The U.S. Department of Justice revealed today the filing of a federal lawsuit against a real estate brokerage doing business as RE/MAX East-West, alleging discrimination on the basis of race and national origin in violation of the Fair Housing Act. RE/MAX East-West is serves Illinois’ DuPage and Cook Counties, including the neighborhoods of Elmhurst, Lombard, Villa Park and Bensenville.

An undercover investigation of RE/MAX East-West conducted by the National Fair Housing Alliance (NFHA) found that the RE/MAX associate’s agents repeatedly steered potential white and Latino homebuyers to areas where their race predominated. According to NFHA, a RE/MAX East-West agent showed a Latino tester three homes in predominantly African-American and Latino areas, homes that were markedly less expensive than those she could afford, and told her that he did not have a lot of time for her. Conversely, the same agent showed a white tester nine homes, the majority of which were in predominantly white areas, and offered to show the tester many more homes in predominantly white neighborhoods as far as a 50 mile drive away.

One real estate agent, John DeJohn, also made illegal comments, NFHA says. He told a white tester, “I don’t care if you are a bigot. If we go to an area and you don’t like it, just let me know. I can’t be a bigot but you can be one.” In addition, DeJohn is said to have informed a white tester that the two homes they viewed together in a predominantly African-American and Latino area were “dumps” and “repos” even though he had told the Latino tester that one of those homes “might be good for you.” And while the white tester received
multiple follow-up calls subsequent to his appointment with the real estate agent, the Latino tester received none.

“That agents of RE/MAX East West were allowed to engage in such blatant discriminatory behavior is outrageous,” says Shanna L. Smith, President and CEO of NFHA. “It is sad to think of how much the community’s residential segregation can be attributed directly to their sales practices.”

The Justice Department’s action comes as a result of a complaint filed by NFHA with the U.S. Department of Housing and Urban Development (HUD). In August, 2005, HUD began an investigation and later found evidence that agents of RE/MAX East-West steered homebuyers based on race and national origin, made discriminatory statements, and treated individuals differently based on their national origin. After HUD issued a charge of discrimination, NFHA filed an election to have the case heard in federal court. As a result, the lawsuit was filed in the U.S. District Court for the Northern District of Illinois, Eastern Division by the Justice Department.

After NFHA filed its HUD complaint in 2005, HUD initiated an investigation based on NFHA’s findings and issued a charge of discrimination on June 9, 2008. The Justice Department then brought suit again RE/MAX East-West and John DeJohn in United States v. S & S GROUP, LTD. d/b/a REMAX EAST-WEST, through its successor in interest, S&W ELMHURST, LLC, also d/b/a REMAX EAST-WEST and JOHN DEJOHN (Case no. 08-CV-4099).

This investigation was part of NFHA’s multi-year, multi-city enforcement project to test for housing discrimination in real estate companies identified by HUD as having previously discriminated during its Housing Discrimination Study.

NFHA’s 12 city investigation found an 87% rate of racial steering and an almost 20% rate of denial for African-Americans and Latinos. The Fair Housing Act prohibits housing discrimination on the basis of race, color, national origin, religion, sex, familial status and disability.

The former mayor of Newark, New Jersey–Sharpe James (pictured to the left)–has been sentenced to serve two years and three months in federal prison, and fined $100,000, for his corruption convictions related to a scheme that enabled his girlfriend–Tamika Riley–to fraudulently obtain steeply discounted city-owned land and resell it for hundreds of thousands of dollars in profits. At the same hearing, Riley was sentenced to one year and three months in prison, and ordered to pay $27,000 in restitution, for convictions related to the same fraud, as well as fraudulent receipt of rental assistance she was not qualified to receive, tax fraud and tax evasion.

U.S. District Judge William J. Martini ordered James and Riley to surrender to the federal Bureau of Prisons on Sept. 15 to begin serving their prison terms. There is no parole in the federal system.

Following yesterday’s sentencings, the U.S. Attorney for the District of New Jersey–Christopher J. Christie–announced his intention to appeal the lenient sentences to the Third Circuit Court of Appeals. Christie had argued before Judge Martini and in a sentencing brief to the Court that, under the advisory U.S. Sentencing Guidelines, former Mayor Sharpe James faced a sentencing range as high as between 15.5 years to 19.5 years in prison. That range took into account James’ leadership role in the scheme to defraud Newark and its citizens, as well as other sentencing enhancements available in the Sentencing Guidelines.

For Tamika Riley (pctured above and to the right), the sentencing guidelines resulted in an advisory range of 8.8 years to 10.8 years in prison.

The U.S. Probation Department determined in its presentencing report and recommendations to the judge that Sharpe James faced a prison sentence of between 12.5 years and 15.5 years in prison, in accordance with the federal sentencing Guidelines, and that Tamika Riley faced 97 to 121 months in prison.

Given the disparity between the guidelines recommendations and the sentences imposed by Judge Martini, the U.S. Attorney’s Office intends to appeal the sentence. The sentencing guidelines, while advisory only, must be consulted by a sentencing judge and considered in formulating a sentence.

A jury convicted Sharpe James earlier this year on all counts against him, which included:

• Three counts of mail fraud related to the sale of the city lots to Riley
• One count of fraud involving a local government receiving federal funds
• One count of conspiracy to defraud the public of James’ honest services

For her part, Tamika Riley was convicted on:

• Three counts of mail fraud for her fraudulent receipt of housing rental assistance for which she was not qualified
• Two counts of tax fraud for failing to report the income she received from her sale of the Newark properties
• one count of corporate tax fraud; and one count of tax evasion.

The prosecution was built around the sale to Riley of municipally-owned properties in Newark. The properties, according to evidence and testimony, were steered to Riley by James, who had a long-running romantic relationship with her. Riley paid only $46,000 for a total of nine properties, and then quickly flipped the properties for more than $600,000.

Evidence at trial revealed that Sharpe James used his influence and power as both mayor and as a state senator to manipulate and control a city program designed to redevelop run-down properties in the city. The program was intended to enable experienced, financially sound and qualified developers to buy blighted lots and houses at substantially less than market rates on the condition that they rehabilitate the properties before re-selling them at market prices. With James’s help, Tamika Riley acquired the properties at cut-rate prices and resold them without any rehabilitation.

Tamika Riley had no real estate or construction experience and did not possess the financial wherewithal or backing required to participate in the program. She was, in fact, the owner of a failed Newark clothing store and had operated an entertainment and public relations firm that reported no income or assets on tax returns in 1999 or 2000, the years before she started flipping Newark properties.

According to trial testimony, throughout the period of their relationship and the property transactions benefitting Tamika Riley, Sharp James and Riley traveled and socialized together, shared hotel rooms and stayed in fine resorts, among other things. Testimony also revealed that James once directed his security personnel to purchase and install an air-conditioner in Tamika Riley’s Jersey City apartment. Riley also donated several times to James’ political campaigns.

The United States Attorney for the Middle District of Florida–Robert E. O’Neill–yesterday announced the return of a 47-count indictment against four real estate industry insiders, charging them with conspiracy, making false statements in connection with bank loans, a scheme to defraud seven FDIC insured banks, and money laundering.

The indicted defendants are:

• Neil Mohamed Husani, 38, formerly a resident of Sarasota, Florida, and owner and principal officer of Capital Force, Inc., an business which purportedly purchased and sold commercial real estate in Sarasota and Manatee Counties
• Michael A. Tringali, 46, a resident of Sarasota, owner and principal officer of G & T Land Development, an entity which purportedly purchased and developed commercial real estate, primarily in Sarasota and Manatee (FL) Counties
• John A. Yanchek, 48, a resident of Sarasota, and a practicing attorney licensed by the State of Florida.
• Larry P. Nardelli, age 49, a resident of Tampa, and a businessman associated with Elba International, LLC and other companies.

John A. Yanchek was arrested yesterday morning without incident. Michael A. Tringali and Larry P. Nardelli were expected to surrender to the authorities today, while Neil Mohamed Husani current whereabouts is said to be unknown.

The maximum penalty for a violation of conspiracy (18 U.S.C. §371) is five years imprisonment and a fine of $250,000. The maximum penalty for a violation of making false statements to a financial institution in connection with a loan (18 U.S.C. §1014) and bank fraud (18 U.S.C. §1344) is 30 years imprisonment and a $1,000,000 fine. The maximum penalty for a violation of a 1956 money laundering charge (18 U.S.C. §1956) is 20 years imprisonment and a $500,000 fine. The maximum penalty for a 1957 money laundering charge (18 U.S.C. §1957) is 10 years imprisonment and a $250,000 fine.

According to the allegations in the indictment, the defendants conspired to obtain approximately $82,790,000.00 in loans from seven financial institutions in the Tampa/Sarasota, Florida area by making false statements to those banks.

We talk about a lot of “constants” here on Flipping Frenzy (e.g., constant threads in real estate and mortgage fraud; the constant barrage of seemingly never-ending real estate and mortgage fraud cases; the constant denial by many in the real estate industry and elsewhere that real estate and mortgage fraud is that big of a problem; etc.). So today we’re joyous over the news out of Brooklyn, New York, of another “constant” development… namely, that one Emmanuel Constant–a Haitian national who, despite being convicted for crimes against humanity, has been living freely in New York since the mid-1990s–has been found guilty of six felony counts against him related to a mortgage fraud scheme.

(photo (c) 2007 Jesse Ward)

A Kings County, NY, Supreme Court jury found Emmanuel Constant guilty last Friday of fraudulently arranging millions of dollars in home loans for three Brooklyn properties. Constant, who has been convicted in Haiti, in absentia, for crimes against humanity, will remain in police custody. Sentencing will occur on September 10, 2008.

In an elaborate mortgage fraud scheme, Emmanuel Constant and other co-conspirators fraudulently arranged bank financing for the purchase or refinancing of three Brooklyn properties. After locating a property for sale and generating an artificially high appraisal value for the property, they would pay a straw buyer to get loans from mortgage banks to purchase the house at the inflated value. Constant and the co-conspirators would then divert the proceeds of the fraudulently obtained home loans to themselves. Many of Constant’s co-conspirators have been arrested, and some contributed to the testimony against him.

For part of the period of the mortgage fraud scheme, Emmanuel Constant, 51, served as the Suffolk County branch manager for D & M Financial, Inc., a New Jersey-based mortgage bank. In a separate conviction also prosecuted by the New York AG’s office, Constant served two years in prison for his involvement in the theft of over $1 million in mortgage funds from the fraudulent sale of a Suffolk County home. Constant completed serving this jail time on July 1, 2008.

Before being arrested for mortgage fraud, Constant, a native of Haiti, had been living freely in New York despite a 1995 federal immigration warrant and a 1995 federal deportation order. He was convicted in Haiti, in absentia, for crimes against humanity. He was the founder and commander of the Front Revolutionnaire Pour L’Advancement et le Progres d’Haiti, or “FRAPH,” which was dedicated to terrorizing and torturing political opponents of Haiti’s military regime.

The Kings County Supreme Court jury found Emmanuel Constant guilty of two class C felonies, two class D felonies, and two class E felonies. Sentencing will occur on September 10, 2008. Emmanuel Constant faces a maximum of 15-45 years in prison.

Editor’s Note: The following Guest Commentary was written exclusively for FlippingFrenzy.com by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry’s commentary is his and his alone and may not necessarily reflect the views or opinions of the management of FlippingFrenzy.com.

When he speaks in public, President Bush usually talks in a very measured tone. Yet late last week, at a private fundraising event in Houston, Texas, the President was more candid than ever before about the state of the U.S. economy:

“There’s no question about it,” President Bush said. “Wall Street got drunk (that’s one of the reasons I asked you to turn off the TV cameras) it got drunk and now it’s got a hangover,” Bush said last Friday, according to a video obtained by Houston’s ABC network affiliate, KTRK. “The question is how long will it [sic: take to] sober up?”

It is with those comments in mind that Guest Blogger Larry Rubinoff weighs in with the following:

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The Truth about Wall Street
By Larry Rubinoff

President Bush is right. Wall Street was drunk (with greed), and it opened the floodgates for the levees to burst, creating what can only be described as economic disaster of unprecedented proportions.

While drunk, Wall Street provided the vehicles for fraud, encouraged it and worse–closed a blind eye to it all the while profiting to the tune of hundreds of billions of dollars.

Not only are they complicit in the fraud we are learning about and fighting here through FlippingFrenzy.com, but Wall Street was instrumental in committing fraud against investors on a global scale… investors who bought the securities almost every mortgage was put into. Fannie and Freddie did the same. The rating agencies committed fraud by rubber-stamping each security issue “AAA,” never really looking at the integrity of the pools. Wall Street sold these securities knowing full well what the true worth and values of the pools were.

The government had full knowledge of what they were doing, and in fact, may have encouraged them to do so to keep our economy flourishing. This was, in fact, the case during the Great Depression.

President Bush admitted what many of us already knew, and that’s why he wanted the cameras turned off.

~ Larry Rubinoff

= = = =
Editor’s Note: You can read more of Larry Rubinoff’s thoughts and opinions on TheMortgageCorner.org
= = = =

Speaking to reporters by phone during this morning’s White House Press Briefing, White House spokeswoman Dana Perino said President Bush is now prepared to sign the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, which is expected to receive full Congressional approval by this time tomorrow. According the legislation, H.R. 3221 will 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.

To shore up the housing market and ensure the availability of affordable home loans, H.R. 3221 would put a new, independent regulator in charge of housing Government Sponsored Enterprises (i.e., GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan banks), which is said to be vital to both the financial markets and homeowners. The new regulator is expected to be far better prepared than the current system is to quickly and effectively respond to issues affecting the safe and sound operation of Fannie Mae, Freddie Mac, and Federal Home Loan banks.

The centerpiece of the bill provides assistance to a large number of homeowners now in danger of losing their homes. Lower-cost government-insured mortgages–which Congressional leaders say come at no cost to the American taxpayer–will be offered if President Bush signs the Bill into law, but according to the Congressional Budget Office estimates, the plan could cost taxpayers around $25 billion.

Specifically, the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, includes the following provisions:

FHA Housing Stabilization and Homeownership Retention Act

1. Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.
2. 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.
3. Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout, legislators say; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal.
4. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
5. Contains critical 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.
6. Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
7. Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Strengthening Regulations of the GSEs

1. Puts an independent regulator in place with what are said to be significant responsibilities and powers so that Fannie Mae and Freddie Mac can safely and soundly work to provide families with affordable housing.
2. The new regulator will have enhanced authority to raise capital standards, set strict prudential standards, including internal controls, audits, and to enforce these new standards and promptly take corrective action.
3. The new regulator will oversee, and can directly restrict, executive compensation at Fannie Mae and Freddie Mac.
4. Raises the GSE loan limits for single family homes to create more affordable mortgage loans for moderately priced homes by allowing GSE loans up to 115% of the local area median home price, and to make GSE loans effective in high cost areas by raising the permanent loan limit from $417,000 to $625,500.
5. Creates a new permanent affordable housing trust fund–financed by the GSEs and not by taxpayers–to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.

Backstopping Fannie Mae and Freddie Mac To Shore Up the Housing Market

1. Gives the Secretary of the Treasury the authority to increase the already existing line of credit to Freddie and Fannie for the next 18 months, as well as giving the Treasury Department standby authority to buy stock in those companies to provide confidence in the GSEs and stabilize housing finance markets.
2. Includes taxpayer protections directing the Treasury Department to take the following into account, when using these authorities: A) Taxpayers should be first in line for being paid back, before other shareholders; and, B) There should be restrictions on dividends for shareholders and on compensation for the executives of the GSE’s until taxpayers are fully reimbursed.
3. Strengthens oversight by requiring the Federal Reserve and Treasury to consult with the new regulator on issues concerning the safety and soundness of the GSEs and use of the standby authority.

Stabilizing Neighborhoods Hurt by the Foreclosure Crisis

1. Provides $4 billion in emergency assistance (CDBG Funds) to communities hardest hit by the foreclosure and subprime crisis to purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in home values of neighboring homes.
2. Foreclosed and rehabilitated homes would be sold or rented to moderate-income individuals and families–those whose incomes do not exceed 120% of the area median income. At least 25% of the funds would be targeted to house low-income and very low-income persons and families–those whose incomes do not exceed 50% of area median income.
3. Any profit from the sale, rental, rehabilitation or redevelopment of these properties must be reinvested in affordable housing and neighborhood stabilization.
4. Provides $180 million for pre-foreclosure counseling, to be distributed in grants by the Neighborhood Reinvestment Cooperation (NeighborWorks), with 15% targeted for low-income and minority homeowners and neighborhoods, and $30 million in grants for legal counseling to assist homeowners in foreclosure.

Preventing Future Abuses and Crises

1. Establishes a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing substantially improving the oversight of mortgage brokers and bank loan officers.
2. Establishes improved mortgage disclosure requirements that will help ensure that mortgage borrowers understand their mortgage loan terms.

FHA Modernization

1. 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.
2. Raises FHA loan limits to create affordable mortgage loans for moderately priced homes by allowing FHA loans up to 115% of the local area median home price, and to make GSE loans more available in high cost areas by raising the permanent loan limit from $362,790 to $625,500.
3. Expands opportunities for seniors to tap into equity in their home through FHA reverse mortgage loans, by increasing the loan limit for the program, reducing and capping lender fees for such loans, and strengthening consumer protections limiting the sale of other financial products in conjunction with FHA reverse mortgage loans.
4. Prevents HUD from raising single family loan fees on lower and middle-income borrowers, and from raising loan fees on FHA rental housing loans.

Preserving the American Dream for Our Nation’s Veterans

1. Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.
2. Helps returning soldiers avoid foreclosure and stay in their home by lengthening the time a lender must wait before starting foreclosure, from three months to nine months after a soldier returns from service and providing returning soldiers with one-year relief from increases in mortgage interest rates.
3. Requires the Department of Defense to establish a counseling program for veterans and active service members facing financial difficulties and provides a moving benefit to servicemen and women who are forced to move out because their rental housing was foreclosed on.
4. Increases benefits paid to veterans with disabilities, such as blindness, to adapt their housing and allows the Veterans Administration to provide for improvements to homes of veterans with service-connected disabilities.

Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720)

1. Provides $15 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $11 billion in mortgage revenue bonds for states, and improves access to low-income housing.
2. 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 $75,000 ($150,000 in the case of a joint return).
3. Provides taxpayers that claim the standard deduction with up to an additional $500 ($1,000 for a joint return) standard deduction for property taxes in 2008.
4. Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $11 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.
5. 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.

The Wall Street Journal reports this morning that President Bush’s support of the measure is a “dramatic split” for both Bush and congressional Republicans, many of whom the Journal says are “angrily opposed to the housing legislation, which they call a handout for irresponsible homeowners and unscrupulous lenders.” President Bush had voiced earlier objections to a provision that would give grants for local governments to purchase and refurbish foreclosed properties–a provision the White House feels amounts to nothing more than a bailout. But White House spokeswoman Perino said today that President Bush doesn’t feel this is the right time for a “…prolonged veto fight, but we are confident the President would prevail in one.”

The last seven day have proved to be quite fruitful in Colorado’s attempt to curb real estate and mortgage fraud. Around the same time Fredric “Rick” Dryer was found guilty on 44 out of 60 felony counts in a securities fraud case involving Dryer’s former company, Mile High Capital Group, LLC, another Denver, Colorado-based real estate con man was found guilty of ripping off the very people he once swore to help.

A jury in U.S. District Court in Denver has found Arvin Weiss, age 58, of Englewood, Colorado, guilty of mortgage fraud and witness tampering in a case involving Hispanic homebuyers (specifically, Weiss was found guilty of 16 counts, including eight [8] counts of mail fraud, five [5] counts of wire fraud, and three [3] counts of witness tampering).

The guilty verdict came after a 13-day trial before a Senior U.S. District Court Judge, where the jury deliberated for less than one day.

Arvin Weiss, who is currently is free on bond, faces five years in federal prison and/or a $250,000 fine per count of mail fraud and wire fraud. In addition, he faces 10 years in federal prison, and/or a $250,000 fine per count for witness tampering. A status conference is scheduled for October 22, 2008, at which time the judge will set a sentencing date.

Arvin Weiss was originally indicted by a federal grand jury in Denver on April 20, 2005. The indictment was superseded on September 27, 2007. The trial began on June 23, 2008.

According to the indictment, as well as facts presented during the government’s trial, from June 1998 through January 2002, Weiss ran a scheme that fraudulently obtained money and property from mortgage companies which funded federally insured loans. Weiss, a licensed real estate broker, bought and sold properties as Reserve Capital Funds, Inc.

Reserve Capital Funds acquired numerous single-family residences in the Denver area at low prices. Within a few months, and after some improvements had been made, Weiss resold the properties at substantially higher prices to unsophisticated low-income buyers. The buyers Weiss targeted were Hispanics who knew little or no English, many of whom were living in the United States illegally.

Many of Weiss’ Hispanic buyers did not understand the mortgage loan process, but wanted to purchase their own homes even though they could not legitimately qualify for mortgages. Weiss arranged for buyers to acquire mortgages insured by the Federal Housing Administration (FHA), so they could purchase homes his company owned. Knowing that the buyers he targeted could not afford to buy houses or legitimately qualify for home loans, Weiss allegedly arranged for false information about the buyers’ qualifications and the sources of their down payments to be provided to various mortgage companies and HUD, making it appear that the buyers were qualified to receive FHA insured loans when they were not.

Operating under the name of Fairfax Homes, Ltd., Fairfax Express Corporation, or just Fairfax (all of which Weiss controlled), Weiss would represent to prospective buyers that he had houses or could find houses the buyers could purchase, and that he and an assistant would take care of all the necessary paperwork. He also told buyers they would not have to make down payments using their own funds, despite a requirement by HUD to do so.

The buyers would provide their personal information directly to Weiss or an assistant. Weiss would then provide information about the borrowers, some of which was true, but material portions of which were false, to the mortgage companies and HUD, injecting false information about the borrowers’ qualifications when necessary to enable them to qualify for the loans.

Weiss would secretly provide the funds for the down payments for the borrowers to be presented by the borrowers at closing. Weiss signed numerous false certifications that he had not and would not pay or reimburse the borrowers for any part of their cash down payments.

Weiss usually sold his properties for two or three times what Reserve Capital Funds had recently paid for them. The buyers typically did not have the option of competitive pricing and did not contest his asking price, because they could not legitimately qualify for the loans. In some cases, Weiss did not disclose the true purchase price to the buyers until closing. In many cases, by encouraging the buyers to move into the properties rent free prior to closing, Weiss minimized the possibility that they would back out of their purchase agreements when they were informed of the properties’ true cost.

Updated: 7/21/08 / 10:16 p.m. ET

Criminal charges were filed earlier this week against Richard Allison, age 36, of Camp Springs, Maryland, in connection with an alleged mortgage fraud scheme prosecutors say falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit.

According to the court filing, in October of 2005, Mr. Allison took a job with the Metropolitan Money Store in of Lanham, MD, where he provided legal services to Joy Jackson, her husband Kurt Fordham, Jennifer McCall, her husband Clifford McCall, their companies and others. Prosecutors say that from December 2005 through June 2007, Allison conspired with Jackson, Fordham, the McCalls, and others, operating through several companies–including the Metropolitan Money Store which was controlled by Joy Jackson and Jennifer McCall–in a scheme which fraudulently promised to help homeowners avoid foreclosure, keep their homes and repair their damaged credit.

Allison and the others would direct homeowners to allow title to their homes to be put in the names of third-party purchasers (i.e., straw buyers) for one year, during which time Jackson, Fordham, and the McCalls would help the homeowners obtain more favorable mortgages, improve their credit rating and eventually return title to their homes to them. This of course never happened.

Allison and his co-conspirators told the homeowners that the equity withdrawn from the properties would be used to pay the mortgage and expenses on their homes and to repair their credit.

Prosecutors say Richard Allison and his co-conspirators:

• Acted as straw buyers for the loans used to acquire the homeowners’ properties
• Made false statements as to the personal and financial information of the straw buyers on loan documents so they could qualify for mortgages
• Obtained fraudulently inflated loans on the properties in the straw buyers names
• Stripped away the bulk of the homeowners equity proceeds and converted that money to their own personal use
• Stopped making the mortgage payments on the homes, resulting in the homes being foreclosed upon

According to court documents, Richard Allison and his co-conspirators spent the money from the mortgage loan proceeds to pay monthly mortgage payments on properties already purchased, pay for their personal expenses, and divert cash to themselves. Also according to the charging document, in March of 2006, Allison agreed to be a straw purchaser for two properties; completed and signed mortgage and other loan documents for those properties which contained false financial and personal information; and, received a $10,000 check for each of the two transactions.

Richard Allison faces a maximum sentence of 30 years in prison and a $1 million fine for the conspiracy. No court appearance has been scheduled.

As an aside, The Washington Post earlier reported that a separate 25-count indictment was unsealed in June, alleging that Jackson, Fordham, and six others used money from another elaborate real estate scheme to pay for a “lavish lifestyle that included luxury cars, houses, jewelry, fur coats and travel.” According to the Post, the June indictment mentioned Jackson and Fordham’s wedding at a high-end hotel where music legend Patti LaBelle sang to more than 350 guests while dinning on expensive seafood drinking Cristal champagne. Jackson told friends that the wedding cost nearly $800,000, according to the first indictment.

Updated: 9:05 P.M. ET, July 17, 2008

According to reports out of Denver, Colorado, Fredric “Rick” Dryer has been found guilty on 44 out of 60 felony counts in a securities fraud case involving Dryer’s former company, Mile High Capital Group, LLC. From Bob Mook at the well-respected Denver Business Journal:

Dryer– the self-described multimillionaire, real estate guru and founder of Mile High — was found guilty on counts of violations of the Colorado Organized Crime Control Act, conspiracy to commit securities fraud, securities fraud and theft. He was found not guilty of 14 counts of securities fraud and two counts of theft.

Dryer sat expressionless as the verdicts were read. He faces a maximum sentence of 24 years for each criminal count.

Dryer was convicted of 44 felony counts including violating the Colorado Organized Crime Control Act (racketeering), securities fraud, and theft. The jury found him not guilty on 15 additional counts.

Dryer and two co-defendants were indicted in 2006, accused of duping hundreds of investors who invested in his companies, Mile High Capital Group and Replacement Property Solutions. Denver’s Chief Deputy District Attorney Joe Morales and Deputy District Attorney Kandace Gerdes prosecuted the case, which spanned 12 days of testimony and three days of jury deliberations. According to Morales, after the jury was discharged, Dryer, who had been out on bond, was led from the courtroom in handcuffs to be held in custody pending sentencing on September 12, 2008 at 1:30 P.M Mountain Time in Denver District Courtroom 10.

Dryer now faces from between eight to 528 years in prison under the watchful eye of the Colorado Department of Corrections.

Dryer’s two co-defendants pleaded guilty earlier. Richard Darrow, 43, pleaded guilty to violating the Colorado Organized Crime Control Act and was sentenced to a suspended 20-year prison term that requires two years in the Denver County Jail and 10 years on probation. He was also ordered to pay $1,150,048.00 in restitution. Jeffrey Dietz, 38, pleaded guilty to securities fraud and was sentenced to two years probation and ordered to pay $990,406.00 in restitution.

In 2000, Rick Dryer launched Mile High Capital Group, LLC (MHCG)–a builder and developer of single-family homes, at the time specializing in mountain building. It was in late 2002, when Dryer was approached by out of state investment clubs looking for a reputable Colorado builder/developer, that the business model changed. Dryer didn’t think mountain properties were suitable for income property, so he began to research what would work.

Over the next two years, MHCG evolved into a builder of just such properties. Its reputation grew. Infinity Broadcasting sent its program directors to ask MHCG to sponsor its Rich Dad Poor Dad Real Estate Workshops, with Dryer as the main speaker with Robert Kiyosaki. Dryer’s research and experience evolved into what was to become his Right Place Right Time Real Estate Investment Strategies syllabus.

MHCG grew with Dryer’s reputation. The company planned to develop subdivisions around the country on the edges of high-growth areas where demand for rental properties was expected to be high. MHCG would then sell the rental properties to investors. The plan was to make it easy for real estate investors to purchase revenue-generating properties.

As far as real estate investment gurus go, Dryer had a track record and reputation that was good and getting better. Typical real estate investment gurus charge thousands of dollars for information that’s worth no more than about $50. They pitch risk-free, get-rich-quick schemes. They encourage people who are in no position to invest in real estate to become full-time investors. Most of these gurus are not successful real estate investors themselves–if they could make millions in real estate, they would not be spending their time pushing seminars.

Dryer was different. His Right Place Right Time Real Estate Investment Strategies were well known in the industry, and he had a solid public record of accurate predictions about emerging markets and trends. He became a popular and frequent speaker at Robert Kiyosaki’s Rich Dad Poor Dad real estate investor workshops around the country before starting his own workshops. He seemed to know his stuff and was said to careful remind people that investing in real estate carries risk. Dryer seemed like the real thing, and MHCG seemed like a legitimate company offering genuine real estate investment opportunities.

Through his seminars, Dryer promoted MHCG to attendees, and they were eager to buy these rental properties. The risk seemed negligible. After all, Dryer had a proven system in place for identifying areas where rental properties would soon be in high demand. His system was so successful, in fact, that many celebrities had bought into the program, including:

• Gary Eldred, PhD, author of Investing in Real Estate and professor of Trump University
• Richard Florida, PhD author of The Rise of the Creative Class and professor in the School of Public Policy at George Mason University
• Richard Karlgaard Publisher of Forbes magazine and author of Life 2.0
• Dan McCabe, Esq., CES of the Investment Exchange Group
• David Bach, New York Times and Wall Street Journal best-selling author of The Automatic Millionaire; Start Late, Finish Rich; and the entire Finish Rich series
• Mark Victor Hansen, New York Times and Wall Street Journal best-selling co-author of the Chicken Soup series

Having these big names involved added to Dryer’s and his company’s credibility, and the list of customers began to grow as investors spread the word to their friends and relatives of Dryer’s Right Place seminars. Money was pouring in. Under the direction of founder and CEO Rick Dryer, MHCG had risen from its humble beginnings to become a $150 million real estate business in just five years. According to court documents, MHCG had over a quarter billion dollars in sales by 2005.

Unfortunately, the product being sold was never delivered, and today Dryer was found guilty of committing some pretty serious real estate fraud-related acts.

If you’ve been following the Cay Clubs’ mess here on FlippingFrenzy.com, you’re already familiar with a former JPMorgan Chase & Co. (NYSE: JPM) loan officer named Ross Pickard. According to a number of Cay Club investors, including Carisa and Craig Urban, unbeknownst to them, while working at Chase, Ross Pickard intentionally fudged their income and assets in order to get their Cay Clubs-related loans approved. As a result, according to the Urban’s, as recently as April of this year, there was a task force looking into Mr. Pickard’s practices, and it may only be a matter of time before he is possibly charged with a real estate or mortgage fraud-related crime.

Fast forward three months and we’re just now learning that Ross Pickard is employed in a loan officer-related role at Wells Fargo. As near as we can tell (from phone calls to placed to Mr. Pickard’s own office), Ross Pickard now works for Wells Fargo Private Client Services‎, which is located at 5625 Strand Blvd. in Naples, Florida.

We’re not sure about anyone else, but we sure are surprised that Wells Fargo chose to engage Mr. Pickard when he stands to lose so much as a result of these alleged bad acts. Inflated incomes and assets–both by homeowners and loan officers–created a lot of our current mortgage mess in the first place, and if Mr. Pickard is doing the same under Wells Fargo’s roof, they too may become caught up in something they just didn’t bargain for when agreeing to work with the likes of Ross Pickard.

Five people–including a licensed real estate broker, a mortgage loan processor, and a licensed mortgage agent–have been charged and entered guilty pleas in a Las Vegas mortgage fraud scheme that federal government say caused over $17 million in losses to federally-insured banks. As previously reported here on FlippingFrenzy.com, Eve Mazzarella, a Las Vegas REALTOR® who ironically was named by REALTOR® Magazine in 2007 to it’s “Top 30 Under 30” list, her husband–Steven Grimm–and four other loan officers and mortgage brokers are currently awaiting trial on federal conspiracy and fraud charges for their alleged role in the scheme, which involved straw buyers, fraudulent mortgage loan applications, and shell companies.

• Daicy Vargas, 23, of Las Vegas, pleaded guilty to one count of misprision of a felony, admitting that from about November 2005 to 2007, she assisted Steven Grimm in the diversion of the illicit proceeds of the fraud and failing to report the fraud as soon as possible to appropriate authorities.
• Benjamin Labee, 27, a mortgage loan processor, and his wife, Shauna Labee, a.k.a. Shauna Dyphibane, a licensed mortgage agent in Nevada, both of Salt Lake City, Utah, pleaded guilty to one count of conspiracy.
  

• The Labees admitted that from about April 1 to December 31, 2006, they conspired with Steven Grimm to recruit straw buyers to pose as property purchasers and that they placed false information in loan applications which allowed straw buyers to qualify for loans for which they would not have otherwise qualified.
• Craig Christians, 39, a licensed Nevada real estate broker in Las Vegas, pleaded guilty to one count of misprision of a felony. Christians admitted that from about January 1, 2006, to March 12, 2008, he allowed his company, Western Pacific Funding, to be used as a conduit for the fraud.
• Robert Samora, 41, of Las Vegas and a licensed Nevada mortgage agent, pleaded guilty to one count of money laundering. Samora admitted that from about 2006 to 2007, he assisted Grimm by diverting illicit proceeds of the mortgage fraud scheme, namely loan officer commissions, to Grimm.

Led by Steven Grimm and Eve Mazarrella, the scheme allegedly included an astonishing 432 straw buyer transactions involving more than 225 properties with a total purchase price of over $107 million. Grimm and Mazzarella defaulted on mortgage payments on many of the loans which not surprisingly caused the properties to go into foreclosure. At least 143 of the approximately 225 properties purchased by the defendants are in default causing losses to the banks estimated at more than $17 million.

Regular Flipping Frenzy readers may recall back around the end of last year and the beginning of this year when I posted several blog entries under the header of “Mile High Monday.” For background information or if you’re new to the blog or just forgot, click on any of the following links:

• December 10, 2007: Rocky Mountain Monday Continued — Said Differently: Mile High Monday
• December 17, 2007: Mile High Monday, Second Installment
• December 24, 2007: Mile High Monday, Fourth Installment: The Indictment
• December 31, 2007: Mile High Monday — the Fifth Installment: Introducing the Key Players
• January 7, 2008: Mile High Monday — the Sixth Installment: Introducing the Key Players
• June 2, 2008: Mile High Capital Group’s Richard Darrow Sentenced

Word today out of Colorado is that Dryer’s trial is nearly over. From Bob Mook at the Denver Business Journal:

Closing arguments in the criminal securities fraud trial of Mile High Capital Group founder Fredric “Rick “ Dryer were made Monday and the case sent to the jury.

Dryer, a flamboyant, self-described real estate “guru” who pitched investments in duplex projects at lavish sales promotions around the country, is charged with 60 felony counts — including violations of Colorado’s organized crime control act, securities fraud, conspiracy to commit securities fraud and theft.

Dryer pleaded “not guilty” to all charges. If convicted, he faces up to 24 years for each felony count.

Prosecutors alleged in a month-long trial that Mile High and its affiliated companies collected more than $44 million from about 1,200 investors from across the United States but completed just over 40 rental duplex units promised to investors between August 2003 and October 2005.

“It takes a lifetime for some people to make the kind of money he took. And that’s why we’re here,” Denver Deputy District Attorney Joe Morales said. “He knew he was a failure and he knew he was a convicted failure … but he took the money anyway.”

Dryer and other Mile High executives booked luxury hotels and convention centers to put on heavily advertised seminars promoting the value of investing in the company’s alleged real estate projects in high-growth areas of the country.

Dryer promised solid financial returns for each $16,500 initial payment on…

For more on this developing story, read the rest of Mook’s article, Mile High case goes to jury.

The Federal Reserve Board today approved a “final rule” for home mortgage loans it says will better protect consumers and facilitate responsible lending, but not until October of 2009. The new final rule prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain other mortgage practices. The final rule also establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in the transaction.

The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Federal Reserve Board in December of 2007, with enhancements that address ensuing public comments, consumer testing, and further analysis.

Essentially, the new final rule adds four protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, the Fed says these protections will:

• Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
• Require creditors to verify the income and assets they rely upon to determine repayment ability.
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
• Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:

• Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.

For all mortgages, the rule also sets additional advertising standards. Advertising rules now require additional information about rates, monthly payments, and other loan features. The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is “fixed” when it can change.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index, or 3.5 percentage points if it is a subordinate-lien mortgage. This definition overcomes certain technical problems with the original proposal, but the expected market coverage is similar.

One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule. As part of its ongoing review of closed-end loan rules under Regulation Z, however, the Board will consider alternative approaches.

In finalizing the rule, the Board carefully considered information obtained from testimony, public hearings, consumer testing, and over 4,500 comment letters submitted during the comment period. “Listening carefully to the commenters, collecting and analyzing data, and undertaking consumer testing, has led to more effective and improved final rules,” Governor Kroszner said.

The new rules take effect on October 1, 2009. The single exception is the escrow requirement, which will be phased in during 2010 to allow lenders to establish new systems as needed.

In a related move, the Fed will be publishing for public comment a proposal to revise the definition of “higher-priced mortgage loan” under Regulation C (Home Mortgage Disclosure), which requires lenders to report price information for such loans, to conform to the definition the Board is adopting under Regulation Z.

Less than 48 hours after federal regulators seized IndyMac Bank, the Board of Governors of the United States’ Federal Reserve System announced today that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is, according to the Fed, intended to supplement the Treasury Department’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

For the uninitiated, Freddie Mac is a stockholder-owned corporation established by the United States Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for homeowners across U.S. Over the years, it has been estimated that Freddie Mac has made homeownership possible for one in six homebuyers.

For his part, Freddie Mac chairman and CEO Richard Syron, had this to say about today’s development:

We are heartened by today’s announcement and the steps outlined by the U.S. Department of the Treasury and the Federal Reserve Board. This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters. I applaud Secretary Paulson and Chairman Bernanke for their leadership and encourage Congress to act quickly to pass the new legislative proposals.

Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) say the company is adequately capitalized, has a large liquidity portfolio and access to the world’s debt markets. The company is in the process of finalizing its June 30, 2008 financial results and says they will show that Freddie Mac has a substantial capital cushion above the 20% mandatory target surplus established by federal regulations.

Speaking on behalf of the United States government, the Secretary of the U.S. Department of the Treasury, Henry Paulson, said:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Below, when Paulson refers to “GSEs” he’s talking about government sponsored enterprises, which are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Updated: 7:57 p.m. ET — 7/11/08

Federal regulators from the Office of Thrift Supervision have seized and shut down IndyMac Bank, transferring its operations to the Federal Deposit Insurance Corporation (FDIC). Today’s move, which just happened moments ago, came on the heels of renewed concerns of a looming government bailout for the lending giant.

Indymac Bancorp, Inc. is the holding company for Indymac Bank, F.S.B., the largest savings and loan in the Los Angeles area and the 7th largest mortgage originator in the nation. Indymac Bank, operating as a hybrid thrift/mortgage banker, provides financing for the acquisition, development, and improvement of single-family homes. Indymac Bank also provides financing secured by single-family homes and other banking products to facilitate consumers’ personal financial goals.

Just this past Monday, IndyMac announced it had stopped making new loans and would cut up to 3,800 jobs. The bank reported a sharp increase in the number of depositor withdrawals following those announcements and remarks made by Senator Charles Schumer (D-NY) on the bank’s ability to survive the current mortgage and foreclosure crisis.

IndyMac is the second largest financial institution to close in U.S. history, and as one may suspect, today’s action may create further insecurity on Wall Street about mortgage backed securities (fraudulent and illegal loans and sloppy underwriting practices tend to make this sort of thing happen).

As the battle intensifies about IndyMac financial stability, a new report from the Center for Responsible Lending (CRL) provides evidence that the lending giant put itself in a hole by engaging in unsound and abusive lending during the nation’s mortgage boom. The report, “‘IndyMac: What Went Wrong?,” finds substantial evidence that IndyMac routinely made loans with little regard for their customers’ ability to repay the loans.

CRL’s interviews with former IndyMac employees and a review of lawsuits in 10 states indicate that IndyMac:

• Pushed through loans based on inflated appraisals and income data that exaggerated borrowers’ finances
• Worked hand-in-hand with mortgage brokers who misled borrowers about their rates and other loan terms and stuck them with unwarranted fees
• Treated many elderly and minority consumers unfairly

In CRL interviews and court documents, 19 former IndyMac employees describe an atmosphere where the drive to close loans ruled even when IndyMac’s own risk experts recommended against approvals. Most of the ex-employees who provided information for the CRL report were mortgage underwriters who were supposed to be making sure borrowers could afford the deals.

According to the FDIC, insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday, July 14. Loan customers should continue making loan payments as usual.

Beginning on Monday, July 14, IndyMac Federal Bank, FSB’s 33 branches will observe normal operating hours and will continue to offer full banking services, including on-line banking..

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

Stay tuned to Flipping Frenzy for more news and analysis on this breaking development. In the meantime, for additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m.

The U.S. Attorney for the Eastern District of California announced that a federal grand jury returned an indictment yesterday charging nine people in connection with a mortgage fraud scheme involving the purchase of 13 properties in Solano County, California, in 2006. The individuals charged include:

• JOY JOHNSON, 33, former RE/MAX Real Estate Agent, Vacaville, Calif.
• CORY WHALEN, 33, of Solano County, Calif.
• ELIZABETH CARRION, 38, of Vacaville
• LENIN GALEANO, 32, of Vacaville
• CARMEN GALEANO, 30, of Vacaville
• ANGELITO EVANGELISTA, 39, of San Francisco, Calif.
• CLARISA ANG, age 43, of Elk Grove, Calif.
• CRIS ANG, 46, of Elk Grove
• LYDIA ANG, 71, of American Canyon, Calif.

According to the U.S. Attorney’s office for the Eastern District of California, the indictment charges ELIZABETH CARRION, ANGELITO EVANGELISTA, CLARISA ANG, CRIS ANG, and LYDIA ANG with mail fraud arising out of their involvement in the fraudulent purchase of 11 real estate properties between May 2006 and September 2006.

The indictment further charges LENIN GALEANO, CARMEN GALEANO, CRIS ANG and CLARISA ANG with making false statements to a financial institution in connection with the purchase of two additional real estate properties in April and May of 2006.

Finally, the indictment charges ELIZABETH CARRION, ANGELITO EVANGELISTA, CRIS ANG, CLARISA ANG, CORY WHALEN, LYDIA ANG, and JOY JOHNSON with engaging in monetary transactions involving more than $10,000 in criminally derived property.

The scheme involved purchasing properties at prices substantially higher than the list price without the lenders’ knowledge. They were entirely financed with so called “80/20″ loans. The difference between the list price and the inflated sales price was then credited at the close of escrow to fictitious businesses controlled by the defendants and others. The defendants and others then used the credited funds mainly to make mortgage payments on the properties and for their own living expenses. In addition, the loan applications contained false information about income, personal assets, and intent to occupy properties as a primary residence. Most of the loans that were secured by the properties have either been foreclosed upon or are in default.

The maximum penalty for mail fraud in these cases is 20 years in prison, a fine of up to $250,000, or both. The maximum penalty for making a false statement to a financial institution is 30 years in prison, a fine of up to $1,000,000, or both. The maximum penalty for engaging in a monetary transaction involving criminally derived property is 10 years, a fine of up to $250,000, or both.

Thanks to an astute Flipping Frenzy reader, we’ve just been reminded of the “Buy and Bail” scheme, which is particularly pervasive when housing values drop in concert with a sharp rise in foreclosures. If you’re unfamiliar “Buy and Bail,” here’s how it works (courtesy of Nick Timiraos of The Wall Street Journal):

Some Buy a New Home to Bail on the Old

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

“I can find the same exact house as what I live in right now for half the price,” says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn’t want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the “buy and bail,” in which borrowers with good credit buy a new home — often at a much lower price — then bail out of the “upside down” mortgage on their first home.

Homeowners are able to pull off this gambit — which some lenders and real-estate agents call mortgage fraud — by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders’ unwillingness to cut deals or restructure loans made when home prices were inflated. “It’s just a business decision,” says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”

For the full story, read Some Buy a New Home to Bail on the Old.

In the meantime, based on what you’ve read thus far, do you think what we’re calling a “buy and bail” scheme qualifies as real estate/mortgage fraud?

Here’s my take:

• The law that governs real estate transactions is referenced on the 1003–-the Uniform Residential Loan Application–which every property buyer signs when applying for a real estate loan (see Title 18, United States Code, Section 1001). To paraphrase the code, you cannot lie on a loan application or any other document related to a real estate transaction. So, if you–as a buyer of the second home-–do not disclose, via the 1003, 100% of your current assets (i.e, that you already own a home and are planning on walking away from it), you’ve just committed a crime that is punishable by fine and up to 5 years in prison. That much is clear.
• Personally, as the WSJ article references, I believe if a real estate industry insider (i.e., a REALTOR®, mortgage broker, loan officer, real estate attorney, appraiser, REO broker, notary, title underwriter, closing officer, real estate investment “guru,” etc.) knowingly collaborates with anyone on a buy and bail-related transaction, they too should be held accountable for their actions (especially when 80% of all reported real estate and mortgage fraud occurs in collusion with a real estate industry insider, and when The Wall Street Journal article in question cites a Las Vegas REALTOR® who receives “one to two dozen inquiries every week from individuals inquiring about a buy-and-bail”).

Finally, in a somewhat related development, if you read Nick Timiraos’ article all the way through to the end, you’ll notice this startling comment from Gwen Muse-Evans, VP of credit policy and controls at Fannie Mae:

If they “have the intention of fraud, then at the end of the day there’s really little you can do to totally prevent that,”

~ Gwen Muse-Evans, Fannie Mae

Wow!! After a statement like that, is there really any question as to why real estate and mortgage fraud is on the rise and that buy and bail schemes are leading the charge? Muse-Evans’ sentiment is right up there with U.S. Attorney General Michael Mukasey’s, who just last month stated that the Justice Department would not be creating a national task force to combat real estate and mortgage fraud as the government did with corporate crime after Enron. “This isn’t that kind of phenomenon,” Mukasey was quoted as saying.

So on the one hand, Fannie Mae’s own vice president of credit policy and controls throws her hands up in the air and proclaims nothing can be done to stop buy and bail fraud, and the U.S. Attorney General says the problem (i.e., real estate and mortgage fraud in general) doesn’t warrant the type of attention that led to stricter enforcement and oversight of corporate America… the same corporate America, mind you, that is enabling buy and bail schemes–and worse. Tell me, where’s the logic in any of that?

As an aside, special thanks goes to Doug Way of the Historic Indian Village Association. Doug took the time to query me about buy and bail after reading Nick Timiraos’ article in The Wall Street Journal.

John Hancock, played by Will Smith, is not your typical superhero, and as you’ll see, neither is Columbia Pictures.

Whenever and wherever Hancock attempts to stop a crime or save someone, he causes mass bedlam and terror. After an awful business presentation, Public Relations stiff Ray Embrey, played by Jason Bateman–who is always trying to convince companies, as a sign of their good nature, to give away their products and services to needy people–somehow manages to get his car stuck in the path of an oncoming train.

It’s against this backdrop that Hancock, the misunderstood superhero, and Embrey, the good-hearted public relations executive, meet; and it also serves as the inspiration for Columbia Pictures’ own PR stunt, the “Hancock Helping Hand Mortgage Payoff Contest.”

According to Steve Elzer, Senior Vice President of Media Relations at Columbia Pictures, the motion picture company will pay off the mortgage debt of one deserving family, with a grand prize worth up to $360,000. But according to the Contest website, you are ineligible if your home is currently subject to any tax, mechanic or another type of lien, foreclosure, or a judgment.

Interesting… so what Columbia Pictures is really saying is this… we’re totally psyched about our movie, we want you to see it, and just like our ill-conceived superhero, we’re going to piss all over you while attempting to help you. Are you kidding me? (To see the official contest rules for yourself, visit the Helping Hand Mortgage Payoff Contest rules page.)

Just as insulting is the fact that entrants are judged on a measly 200-word essay (authenticity counts for 30%, grammar 10%, clarity of thought 20%, presentation 10%, articulation 10%, passion 10%, and personality 10%). I don’t know about anyone else, but to me the notion of someone authentically and passionately expressing a need as great as having their mortgage paid off in 200-words or less is absurd and downright laughable.

Hey, Columbia Pictures and your parent company, Sony Pictures… wake up:

1. We live in a country where a full 2% of all existing home mortgages are in foreclosure because of fraud and institutional greed (with more foreclosures on the way) and you say you want to lend a helping hand but not to those who need it most?
2. Come on… get real; you wouldn’t be running this contest in the first place were it not for the current mortgage meltdown and foreclosure crisis.
3. While I have no doubt a “worthy” homeowner will benefit from your PR stunt, the most deserving of the lot will not even be afforded the benefit of the doubt that created your moronic eligibility requirement in the first place.

Next time, Columbia/Sony, do us all a favor by sticking to what you do best… making movies, some of them disappointing, just like the Hancock Helping Hand Mortgage Payoff Contest.

More than two years agp, I wrote a blog entry titled “Call To Action: Automated Notification Systems Are Needed for Change in Status of Property Ownership.” Now, someone’s finally doing something about it. But before I go there, take a look what I wrote (in part) back on June 22 of 2006:

Here’s a better approach to stopping unscrupulous mortgage ‘rescue’ firms and others who prey off the ignorance of unsuspecting homeowners: Just like they do in the credit scoring industry, start a national campaign aimed at getting homeowners to be more in tune with what their local government says is the ownership status of their property. How many times have you seen those advertisements on television for companies selling credit score monitoring services? As a result, more American’s know their credit score now than at any other time in history.

Local governments should act now to establish notification systems to alert homeowners of any changes to the ownership rights of their property. How simple would it be for an automated system to be kicked into place once real estate-related documents are filed with the proper authorities? Pretty darned easy! If I can do it for the people who inquire about my real estate services (send them automated e-mail messages, that is), surely local government can procure a system that e-mails and snail-mails notification immediately upon any attempted change in status to real estate.

With the stakes being as high as they are, can we really afford not to have automated notification of the change of property ownership status in place?

Now, some two years later, word comes from the Dane County, Wisconsin, Register of Deeds that they just launched a free online service that affords consumers the ability to have their name monitored within the Register of Deeds office in order to track possible fraudulent activity. According to Kristi Chlebowski, Dane County’s current register of deeds, county residents are notified only when the name they have submitted to the new Property Fraud Alert system is found on a document recorded in the Register of Deeds office.

“Protecting consumers information and real estate property are our top priorities,” says Chlebowski. “While the Property Fraud Alert will not prevent fraud from happening, it will provide an early warning system that will allow our citizens to take appropriate actions should they deem possible fraud activity has occurred with their property.”

Flipping Frenzy salutes Kristi Chlebowski and the staff of the Dane County, Wisconsin, Register of Deeds office. Your Property Fraud Alert system is a step in the right direction!