of our new investment home and said it had a high value of $404,000, and that I would easily be able to get a HELOC for $200,000. I was not comfortable giving Mr. Davy 30% of $200,000 so I said I wanted only $100,000.

Delroy Davy sat there and showed me the numbers right at Tamir Morris’ desk. He showed me what my loan payment would be once I refied through Bank of America. With the 1st and the HELOC, I should easily be able to find a renter who could cover both these loans. Delroy Davy told me I would receive $1,200 from Section 8 renters and might even have some positive cash flow each month. He said that I should never have to make a payment to Omni National Bank because it would be refied before the first payment was due.

The HELOC closed within the month without a problem. Money was deposited directly into my Bank of America account, and I approved the bank to give Delroy Davy his money.

Our refi was started with Leshia Jackson of Bank of America (whom I never actually met in person). We spoke by phone and she told me what she needed from Rob and myself, which I immediately sent from my home in California to a processing office in Jacksonville, Florida. Ms. Jackson confirmed by phone that she had everything she needed and that I should be closing soon. Then I waited, and waited, and waited some more. I called Leshia Jackson at Bank of America several times, but for some unknown reason at the time, she would not take my calls, nor would she return any of my many initial messages. I spoke with her once after that, when she apologized for not contacting me sooner, stating that she was on vacation and that things were just about finished on my refi.

I never heard from Leshia Jackson at Bank of America again.

I called Bank of America’s service center in Jacksonville a month later and was told our refi was declined due to the value of the home being too low. In stark contrast to what Delroy Davy told me in the presence of Tamir Morris at Bank of America, neither of the investment properties was eligible for refi due to value.

OK, so we had the repair work for these homes built into the loans through Omni National Bank. Delroy Davy and his repair team did all the rehab work. Once he completed the work, Greg Patten from Omni National Bank needed to sign off that all the repairs were in fact complete and correct, and then he could release payment for the rehab work to Delroy.

As a side note, Greg Patten admitted to us that he never actually checks to make sure that the appliances, electricity, air conditioning unit, or any of the lights actually work. In fact, the power to the properties in question was not even on turned on when he did his walkthrough! He only checks to make sure that appliances are in the structures. As it turns out, many of the appliances, water heaters, air conditioning and wiring have been faulty in several of our properties. Our friend, Rick Matthew (one of the other people we convinced to invest) has receipts showing that all of his appliances have been replaced in his two houses. As of today, we learned that there is absolutely no electricity running to the AC unit in one house!

I believe I even have photos of John and Cheryl Beech’s home (purchased from Delroy Davy also) with sleek black appliances, yet the tenant living there says the appliances are white and most do not work properly. I just happened to take pictures of the house so I could show my cousin how beautiful it was. This proves to us that Delroy Davy places new appliances in his home to show to and impress potential buyers, then switches them out once we had approved them.

My husband and I have called Greg Patten about the fact that he and Omni National Bank signed of on work that was not done, not completed, or done improperly. He has never assumed responsibility for any of this, and Rick Matthew has paid for his own investment property repairs out of pocket. Greg Patten actually said that he contacted the tenant in John and Cheryl Beech’s investment property to ask about the appliances and he told us that the tenant indicated that everything was fine. That tenant, however, tells us that she never told anyone that everything was fine, because in fact, it is not fine.

Next up: We signed lease agreements with a Delroy Davy-controlled property management entity called “Sedona Realty Group” to find renters for our investment homes. Sedona did all the work with Section 8 to get tenants placed in three of the investment properties. They sent us signed leasing agreements from our prospective tenants stating the two of the properties were getting $1,200 per month. Long story short, that was not true!

Our tenant–the one in the Garibaldi Street property–said she never agreed to pay $1,200 per month. My husband and I are receiving $758.00 per month through Section 8 and John Beech receives around $799, I believe. Delroy Davy went to the Section 8 office and completed paperwork on these properties as the owner of our investment homes. I believe his wife–Keesha Davy–may have even been listed as the owner on one of the homes.

(Keesha Davy (on left) / (c)2006 JiMiFLiX!!)

Once we ended our management agreements with Davy’s Sedona Realty Group, we found all this out. We all had to complete change of ownership papers with the Atlanta Housing Authority and send them HUDs to prove that we were owners and that they should be sending the monthly rent payments directly to us. I filed a complaint against Delroy Davy with the Section 8 office in Atlanta.

That’s our story in a nutshell. I hope that reading this helps others avoid a similar situation.

~ Dianne Alexander

Thank you, Dianne, for sharing your story. I know it’s not easy re-living these events. I assure you that at least one other person will come across your account of what happened to you and your friends and family, and whether they leave a comment here on the blog or not, your story will have inspired them to either not do business with the people mentioned in your story, or, like you said, think twice about entering into a similar situation themselves.

In the meantime, there is a lot of ground to cover here, so let’s get started. To summarize:

• Delroy Davy, Keesha Davy, Charles Boney and others run a real estate company in Atlanta, Georgia, called DNK Investment Group.
• Davy matches investors with investment properties for a $15,000 sign-up fee. Davy will split the fee for referrals given to him.
• Delroy Davy has a relationship with Omni National Bank - Atlanta and Omni Atlanta loan officer Greg Patten.
• Omni National Bank - Atlanta will only work with out-of-state investors if they go through Davy to find properties.
• The appraised value of Alexander’s home–per Omni at the time hard money was loaned–was $250,000.
• Delroy Davy took Dianne Alexander to Bank of America and Tamir Morris to secure a HELOC (home equity loan) on one of her properties. At this time, Bank of America’s desktop appraisal set the house’s value at $404,000. Dianne Alexander was told she could take out up to $200,000. Delroy Davy told Dianne Alexander that he would take 30% of whatever equity they drew out as a finder’s fee.
• Dianne Alexander took out $100,000 of the “equity.” Bank of America transferred $30,000 to Delroy Davy.
• Bank of America (BOA) was to refinance property to wrap the hard money loan (Omni) and the HELOC loan (BOA) into a single mortgage loan with BOA. This was never done and the house never qualified. The reason given by BOA’s refinance loan officer was that there was not enough value in the home to refinance it (i.e., loan to value ratio was too high).
• The Alexander’s escrowed the rehab money with Omni National Bank (Greg Patten). Greg Patten was to sign off on all repairs before releasing monies to contractors. Delroy Davy and his repair team were the “contractors” used on the rehab. (Editor’s Note: Omni National Bank has informed Flipping Frenzy that all necessary inspections were done, and that it has the records and certifications of those inspections.) Nonetheless, according to Diane Alexander, rehab monies were released by Patten to Delroy Davy, without proper inspections. Again, according to Diane Alexander, appliances were faulty and there was no power to parts of the house. She also claims many appliances had to be replaced at additional cost to investors. (Editor’s Note: Omni Bank also informed Flipping Frenzy that it does not know if inspections were done as they should have been done.)
• Several of the investment properties were rented “Section 8” through Davy’s Sedona Realty Group. The lease agreements sent to the Alexander’s by Sedona reflected $1,200 monthly rent. These agreements were signed by prospective tenants; the true rent was less than $800.
• Finally, Delroy Davy held himself out as owner of the units to the Section 8 office (Atlanta Housing Authority) and registered as such with them. The Alexander’s had to provide closing statements and proof of ownership to have the Atlanta Housing Authority send the rent monies to them instead of Delroy Davy or Davy’s associates or one of his companies.

Analysis

1. Unlicensed REALTOR®: In Georgia, according to the Georgia Real Estate Commission, in order to promote and sell real estate, you must have a real estate license. According to the Georgia Real Estate Commission’s “Find a Real Estate Agent” searchable online database (free to the public, by the way), no one named Delroy Davy has ever held a Georgia Real Estate Commission Certification of Licensure. To be safe, we ran a similar search on Davy’s wife, Keesha Davy, who is described on Davy’s real estate investment firm website as the “dynamic self-starter” President of Sedona Realty, and “the backbone” of Davy’s DNK Investment Group. Here too, we found no record of Mrs. Davy ever having held a Georgia Real Estate Commission Certification of Licensure (which is odd, because on the same website, Keesha Davy is hailed for her real estate sales prowess while working in another Atlanta real estate firm–EDJ Realty–where she is positioned as having joined the “Millionaire Club” after only a few months on the job… I wonder what EDJ Realty owner, DeShawn Snow, would say about having had an unlicensed REALTOR® in her firm’s prestigious Millionaire Club?)

   Now its quite possible that Keesha Davy’s maiden name is Keesha Legrand, which the Georgia Real Estate Commission’s “Find a Real Estate Agent” online searchable database says is a licensed real estate agent in the state of Georgia (9/2/05 - Present: Status is listed as “Active”). However, the DNK Investment Group website does not list anyone named Keesha Legrand under its “The Company” section (only Delroy Davy, Keesha Davy, Ples Bruce, Marsha Evans-Younger, and Charles Bonney), and the State of Georgia listing for Legrand is associated instead with an entity called Allure Realty Group, which similarly does not list a Keesha Legrand on its website.

2. Unlicensed Real Estate Company: Similarly, the Georgia Real Estate Commission has no record in its “Find a Real Estate Company” searchable online database of Davy’s investment company, DNK Investment Group (3355 Lenox Rd, Ste 750, Atlanta, GA 30326), or his real estate management firm, Sedona Realty Group (address unknown or perhaps the same as DNK’s). Again, in Georgia, according to the Georgia Real Estate Commission, in order to manage real estate, you must have a license.

   Additionally, it should be noted that the State of Georgia’s “Search for a Business Entity” database does include a “Active/Compliance” status listing for Sedona Realty Group, but here again, being a registered LLC in the state of Georgia does not supersede or set aside the Georgia Real Estate Commission’s licensing requirements for companies.

3. Steering: Greg Patten of Omni National Bank allegedly demanded that a loan applicant (the Alexander’s) engage the services of a particular entity or their loan application would be denied. If true, such tactics—steering loan applicants in the direction of one REALTOR®, appraiser, contractor, what have you—are problematic. (Editor’s note: According to Omni National Bank, it does require a local presence before lending to out-of-state investors, however Omni does not demand that an applicant engage the services of a particular entity as a term of approval.)
4. Cutting Corners: Greg Patten allegedly told the Alexander’s that he does not verify that work to a property has actually been done before releasing funds. Checks and balances exist for a very good reason. For the bank employee responsible for ensuring his bank’s funds have been properly spent to say this, as the Alexander’s claim, is remarkable. In my experience, real estate industry insiders who cut corners usually do so on a frequent basis, especially when they have special (i.e., exclusive) relationships with Realtors, contractors, appraisers, and other industry insiders. (Editor’s note: Omni National Bank has informed Flipping Frenzy that it regularly performs inspections and that inspections were performed in this instance as well, and that they had never been given any reason to question the way the inspections were handled.)
5. Section 8 Silliness: As I mention in the summary above, Delroy Davy held himself out as owner of the Alexander’s investment properties (the properties that were presented to the Atlanta Housing Authority (AHA) as being available for Section 8-qualified tenants). Registering the Alexander’s rental units with the AHA under false representations surely is a violation of the law and is something that the Housing Authority of the City of Atlanta will want to look into.

Real estate is a multitrillion-dollar-a-year industry. It fuels the American economy; builds personal wealth; and employs millions of mortgage bankers, real estate professionals (including licensed Realtors), contractors, and others who make an honest living financing, buying, selling, and improving homes.

Unfortunately, money attracts more than homeowners, investors, and honest professionals. It also attracts thieves–people who are looking to score large amounts of quick cash by cheating others out of their hard-earned and invested money. Through various clever scams and schemes, con artists have figured ways to pick the pockets of the real estate industry, real estate investors, and individual homeowners, often with the assistance of the very professionals who stand to suffer most from the industry’s demise.

Copyright 2008 Ralph R. Roberts

From James Thorner, Staff Writer, at the St. Petersburg Times:

Clearwater Cay Club condos up for auction

Millions of dollars in debt and sued by dozens of disgruntled customers, the developers of the Clearwater Cay Club are liquidating some of their property to try to stay afloat.

The Clearwater luxury condominium complex has hired auctioneer J.P. King to sell 26 units, 20 boat slips and six adjoining commercial parcels. The on-site auction is scheduled for 10 a.m. June 14 at 2704 Via Murano.

During the real estate boom, Cay Club partners Dave Clark and Dave Schwarz made millions selling condo-hotel units to 1,600 investors at 14 separate luxury destinations from Las Vegas to the Florida Keys.

In Clearwater, the pair promised to convert apartment buildings into luxury condominiums on Old Tampa Bay modeled after Las Vegas’ Venetian and Bellagio hotels.

Investors from across the country sued, saying Cay Club violated securities laws by luring them into contracts with promises of quick appreciation and easy rental income.

Instead, many units are worth only half of what buyers paid for them. Cay Club also reneged on promises to rebate part of the purchase price through a “lease back” program that put units in a rental pool.

At the auction, 10 of the condos and 10 of the boat slips will go to the highest bidder without a reserve price.

The following case of real estate fraud is so ridiculously far-fetched and absurd that you’d think today was April Fool’s Day and that I was playing a bad joke by reporting it. Sadly, and unbelievably so, the following is true!

California’s Attorney General, with support from the FBI, has shut down a company that acquired deeds to hundreds of homes in foreclosure by convincing distressed homeowners to place their property in a “land grant,” a phony and worthless real estate document. Federal Land Grant Company (FLGC)–a San Diego-based business run by William “Bill” Hutchings, 62, his wife Xiaoke Li, 43, both of San Diego (Scripps Ranch); and Hutchings’ former wife Shawna Landis, 29, of Sorrento Valley–tricked homeowners into believing they could protect their homes from foreclosure by deeding their property to “federal land grants.” Land grant transfers, which were used hundreds of years ago when the United States was still acquiring land from other countries, are no longer recognized by any court or county assessor in California or anywhere else that I’m aware of for that matter.

There hasn’t been a legitimate use of the land grant since the conclusion of the Mexican-American war. If some fast talking scam artist offers you a quick escape from foreclosure using archaic documents, be more than extremely suspicious. Hutchings’ company, Federal Land Grant Company (FLGC), required homeowners to pay up to $10,000 to put their property in a so-called land grant which FLGC claimed would prevent foreclosure. FLGC also tricked homeowners into signing over the deed to their home and paying the company rent.

To make the meaningless grants appear legitimate, FLGC attached a land survey from when property was transferred to the United States by a foreign entity hundreds of years ago. In San Diego, for example, FLGC attached a survey from the Spanish Land Grant of 1872 and said that the deed reinstated the land grant and would protect homes from foreclosure.

State investigators in California confirmed from realty specialists in the Bureau of Land Management (BLM) that a federal land grant transfer is meaningless and there is no mechanism in California for establishing a land grant on privately held land. Homeowners who are conned by the land grant scam are typically evicted from their property at the completion of foreclosure proceedings and retain no legally recognizable title to their property. At least two Riverside County Superior Court judges, when faced with foreclosure sales involving so-called land grants, did not give any consideration to the deeds and issued eviction orders sought by the lender.

FLGC often perpetrated its scam by inviting homeowners to attend weekly seminars on the fraudulent land grant program. During these seminars, which reportedly attracted up to 50 participants or more, FLGC convinced homeowners to enter a lease-back scheme in which the homeowners transfer their property to FLGC and then make monthly payments, purportedly for rent. Investigators in California discovered more than 280 properties in San Diego and Riverside counties that have been transferred to FLGC or one of its affiliated companies. An additional 65 properties have been transferred in other counties, including Los Angeles, Orange and San Bernardino. At least 60 homeowners have had their homes sold through foreclosures.

If you or someone you know signed properties over to Federal Land Grant Company, report it by calling the following hotline: (619) 531-4475.

…one cannot help but think what the battle against real estate and mortgage fraud would be like if the brave men and women in uniform were available to aid in the fight.

To all our Veterans, wherever you are, we salute you and thank you for the deep sacrifices you made in support of the American Dream.

Continuing our coverage of the Cay Club story, 26 of the Clearwater Cay Club Resort & Marina condominiums–along with six adjacent commercial parcels–will be sold at auction on Sunday, June 14, 2008, at the Hilton St. Petersburg (Florida) Bayfront.

From the J.P. King Auction Company:

“Clearwater is one of the jewels of Florida and an escape for many from their daily lives,” said Craig King, president & CEO of J.P. King. “The Clearwater Cay Club Resort offers potential buyers the opportunity to attain luxury living within the confines of the Florida coast.”

Clearwater Cay Club offers buyers a luxury resort lifestyle surrounded by Clearwater, Florida’s natural coastal beauty. Properties to be auctioned include twenty six condominiums and 10 selling to the highest bidders. The condominiums have multiple floor plans to choose from and come complete with nine-foot ceilings, crown molding, custom tile floors, large walk-in closets and much more.

The resort was built in 2001 and then converted to condominiums in 2004. The resort type condominiums are 1300 – 2200 square feet with all units separate and distinct in design. Amenities include a fitness spa and swimming pool.

Also included in the auction are twenty, 50 foot +/- boat slips offering easy access to the serene waters of Tampa Bay and the Gulf of Mexico. The boat slips are available to current owners and winning bidders, making it the perfect place to house a watercraft. Ten slips are selling to the highest bidder. In addition to the luxury condominiums and convenient boat slips, buyers can purchase a garage unit that is perfect for extra storage.

In addition, six parcels of land will be available in the high growth Highway 19 corridor of Clearwater, Florida. Clearwater is booming with expansion, similar to other urban cities within the Tampa Bay region allowing for a vast array of opportunities for business investors, developers and retailers. The current location has traffic counts as high as 110,000 per day, providing great visibility.

“The Sabet office building and New York New York nightclub are located on two of the parcels and both are currently under lease, which will provide immediate income to buyers,” said King. “The location has room to develop and the business opportunities are endless.”

Individuals seeking additional information about the auction may contact J.P. King at 800.558.5464 or visit the firm’s web site at www.jpking.com.

J.P. King, based in Gadsden, AL, is the nation’s leading auction marketing firm specializing in high-value properties such as condominiums, developments, superluxury homes, ranches and land. J.P. King has marketed upscale properties in 49 states and 6 countries with recent sales in Florida, Colorado, California, New Hampshire and Alabama.

Hundreds of savvy people were taken in by smooth-talking Cay Clubs promoters. The warning signs were there (as we’ve detailed here on FlippingFrenzy.com through numerous blog entries), but the con artists were so convincing that even the most careful investors were scammed. For more information about allegations of fraud associated with the original Cay Club investments, click on “Cay Clubs Resorts” in the categories list below and scroll down the ensuing page.

The Internet is buzzing today over a comment made by Countrywide Financial Corp. founder, chairman and chief executive officer, Angelo Mozilo. Compiled from various news reports:

Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo inadvertently responded to an e-mail from a struggling mortgage borrower seeking help from the company, calling it “disgusting.”

Dan Bailey wrote a May 19 e-mail to Mozilo and other executives at Countrywide, asking the Calabasas, California-based lender to lower his payment to help him keep his home. Bailey said he misunderstood the terms of his adjustable-rate loan and is unable to keep up with payments.

“This is unbelievable,” Mozilo wrote the same day in an e-mail response that Countrywide called inadvertent.” Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the internet. Disgusting.”

In one of the most irrational moves yet by the popular media, somehow everyone–including editors at some of the nation’s most respected papers and web-based news gathering and reporting organization–agrees that Mozilo’s use of the word “disgusting” refers to Dan Bailey’s request that Countrywide step up and help him keep his home.

Are you kidding me?

Now listen folks… all it takes is a junior high school education to see that Mozilo’s comment was directed at the tactic Bailey used to generate his letter; not the request for help itself.

A little research reveals that Bailey issued a stock letter found on LoanSafe.org–an Internet site that “encourages borrowers to pester companies and executives until they agree to rework mortgages,” according the Arizona Daily Star. For anyone to take Mozilo to task for his comment–which was so clearly in response to the use of a stock letter–is absurd. Of course he wasn’t slamming Bailey personal situation, nor was he indicating that Countrywide wouldn’t help Bailey. He was simply venting steam over the fact that he has received hundreds of letters containing the exact same language, and of course, the response he wrote was not aimed at Bailey in the first place (he hit “reply” rather than “forward” — who among us hasn’t done that!).

Now before you go assuming or leaving comments on this post suggesting that I’m defending Countrywide or Mozilo against allegations of collusion in real estate and mortgage fraud, don’t even bother. All you have to do to know where I stand on these issues is review the content of this site. I am not defending Countrywide for the mortgage meltdown they helped create. Rather, what I’m suggesting is this…

If you want to attack Mozilo and Countrywide, fine, because there’s lots to go after them on–like, for example, allowing millions of homeowners to receive loans that the company knew homeowners’ could not afford to pay, and then packaging these loans up and selling them to Fannie, Freddy, Wall Street, and international investors, all the while knowing full well that non-performing loans were included and would never stand a snowball’s chance in hell of being repaid. But please, don’t diminish Countrywide’s role in all of this by going after its CEO just because he commented on form letter tactics. The issues at stake here–namely, that millions of homeowners are at risk right now–are much larger than Mozilo’s use of the word “disgusting.”

Earlier today, the FBI released another new report detailing fraud in financial markets, including those related to real estate. The Financial Crimes Report for Fiscal Year 2007 covers corporate fraud, securities and commodities fraud, health care fraud, mortgage fraud, insurance fraud, mass marketing fraud, and asset forfeiture/money laundering.

As we know, financial crimes affect the economic security of all Americans, regardless of whether we feel safe and secure in our homes or not. Key findings presented in the new report include:

1. By of the end of Fiscal Year 2007, 529 corporate fraud cases were being pursued by the FBI, several of which involve losses to public investors that individually exceed $1 billion.
2. FBI securities and commodities fraud cases increased from 937 in 2003 to 1,217 in 2007, and resulted in $24 million in recoveries, $1.7 billion in restitution orders, and $202.7 million in fines in 2007.
3. Through 2007, the 2,493 health care fraud cases investigated by the FBI resulted in 839 indictments and 635 convictions of health care fraud criminals.
4. The 1,204 pending real estate and mortgage fraud cases in 2007 resulted in 321 indictments, 206 convictions, $595.9 million in restitution orders, and $21.8 million in recoveries.
5. The FBI investigated 548 money laundering cases in FY 2007, resulting in 141 indictments, 112 convictions, $66.9 million in restitution orders, $2.2 million in recoveries, and $11.4 million in fines.

Although there are many mortgage fraud schemes, the FBI says it is focusing the majority of its efforts on those perpetrated by real estate industry insiders. In the report, the FBI says it is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the upwardly trending real estate and mortgage fraud schemes include:

• Equity skimming
• Property flipping
• Mortgage-related identity theft

Equity skimming is a tried and true method of committing real estate fraud. Today’s common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, shell companies, along with a slew of industry insiders, to conceal their methods and override lender controls.

The U.S. Senate Committee on Banking, Housing, and Urban Affairs, yesterday announced they reached an agreement on legislation entitled “The Federal Housing Finance Regulatory Reform Act of 2008,” which includes efforts to:

1. Help prevent the rising number of foreclosures
2. Create more affordable housing for consumers
3. Reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system

According to CNNMoney.com, provisions of the proposed legislation include:

• Allowing the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers’ homes.
• Stricter oversight of Fannie Mae and Freddie Mack. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market.

The new FHA program could benefit an estimated 500,000 people, reports CNNMoney.com. It could cost as much as $500 million, which would be paid for by Fannie and Freddie. If it turns out the costs fall below that level–that is, should few if any borrowers default on their new FHA loans–the funds from Fannie and Freddie would be redirected back to the affordable housing trust fund.

The Senate Banking Committee is scheduled to debate and vote on the bill later today. The measure is certain to pass at both the committee and full Senate levels in time to go to President Bush before the July 4 congressional recess, reports CNNMoney.com. It remains an open question whether President Bush would support the bill. He did, after all, threaten to veto a similar bill sponsored by Congressman Barney Frank and passed by the House of Representatives several weeks ago. But Senator Dodd said that while the Bush White House hasn’t endorsed his bill yet, “there’s been some positive reaction out of the White House.”

Two brothers from Michigan were sentenced last Thursday for their role in a real estate and mortgage fraud scam that netted jail time for eight (8) other defendants. Hani Mortada, 29, and Wael Mortada, 28, both from Dearborn, Michigan, were sentenced by U.S. District Judge Patrick Duggan to 20 months in jail and six (6) months in a correction center respectively. Hani Mortada was ordered to pay restitution of $648,750 and to serve five (5) years under the supervision of the court upon his release from jail. His younger brother, Wael Mortada, because he was determined to be a less significant player in the scheme, was sentenced to three (3) years under the supervision of the court (the first six (6) months of which he will serve in a community corrections center), 300 hours of community service, and ordered to pay restitution in the amount of $82,800.

The Mortada brothers were the last of 10 defendants to be sentenced in the case. In October, 2007, Safi Sobh, 35, also of Dearborn, was sentenced to serve 10 years in prison after being convicted by a jury of leading the real estate and mortgage fraud conspiracy that obtained inflated appraisals on residential properties, created false home loan applications, and obtained millions of dollars in bank loans.

The evidence presented during Sobh’s three-week trial showed that between July 2002 and December 2005, the Mortada brothers and others successfully corrupted a system of checks and balances lending institutions rely on to determine how much money they can safely lend on a property, and whether a particular borrower is qualified to repay the loan. Ohio Savings Bank, Commercial Federal Bank, and several other federally insured financial institutions, relied upon false representations to loan millions of dollars, most of which has not been recovered. Working out of his realty office, The Success Group, Sobh hand-picked and taught his co-conspirators how to commit real estate and mortgage fraud crimes. Co-conspirators (including the Mortada brothers) acted as corrupt loan originators, processors, appraisers, and straw buyers.

According to the FBI and multiple public and private sources, Michigan ranks among the top 10 hotspots nationwide for mortgage fraud (#3), with metro-Detroit (which includes the Mortada brothers town of Dearborn) ranked #4 for cities with the highest level of mortgage application misrepresentation.

Earlier this week, I posted a blog entry here on FlippingFrenzy.com called “Stuck Between Rock Financial and a Hard Place,” which drew comments about my statement that “your loan officer is not your friend,” and about the concept of “churning.” Rather than burry my reply in the comment area of that post, I figured I’d highlight the issue further by posting my response here. (If you’re new to this thread, you may want to read “Stuck Between Rock Financial and a Hard Place” before reading the following.)

The term “churning” might not have the same “legal” or “business” understanding when used in the mortgage arena as it does when used in the securities arena, but the concept that is relayed by the use of the term helps most everyone understand what happened with the loan process.

The reason I used that term is because at no point in time did the loan officer ever tell his clients, “You can’t afford to borrow this much, because you can’t afford to repay it“, or “Borrowing this much, based on your income (risk tolerance) isn’t in your best interest.” That’s where the analogy fits in with the stock broker who continues to buy, sell, trade on a stock account in a way that: (1) Doesn’t benefit the account owner; (2) Is detrimental in the long run to the account owner; or, (3) Serves only to line the broker’s own pockets.

Granted the owner of the account still owns the stock and securities in the account and the owner may have taken dividends on that account (cash out from closing), but what the owner isn’t aware of is that their trust is ill placed.

Now, let me also say that not every loan officer is out to milk the equity out of a home (so too, not every stock broker is out trading against the risk tolerance of their client). The homeowner may very well have gone to another loan officer when told that this one couldn’t (or wouldn’t) place the loan. They may have found someone to place the loan and draw out the equity. But, with all that in mind, the loan officer at Quicken Loan’s Rock Financial didn’t even bother mention that continuing to increase the LTV (loan to value) and DIR (debt to income ratio) might cause financial strain. Instead, he encouraged them to refi time after time, and why—-one has to assume because he made very healthy commissions each time or because he was never trained in how to properly do his job. (As an aside, the Rock Financial loan officer not only encouraged Lisa and Peter, he altered numbers to make the transaction possible. Stated loan applications don’t mean you get to show income from a high paying job when the reality is much different. Yes, some homeowners fudge numbers, too, but more often now-a-days, we’re seeing unscrupulous loan officers doctoring the numbers to qualify borrowers and place loans.)

One commenter to my original post made a great point when he said that homeowners have to take responsibility for some of their actions, but where I think he fails is here: The loan would not have passed underwriting if the underwriter would have done his/her job. All the documents were in the loan application file to “red flag” the whole thing (they often are). Not just on the final loan, but for each refi. So even if you don’t believe that the loan officer owes some “duty” to the homeowner, they (and the underwriter) surely owe it to the lender to place a secure loan – and they did not.

The fact of the matter is that homeowners–especially novice or first-time homeowners–rely on professionals to help them understand the process. They expect (hope) that they (the loan officer, REALTOR, whoever) are looking out for their (owners) interests. They look to real estate industry insiders to be a financial advisor on the home loan issue because the loan officers have professional expertise on the matter. So when that “trusted advisor” (time and time again) sells you down the river, all the while continuing to pretend to be working for you…it’s pretty hard not to say: Be aware, your loan officer is not your friend! This is not an isolated incident, it happens to millions of people each year (and not just in real estate – look at the automobile financing industry and you see example after example of someone driving a car they simply cannot afford but were nevertheless approved for a lease or loan).

A commenter to my original post is also correct when he says that not coming out of pocket on a refi is common practice. That’s true. What is problematic is that very few people know how to read settlement statements or know what questions to ask about them. They see money coming to them and the rest is Greek (unless you speak Greek, then maybe its Russian or Chinese).

When we see “Yield Spread Premium” on the statement, does the average or first-time homeowner immediately think “Oh, that’s a bonus being paid (some would say kickback) to the loan officer for placing me in a product that will generate large returns for the lender/investor?” Or, when the homeowner sees POC (paid outside of closing), do they know to ask about it. Do they ask why it’s not being paid at closing since it looks like a pretty standard cost that is paid at closing? The truth is most don’t. They don’t even know to ask, and they aren’t being told.

I would venture to guess that there are not many loan officers who tell the homeowner “I could have placed you in product A–which actually makes more sense for you)–but because product B pays me more I went with that loan instead.” Then of course they’d follow up with, “Oh, but don’t worry, I’ll just get my cut from your equity; you won’t have to actually come out of pocket to pay me.”

If I sound disgruntled, it’s probably because I am. It seems there used to only be a few rotten apples in the industry (and it’s that way in every industry to address one commenter’s ‘real estate agent overselling a buyer ‘comment), but it looks more and more today like entire parcels of the crop are bad, with the exception being the few good apples like the commenter in question.

Whatever disagreements commenters to the original post and I have, I hope we agree on at least one thing: that the system is broken (or corrupt) or at least pieces of it are. If the system is going to be fixed we have to address all the issues creating the problem. We need borrower education, system overhaul, and a whole lot of work by all of us.

Finally, one last thought (related to the whole ‘who is and is not your friend’ issue, which is raised in my original post ). To me, a friend is someone you can call anytime of the day or night and on the drop of a dime they’ll gladly drive 75 miles to help you change a tire or travel twice that distance or further to pick you up at the airport at one in the morning. If you live this life with three or four true “friends” by your side, you’re one lucky son-of-a-you-know-what; and unless you know him or her on a highly personal level, your loan officer is not your friend, just like your REALTOR, stock broker, auto mechanic, attorney, etc. is not your “friend” either. Loan officers—just like every other professional–have a job to do, and they will almost always protect their business interest over yours (just like most Realtors will). As more than one commenter likes to say, “buyer beware,” always!

The FBI just released a comprehensive new report on real estate and mortgage fraud, and, as you might expect given everything we talk about here on Flipping Frenzy, it isn’t a pretty picture. The information contained in the report can get quite technical, with plenty of charts, graphs, and hard numbers. Regardless, it’s worth the read–see “The 2007 Mortgage Fraud Report.” Among the Report’s key findings:

1. Real Estate and Mortgage Fraud is clearly on the rise. Although there is no central way to track the total extent of the problem, the FBI received 46,717 Suspicious Activity Reports related to real estate and mortgage fraud last year—compared to 35,617 in 2006 and just 6,936 in 2003. Only 7% of these reports documented an exact dollar amount in terms of losses, but even so, the total loss from this 7% was $813 million. The FBI’s caseload has also escalated. By the end of fiscal year 2007, the Bureau was handling just over 1,200 real estate and mortgage fraud investigations—a 47% increase from 2006 and a whopping 176% increase from 2003.
2. The downward trend in the housing market will continue (see forecasts provided by the Mortgage Bankers Association in the report), providing further incentive for shady real estate industry insiders to look for dishonest ways to turn a profit and growing opportunities for scam artists to prey on vulnerable homeowners.
3. The subprime lending crisis is a contributing factor to real estate mortgage fraud, both directly and indirectly. Subprime loans, designed for people with poor or limited credit histories, now represent more than 13% of all outstanding loans–double the percentage of five years ago. These high-interest, high-risk loans contributed to the 2.2 million foreclosures filed during 2007, up 75% from 2006. The trouble actually began when home prices were rising a few years ago, leading to relaxed lending practices throughout the industry and the exaggeration of assets by industry insiders and borrowers under their charge anxious to qualify for loans, both of which contributed to fraud.
4. The top 10 hotspots nationwide for mortgage fraud in 2007, carefully mapped from multiple public and private sources, were:
   
   1. Florida
   2. Georgia
   3. Michigan
   4. California
   5. Illinois
   6. Ohio
   7. Texas
   8. New York
   9. Colorado
   10. Minnesota

   Other states significantly affected include: Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut. The north-central region of the United States had the largest share of fraud, followed by the west and southeast regions.



5. The latest mortgage scams run the gamut: from builder-bailout schemes where developers unload excess inventory through financial trickery, to foreclosure rescue schemes that trick homeowners into signing over the deed to their house; from seller-assistance scams that use false appraisals to sell homes, to identity theft that leads to home equity credit lines being opened and drained.

The FBI’s report also briefly recounts the agency’s own response to the problem, including the Bureau’s participation in the Department of Justice’s Mortgage Fraud Working Group, through which the agency says it is helping to identify large-scale real estate industry insiders and criminal enterprises conducting systemic real estate fraud

The purpose of the The 2007 Mortgage Fraud Report is to provide insight into the breadth and depth of real estate and mortgage fraud crimes in the United States. The report updates the 2006 Mortgage Fraud Report and addresses current fraud projections, issues, and hot spots (as noted above). The objective of the report, according to the FBI, is to provide FBI program managers with relative data to justify real estate and mortgage fraud investigative and preventive resources and for investigators to identify real estate and mortgage fraud activity.

A lot of Flipping Frenzy readers take the time to contact my office with their own suspicions surrounding real estate and mortgage fraud. One such reader, Lisa D. from Michigan, recently gave us permission to share her experience with the rest of our readers.

See if you can spot the fraud:

My husband Peter and I got married in 2002 when we were both 23-years old. Peter had a Bachelor’s degree in Fine Arts and was student teaching. We lived with my parents for a while and then moved into an apartment of our own. I previously worked waitressing a couple nights a week to help make ends meet. Peter eventually secured a job as a teacher at the local county jail. His pay was solid and steady, and he also went back to school to get his teaching license.

With our little family growing, we started looking around for a house we could afford (apartment living was fine but we needed more room). We finally came across the perfect house: A quaint little home in the town where Peter grew up. Since the home was in a state of foreclosure, we thought we might have a good chance to get the house at a discount. We tried to get approved through a traditional loan but were unable to. So we went through a private company and secured a land contract instead, and by Christmas of 2003 we were settling into our first new home.

We lived in the house for a year when Peter started hearing commercials on the radio for Rock Financial–a Quicken Loans Company. The company’s spokesperson promised to qualify people for a mortgage they could afford. We called Rock Financial, made an appointment, and got a really good feeling from our sales representative. He was a very nice man who seemed eager to help us get into a loan with a lowered interest rate. He was charismatic and told us not to worry about a thing.

At the time, after paying on our mortgage for a year and Peter having been at his job longer, Peter’s credit score was improving (it was in the 680’s). That was an important thing for us because my credit was blemished from uninformed college spending. We knew it would be important to keep Peter’s credit healthy so we could at least rely on it while we worked to correct mine.

The sales representative at Rock Financial was able to get us approved for a loan rather quickly. He arranged for an appraiser to come out and do an appraisal on our house and property, which they appraised at $135,000. Our sales representative wasn’t sure that he could get us straight into a 30-year fixed loan, so we started out with an adjustable and had to take out a second mortgage for $12,000 to help pay off some bills.

When we arrived at the closing, we learned that our Rock Financial sales representative was not able to be there. Two ladies that worked for Rock Financial were there instead to go over the closing materials. To say they rushed us through the closing process would be an understatement. We pretty much just signed paper after paper were they told us to do so. When we left, I told Peter I didn’t feel good about what had just happened; I felt rushed and uniformed, and Peter agreed. Together, we called our sales rep at Rock Financial and told him what had happened and how we felt. He apologized profusely and offered to come to our house and go over anything and explain everything we did not understand. We said that we didn’t want him to have to do that; talking to him put us at ease. A few days later we received a package from the sales rep that included a nice popcorn bowl from Crate & Barrel and a $5 Blockbuster Video gift card. That confirmed in our minds what a great guy the Rock Financial sales representative really was.

Our mortgage payment at this time was $720.94 (4.124%) with an adjustable rate mortgage and our payment on our second mortgage was $254 (5.75%), interest only. We felt that this was a good deal. Originally, we had paid $904.00 on our land contract. Even though our payment was a little higher we were able to pay some bills off and also build a garage. Peter and some of his friends built the garage, and we felt blessed to still be in this perfect little home of ours but at a manageable cost.

A year later we started hearing the commercials on the radio again from Rock Financial saying that interest rates were on a rise and homeowners with adjustable rate mortgages should consider a fixed loan. Peter called the sales rep to see what he could do about getting us a fixed loan. We had bought a used truck in 2004 and our payments were $359 a month, and since we were falling behind in the payments, our Rock Financial sales rep said we could take our more money on our second mortgage and that he could get us a fixed rate on both. All he needed, he said, was to get an appraisal on our home for $158,000. Accordingly, the Rock Financial sales rep sent out an appraiser who saw the new garage and the few minor updates that we had done in the past year, and lo and behold, the home appraised for $158,000. This was especially great news seeing that we bought the house for $114,000. We took out more money on our second mortgage to bring the loan to $34,000, and used the money to pay off bills and pay down other debts. Our Rock Financial sales rep got us into a fixed rate of 6.25% on our first mortgage and 5.25% on our second mortgage. Our payments went up to $771.19 on our first mortgage and $148.75 interest only on our second mortgage.

Shortly afterwards, we started having a difficult time coming up with our payments. Not having enough money and having to use credit cards that we had paid off with our second mortgage money back was getting us nowhere.

We called our Rock Financial sales rep who indicated that he wasn’t sure what he could do but that he would look into it and get back with us.

When the sales representative called back, he said that he could help us but only if the house appraised in the $170’s. Knowing our neighborhood as we do, we were apprehensive. A comparable house next door to our own–a two-bedroom with an asking price of $150,000–was on the market for nearly two years. When it finally sold, it fetched only $120,000 or thereabouts. But to our excitement, our appraisal came back at $178,000. The Rock Financial sales rep said we could get some money back on our second mortgage raising the loan amount to $45,000 and our interest rate to 12.8%.

While we were nervous about the interest rate and our payment, our Rock Financial sales representative assured us that using the money we’d get back to pay down our credit cards and giving it three to six months, he would be ale to lower the interest rate on the second mortgage considerably. So we went on to do that and felt an immediate sense of relief.

Several months had past and the new payment of $501.00 on our second mortgage and $1,049.90 on our first mortgage, got us into the same predicament of using credit cards for daily expenses. Peter called Rock Financial to see if enough time had passed to get our interest rate lowered on the second mortgage. Unfortunately the sales rep we’d been dealing with since day one no longer worked there and the person Peter spoke with said there was nothing he could do for us because our credit was so damaged and our debt too high. We were devastated. I had always worked through all these years at night so I could stay home with the kids during the day. I had to start picking up more shifts. I began working five to six nights a week, leaving little time for Peter and I to even see one another. Peter would come home from work and I would leave to go to work as soon as he did.

Long story short, we stopped paying on our credit cards with the thinking being that the most important bill was our house. All of our credit cads are now in collections with one of the credit card companies placing a lien on our house. We have creditors calling daily, but there is nothing to give them. We are not sure how much longer we will be able to keep our heads above water let alone save for our children’s future.

Our worst fear is having to walk away from a house we love so much and put so much time and energy into, but we also feel there may be no other answer. Our dream home has now become a nightmare that we may just have to walk away from, but with such bad credit I’m not sure we’d even be approved for a local apartment.

~ Lisa D.

From what you read, were you able to spot the fraud? If not, read on.

The first thing that should raise the hair in the back of your neck is that the loan officer at Rock Financial placed Peter and Lisa into multiple loans with the promise he would refinance and consolidate them into one fixed rate loan. The problem here of course is that situations change and no one can ever guarantee that you can refinance at a later date in time. This tactic is known as “churning,” like stock and brokerage accounts. Sadly, some mortgage loan officers insure repeat business by placing people into loans that require refinancing or have larger or rising interest rates. When the time comes and the borrower doesn’t qualify, it’s not the loan officer left holding a note they cannot afford to make payments on. In Lisa and Peter’s case, the loan officer did refinance the loans. He did so three to four times in 24 months and made about $17,000 in refi commissions.

Next, in order to get loans approved, some loan officers jack up the borrowers assets to give the false impression that the borrower is more solvent than actually is the case. Other times, a good loan officer gone bad may increase the homeowner’s income to get them qualified. Most often though—and this was the case with Peter and Lisa—the loan officer uses a known appraiser and simply tells said appraiser what s/he needs the value to come in at in order to get the borrower qualified.

Notice too that Peter and Lisa were not required to present any cash at closing. While this is not a problem, per se, when homeowners don’t have to pay the refi costs out of pocket, it is much easier to churn the loans. Instead of coming out of pocket with the dollars, the loan officer uses the house’s equity to pay himself, and the homeowner simply sees it as another number on a settlement statement.

You may think trusting your loan officer is a good idea—as did Peter and Lisa—but at a core level, your loan officer is not your friend. Sure, legally, a loan officer has an obligation to uphold the law and operate within certain guidelines and commonly accepted practices, but not all loan officers—or anyone else who is party to a real estate transaction—operates with integrity. When a loan officer works in coordination with an appraiser—as was the case at Quicken’s Rock Financial—any benefit to you is temporary at best.

A federal jury in Greenbelt, Maryland, has convicted a husband/wife team of real estate fraud. Patricia Omondi, age 39, and her husband Boureima Sanfo, age 47, both of Woodbridge, Virginia, were convicted in late-April on eight (8) counts of interstate transportation of property obtained by fraud, three counts of money laundering, and one count of obstruction of justice in connection with a scheme to defraud residential lot buyers.

According to testimony presented during April trial, Omondi was the president of Raycha Homes, also known as Construction Consulting and Management (CCM), a home builder located in Woodbridge, Virginia. Sanfo was a loan officer for CCM. From November 2004 to December 2005, Omondi and Sanfo met with consumers and promised to build homes for them on the lots of their choice. Omondi and Sanfo drove people to view several parcels of land in Prince George’s County to select the lot, provided copies of design drawings of homes, provided fictitious letters on the letterhead of a mortgage company falsely representing that the individuals had been pre-approved for mortgages and falsely stated that CCM had obtained permits to begin construction of their houses.

The evidence showed that Omondi and Sanfo caused individuals to enter into contracts with CCM for the construction and purchase of a house and to make regular payments towards the down payment. However, no homes were ever constructed, nor were any lots purchased. Under this scheme, Omondi and Sanfo obtained more than $200,000 from at least seven victims, which they deposited in their bank account in Virginia.

According to trial testimony, in October 2006, Omondi and Sanfo obstructed a grand jury investigation into whether the defendants were committing fraud in connection with their home building operations by providing the grand jury with studies that had purportedly been done in 2005 regarding the feasibility of constructing houses on lots selected by purchasers, when in fact the feasibility studies were completed in September 2006.

Omondi and Sanfo face a maximum sentence of 10 years in prison followed by three years of supervised release and a $250,000 fine for each of the 12 counts. U.S. District Judge Deborah K. Chasanow has scheduled sentencing for both Omondi and Sanfo on September 5, 2008.

To all the Mothers out there who make this day possible in the first place, we say…

Happy Mother’s Day!

P.S.: You won’t need a magic cape to spot, report, and stop real estate and mortgage fraud! Just do it!

Defying veto threats from the Bush administration, the U.S. House of Representatives yesterday passed a comprehensive measure in response to the mortgage crisis. The American Housing Rescue and Foreclosure Prevention Act (H.R. 3221) appears to respond directly to the current crisis facing middle class Americans while providing many of the tools necessary to prevent a repeat of these problems. President Bush has threatened to veto the roughly $300 billion package, arguing it would “reward speculators and lenders.”

The legislation combines a number of bipartisan bills including measures to modernize the FHA and reform the GSEs, which will provide crucial liquidity to our mortgage markets now, and also strengthen regulation and oversight for the future. In addition, the package could help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

Amendment 1: FHA Housing Stabilization and Homeownership Retention Act (H.R. 5830)

• Provides mortgage refinancing assistance to keep families from losing their homes, protect neighboring home values, and help stabilize the housing market.
• Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government -insured mortgages they can afford to repay. This legislation will help troubled borrowers avoid foreclosure while minimizing taxpayer exposure.
• Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
• Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
• Contains important protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
• Provides $230 million for financial counseling to help families stay in their homes.

FHA Modernization (H.R. 1852)

• Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
• This measure passed the House in September. (Expanding American Homeownership Act of 2007, H.R.1852)

GSE Reform (H.R. 1427)

• Strengthens regulation of Fannie Mae and Freddie Mac, and the Federal Home Loan Bank system.
• Raises the GSE loan limits for single family homes in high cost areas, so that these entities can purchase more loans in higher cost areas (thereby lowering interest rates for new homes and refinancings in those areas).
• Expands liquidity in the mortgage markets by buying loans already made, freeing up money for new mortgages and refinances.
• Creates a new Fund to boost the nation’s stock of affordable rental housing.

Encouraging Mortgage Modifications/Castle Bill (H.R. 5579)

• Mortgage servicers are concerned about the threat of investor lawsuits if they help families in danger of losing their homes with loan modifications that reduce monthly mortgage payments through lower interest rates, reduced principal amounts or other changes in loan terms.
• To speed loan modifications and keep more families in their homes, this package includes HR 5579 to provide mortgage servicers with clarity and certainty for their actions, and protection from such lawsuits for specified loan modifications.

Preserving the American Dream for Our Nation’s Veterans

• Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.

Amendment 2– Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720): This amendment provides $11 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $10 billion in mortgage revenue bonds for states, and improves access to low-income housing.

• Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $70,000 ($140,000 in the case of a joint return).
• Provides taxpayers that claim the standard deduction with up to an additional $350 ($700for a joint return) standard deduction for property taxes in 2008.
• Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $10 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
• Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.
• Helps returning soldiers avoid foreclosure by lengthening the time a lender must wait before starting foreclosure, from three months to one year after a soldier returns from service.
• Would not add to the national debt. The cost of this bill is offset with a tax compliance provision included in the President’s Budget and by delaying the effective date of a tax benefit for multinational companies that has not yet taken effect.

Amendment 3–Miller/LaTourette

• This amendment protects the right of states and cities to regulate the foreclosure process and the treatment of foreclosed property — by clarifying that this act, the National Bank Act, and the Home Owner’s Loan Act do not preempt State foreclosure laws for national banks or federally chartered thrifts.
• Exempting national banks and thrifts from foreclosure law would deprive the states and cities of the right to require that foreclosures must follow certain procedures, including notice to the people foreclosed, and that foreclosed property be safely maintained.
• Many in the industry and in the Bush administration argue that national banks should be exempted from these rules. There is no reason that national banks and federal thrifts should be treated differently from all other mortgage holders when it comes to how to foreclose and how to maintain foreclosed property.

The U.S. Attorney for the District of Colorado–along with the FBI’s Denver Division and the IRS’ Criminal Investigation Field Office in Denver–late last week announced that 72-year-old Norman Schmidt of Denver, Colorado, was sentenced by a U.S. District Court Judge to serve 330 years in federal prison and ordered to forfeit more than $38 Million for his role in a fraudulent high yield investment scheme involving more than 1,000 victims.

While Schmidt’s case did not significantly involve real estate-related investments, his unusually long sentence–especially given his advanced age–may serve as a deterrence to the scumbags who violently interrupt the American Dream of Homeownership with their acts of real estate and mortgage fraud.

Schmidt was found guilty on in late-May of 2007, following an eight week jury trial, of conspiracy to commit mail fraud, wire fraud and securities fraud, as well as substantive counts of mail fraud, wire fraud and securities fraud, and separately the crime of money laundering. Schmidt, his wife, and five others were indicted by a federal grand jury in Denver in March of 2004. The wife, Jannice Schmidt, was previously sentenced to serve nine (9) years in federal prison. Three other co-defendants in the case–George Alan Weed of Benton, Illinois; Charles Lewis of Littleton, Colorado; and Michael Smith of Colbert, Washington–are all awaiting sentencing. George BerosPeter A.W. Moss of London, England, remains a fugitive.

According to the evidence presented during the trial, Schmidt obtained tens of millions of dollars from hundreds of investors, and used the money for his and his co-conspirators own personal gain. From April 1999 through April 2003, Schmidt and the others engaged in a conspiracy to commit mail, wire and securities fraud by executing a scheme to defraud investors by implementing a high-yield investment program.

Schmidt, with assistance from others, falsely stated that they would invest victims’ money, promising rates of return from 2-400% per month. To perpetuate the scheme, the defendants sent investors fraudulent monthly statements which falsely reflected the growth of and earnings on their invested funds. The defendants would encourage victim investors to make additional investments, defer disbursements, and refer new investors to the program.

To lure and reassure investors, Schmidt and his friends made false representations that the investments were safe because invested funds could not be moved, and that the investments were insured from loss by various high profile insurance companies. They also misled investors by using false legal opinion letters concerning the status of insurance on investor funds. To further their scheme, they created corporate alter egos through which the investment program was offered. Entities involved in the scheme include the Reserve Foundation Trust, Smitty’s Investments, Capital Holdings, Monarch Capital Holdings, and Fast Track.

The defendants then used investor funds for purposes other than those represented to investors, including for loans or payments to the defendants, personal expenses, acquisition of unrelated businesses and assets, payments to other investors, and the payments of monthly commissions or overrides to members of a network of individuals, acquaintances, and insurance agents recruited by the defendants to obtain new investors in the fraudulent program. Some of the investors’ money was used to purchase the Redstone Castle, which was built around the turn of the 20th century by coal magnate John Osgood. The castle was sold by the IRS at auction in 2005 for $4 million to someone who reopened it for public tours last year.

Also seized during the course of the investigation, was money in approximately 60 bank accounts, and 8 NASCAR race cars, 1 race truck, as well as other race related vehicles and items. In all, federal agents seized assets, including cash and property, worth approximately $24,000,000, which have since been distributed to the victims of this fraudulent scheme through a separate court process. To date over $18,000,000 in forfeited funds have been returned to the victims of the crime.

Federal investigators last week identified the majority development partner in a troubled condominium project as the central figure in a mortgage fraud scheme involving about one-quarter of the units sold in a downtown Minneapolis, Minnesota, building. In an affidavit filed in U.S. District Court in St. Paul, MN, IRS agents say Brett ThielenJJT Development, owns 50% of Sexton Lofts, LLC, which developed the project.

The Sexton has 123 units, but fewer than 50 were ever sold, according to local property records.

The affidavit says Thielen laundered proceeds from the scheme by having his lawyer, Ben Houge, wire money to an attorney in Australia, who then wired the money back to Thielen and others taking part in the scheme. The Australian attorney also wired money on Thielen’s behalf to buy $700,000 worth of stock in two U.S. companies:

• Digital Town, Inc.: a Burnsville, MN-based company that is attempting to develop a nationwide network of online communities for high school alumni, boosters, students and local citizens.
• ESPRE Solutions: a Plano, TX-based videoconferencing company.

The IRS filed its affidavit to seek a warrant to seize the stock and other assets that it says were proceeds of the scheme. And while court documents do not specify a total amount of fraudulent proceeds, it is alleged that attorney Houge sent more than $2 million to his counterpart down under.

The U.S. Attorney in charge of the case declined to comment on whether Thielen, Houge or anyone else will be charged in connection with the scheme outlined in the court documents.

According to the affidavit, the fraudulent transactions began with Thielen providing cash to buyers, who would then hold purchase agreements for specific units. The titles would be transferred to Thielen, who then re-sold the units at inflated prices to new buyers on the same day or soon after the original sales. The higher resale prices were based on false appraisals and income information for the new buyers. Thielen would then get the fraudulent proceeds from the re-sales, splitting the money with others taking part in the scheme, the affidavit said.

One person already has been convicted of mail fraud and conspiracy for their role in the scheme outlined in the affidavit. As part of a guilty plea, Joseph Huebl, 28, agreed to cooperate with an investigation by the U.S. attorney’s office.

The charges of mortgage fraud are the latest of several financial and legal troubles to surface at the Sexton condo project, which went into foreclosure last fall. Condo owners have sued the developers for failing to complete the project, including building a parking ramp whose cost was included in the price of some units. An unpaid contractor has placed a $5 million lien against all the units in the building.

The Financial Crimes Enforcement Network (FinCEN)–which safeguards the U.S. financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity–last week released “Suspected Money Laundering in the Residential Real Estate Industry: An Assessment Based Upon Suspicious Activity Report Filing Analysis,” a new report that identifies several transactional typologies and associated illicit activities that may be perpetrated by individuals or groups seeking to launder funds via residential property transactions.

The study appears to confirm an increase in the number of suspicious activity reports (SARs), indicating suspected money laundering in the real estate industry which tracks closely with the past expansion of the real estate market, especially in 2004 and 2005. Previous FinCEN studies concerning mortgage loan fraud and money laundering in the commercial real estate industry confirmed similar trends. However, in contrast to criminals seeking to profit by committing mortgage fraud, those who seek to launder money through residential real estate generally intend to make timely payments and seek to make their transactions appear as unremarkable as possible in order to disguise the source of their funds.

Laundering money through residential real estate involves turning the proceeds of crime into the use or ownership of real property assets. For example, a criminal may use illicit funds to outright purchase or to make monthly rental payments on real property. Internationally, these laundering techniques are well known. FinCEN’s report shows that U.S. financial institutions have been able to identify some possible instances of money laundering through residential real estate. The report is intended to help raise awareness of the vulnerability and assist financial institutions to better recognize risk and thus provide better information to law enforcement in order to combat criminal activity.

In some cases, according to the new report, laundering money through residential real estate was found to support tax evasion, fraud and identity theft.

Though SAR narratives reporting suspicious activity associated with the residential real estate industry are relatively common, only about 20% of such filings reportedly describe suspected structuring and/or money
laundering, and of those, only about 11% described any other suspected illicit activity including tax evasion, fraud, or identity theft. Specifically, illicit activity related to tax evasion included:

• cashing checks payable to businesses and the diversion of cash business receipts in a manner possibly designed to evade taxes.
• misusing the tax exempt status of organizations to conduct real estate-related businesses and disguise the profits as contributions.

Various types of fraud and identity theft were reported, including:

• check kiting on real estate investment accounts
• real estate investment accounts used to promote a potential pyramid scheme
• fraudulently acquired state and federal tax refunds laundered through mortgage trust accounts
• mortgage loans granted on the basis of fraudulent appraisals
• identity theft employed to drain the balances of home equity line of credit accounts and to layer illicit proceeds from money laundering activities

Over 75% of the entities suspected to be involved in residential real estate-related money laundering were identified as individuals unaffiliated with residential real estate-related businesses. For example, launderers may use multiple nominees or straw buyers to secure numerous mortgages on various residential properties, thereby creating a means for the conversion of illicit cash into real property while projecting the appearance of many unrelated mortgages paid on a regular and timely basis.