John C. Richter, the United States Attorney for the Western District of Oklahoma, announced last Friday afternoon that Terry Hugh Mahon, 69, of Broken Arrow, Oklahoma, has been sentenced to 13 years in federal prison in connection with a fraudulent investment scheme involving cash-back rebate coupons and home mortgages.

On March 26, 2008, a jury found Terry Mahon guilty on charges of conspiracy, mail fraud, and money laundering. Mahon has been incarcerated since the jury’s verdict in March. A co-defendant, Grover Harold Phillips of Stillwater, Oklahoma, pled guilty to conspiracy and money laundering on March 21, shortly before trial. His sentencing is pending.

Mahon and Phillips concocted a scheme whereby they falsely promised buyers and homeowners that if they took out a new mortgage or refinanced their existing mortgage they could pay it off in just five years, but there was just one catch — they had to buy a bogus “cashback rebate coupons” which promised financial freedom but delivered nothing but misery.

Starting in the year 2000, Terry Mahon operated a Nevada corporation called Rebates International, Inc., with its office in Hollister, Missouri. Grover Phillips worked in tandem with Mahon through a Nevada business trust called Amsterdam Fidelity Business Trust (Amsterdam’s offices were located in Phillips’s home in Stillwater, Oklahoma).

The evidence at trial showed that from 2000 to 2003, Phillips and Mahon worked with other people, including Emzie Huletty of Oklahoma City, to sell cashback rebate coupons that would supposedly allow purchasers to pay off their home mortgages in five years.

Mahon and the other conspirators made false representations that if victims paid 17% of the value of their homes to them, they would receive rebate coupons worth the entire value of their homes. The money that they paid was to be invested in high-yield trading programs, according to court documents. At the end of five years, the victims could supposedly redeem these rebate coupons for face value and pay off their mortgages.

Many victims re-financed their homes to generate the 17% required to participate in the program.

According to U.S. Attorney Richter, the jury in Terry Mahon’s case heard more than two days of testimony, including evidence offered by victims who took out mortgages so that they could pay tens of thousands of dollars into the program. The evidence presented at trial demonstrated that the only investment in anything resembling a “high-yield” trading program was a $50,000 payment in April of 2002 to OsGold, a massive Ponzi scheme that folded in the wake of a federal investigation.

The jury in this case also heard evidence that Terry Mahon and other conspirators siphoned off hundreds of thousands of dollars that were supposedly to be invested for the benefit of coupon holders.

After deliberating just over an hour, the jury convicted Mahon on all four counts in which he was charged. These included conspiracy to commit mail fraud, using a commercial interstate carrier to commit fraud, engaging in a financial transaction over $10,000 in criminally derived proceeds, and engaging in a financial transaction designed to conceal the nature of the funds involved.

Terry Mahon was sentenced to 13 years in prison for his crimes. He was also ordered to pay $3,079,684.95 in restitution to hundreds of victims and is subject to a forfeiture order in the amount of $1,061,294.85.

Emzie Huletty, who operated EASE Corporation, Vision Services, Inc., and Sunset Financial Group, all located in Oklahoma City, pled guilty to mortgage fraud on March 24, 2006, and was sentenced to two years in prison.

Hats off to the great investigative work conducted by the FBI and the Criminal Investigative Division of the IRS with the assistance of the Oklahoma Department of Securities.

While members of Congress, President Bush, and the Treasury Department attempt to work out (pun intended) the $700 billion Troubled Asset Relief Program, real estate and mortgage fraud continues to be the fastest-growing white collar crime in American:

WaMu loaned millions to California home flippers convicted in fraud scheme: Records show WaMu, America’s largest savings and loan, financed at least 43 mortgages worth $24.5 million on properties bought and sold by members of the Soni family since 2007. Of the 22 homes sold in that period, at least six have become problems for WaMu: Four were foreclosed, one received a notice of default and another was listed for sale at a $260,000 loss. Total value of WaMu’s mortgages on the troubled properties: $2.7 million.

Weld County’s ‘Most Wanted’ fugitive — a developer — busted in Mexico: Weld County’s “Most Wanted” fugitive sits in a California jail today after a dogged investigation led to his arrest in Mexico. Mark Strodtman, a Greeley developer, was indicted March 25 by Weld County grand jury on 23 felonies, including racketeering. Strodtman, 51, and two others are accused in a mortgage fraud scheme that left many Greeley area families in foreclosure, reduced property values of neighboring homes and defrauded lenders, according to the Weld County District Attorney’s Office.

Brothers admit to million-dollar mortgage fraud: Federal prosecutors say two Virginia brothers have pleaded guilty in a million-dollar mortgage fraud scheme. Twenty-nine-year-old Mohammed Rababeh of Vienna and 31-year-old Ahmed Rababeh of Haymarket pleaded guilty Wednesday to conspiring to commit bank fraud.

Former mortgage loan officer pleads guilty to fraud scheme: A 25-year-old woman pleaded guilty in federal court yesterday to participating in a mortgage fraud scheme and faces up to five years in prison and $250,000 in fines. Paula Galacgac admitted that, while working as a loan officer for Mortgage Ability, LLC she recruited two “straw buyers” for properties on O’ahu and assisted them in fraudulently applying for mortgage loans worth more than $400,000. Other members alleged to be part of the fraud conspiracy were named in a separate criminal indictment returned by a federal grand jury May 30.

Officials say Florida man is part of mortgage scheme: A Seffner man was arrested Wednesday in connection with a multimillion-dollar mortgage fraud scheme that victimized dozens of people since 2004, the Florida Department of Law Enforcement said. Michael Fetterhoff, 37, of 205 Kingsway Road, was charged with grand theft of more than $100,000. Fetterhoff worked in sales for Advanced Mortgage Solutions, a mortgage broker company associated with other home improvement businesses that persuaded mostly minority customers in poor areas of Florida to take out home loans, FDLE spokeswoman Trena Reddick said.

Kansas City mortgage fraud ringleader sentenced to 13 years: A Kansas City businessman was sentenced to 13 years in prison for a $17 million mortgage fraud scheme that included buying a home owned by former Jackson County Executive Katheryn Shields and her husband. Raymond Zwego Jr. will also pay nearly $5.6 million in restitution and serve three of those years in prison for a probation violation.

AARP Calls For Help For Victims of Mortgage Fraud: Florida is one of only three states that doesn’t offer financial protection to victims of fraudulent loans. We’re also first in the nation for mortgage fraud. The Florida Association of Mortgage Brokers and AARP are calling on lawmakers to revive the Mortgage Brokerage Guaranty Fund. The fund was quietly cut in the 90’s. It would pay some victims or mortgage fraud 20,000 dollars for their losses. AARP Spokesman Dave Bruns said if the program hadn’t been canceled, today the state would have 24 (m) million dollars to help victims.

Delray Beach mortgage agent guilty of fraud: A Delray Beach mortgage broker pleaded guilty Friday to participating in a wire fraud scheme to misappropriate more than $1.2 million in client funds supposedly held in escrow for real estate transactions and related expenses. John Mohan, 38, faces up to 20 years in prison when he is sentenced Dec. 19 in federal court. According to the U.S. Attorney’s Office, Mohan worked as a mortgage broker and closing agent. He collected money from buyers and lenders and represented to the parties that the funds were being held in escrow to be disbursed for various specified purposes, including the satisfaction of pre-existing mortgages. Prosecutors said Mohan used the money for personal use and investments and tried to conceal the fraud and prevent immediate foreclosure of the property by sometimes making payments on the homeowner’s original mortgage.

Virginia mortgage broker sentenced in real estate fraud scheme: A mortgage broker from Norfolk has been sentenced to four years in federal prison in a mortgage fraud case involving a home in northern Virginia. Fifty-year-old David A. Freelander was sentenced last Friday in Alexandria federal court. He has to pay more than $5.4 million in restitution.

Florida AG suing 10 companies, 15 individuals for mortgage fraud: Florida Attorney General Bill McCollum announced last Friday that his state’s Mortgage Fraud Task Force is suing 10 companies and 15 individuals for their alleged roles in a Central Florida mortgage fraud scheme. The suit alleges that the group obtained more than $37 million in mortgage loans for at least 60 homes and siphoned off more than $6 million of the loan proceeds for their personal use.

12 indicted in Atlanta mortgage fraud scheme: Local authorities said last Monday they charged 12 men with an elaborate mortgage fraud scheme in Atlanta’s West End neighborhood and seized more than $200,000 of assets. In indictments filed last week, Fulton County District Attorney Paul Howard Jr. accused the men of buying and selling nine homes using false appraisals that were more than double the homes’ actual value. Seven of the houses were in the 30310 zip code in the West End, where 26 homes were put up for foreclosure auction in late June.

If anyone is interested in reading or commenting on H.R. 6853, the Nationwide Mortgage Fraud Coordinator Act of 2008 (which was passed by Congress by a vote of 350-23 earlier this week), here is the full text:

To establish in the Federal Bureau of Investigation the Nationwide Mortgage Fraud Coordinator to address mortgage fraud in the United States, and for other purposes.

SECTION 1. SHORT TITLE.

SEC. 2. ESTABLISHMENT IN THE FEDERAL BUREAU OF INVESTIGATION OF THE NATIONWIDE MORTGAGE FRAUD COORDINATOR.

(a) Establishment- The Director of the Federal Bureau of Investigation shall assign the Chief of its Financial Crimes Section, Criminal Investigative Division, in addition to other assigned duties, to be the Nationwide Mortgage Fraud Coordinator.

(b) Duties of the Coordinator- The Nationwide Mortgage Fraud Coordinator shall oversee all Federal Bureau of Investigation activities related to the investigation of mortgage fraud, including the following:

1. Establishing and operating regional task forces, consisting of the voluntary participation of Federal, State, and local law enforcement and prosecutorial agencies, to organize initiatives to investigate mortgage fraud, including initiatives to enforce all pertinent Federal and State mortgage fraud laws.
2. Providing training to Federal, State, and local law enforcement and prosecutorial agencies with respect to mortgage fraud, including related Federal and State laws.
3. Collecting and disseminating data with respect to mortgage fraud, including, to the extent practicable, Federal, State, and local data relating to mortgage fraud investigations and prosecutions.
4. Preparing an annual report describing the Federal Bureau of Investigation’s efforts to combat mortgage fraud and the results of these efforts. This report shall be submitted by the Federal Bureau of Investigation to Congress. The initial report shall be submitted no later one year after the date of the enactment of this Act.
5. Making recommendations to the Director as to the need for resources to combat mortgage fraud.
   

6. Performing other duties as assigned that are related to the investigation and prosecution of mortgage fraud.

(c) Optional Functions- The Nationwide Mortgage Fraud Coordinator shall have the following optional responsibilities:

1. Establishing a toll free hotline and other information systems for–

(A) receiving reports of mortgage fraud;

(B) providing the public with access to information and resources with respect to mortgage fraud; and

(C) directing reports or allegations of mortgage fraud to the appropriate Federal, State, or local law enforcement and prosecutorial agency, including any appropriate regional task force.

2. Creating a database with respect to suspensions and revocations of mortgage industry licenses and certifications to facilitate the sharing of such information by States.

(d) Optional Responsibility of the Department of Justice- The Department of Justice, upon consideration of any recommendations by the Nationwide Mortgage Fraud Coordinator, may–

1. propose legislation to Federal, State, and local legislative bodies to assist in the detection, investigation, and prosecution of mortgage fraud, including measures to address mortgage loan procedures and property appraiser practices that provide opportunities for mortgage fraud; and
2. make recommendations to Congress as to the need for additional resources to combat mortgage fraud.

(e) Sunset- This section shall sunset September 30, 2015.

Passed the House of Representatives September 22, 2008.

Image by robertodevido via FlickrAs everyone knows by now, late last week the U.S. government announced it would ask Congress for the authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets, including residential and mortgage-related assets, which include mortgage-backed securities. The move–as defended today by Treasury Secretary Henry M. Paulson, Jr. before the U.S. Senate Banking Committee–purports to stabilize the U.S. economy, which I have long maintained is being rocked to its very core by real estate and mortgage fraud.

The news about the government’s proposal has been fast and furious, with objections popping up on an hour-by-hour basis since last Friday (which partly explains my silence over the last four days… literally, it has been difficult to tell what the latest proposal actually calls for or means to distressed homeowners and taxpayers alike).

While members of Congress have generally balked at rubber-stamping the Treasury’s plan to remove illiquid assets from the banking system, illiquid assets may be the result of the problem but they are not the problem itself. The problem is (and will continue to be, until something drastic is done to fix it) the fraudulent lending practices and sloppy underwriting oversight that placed disadvantaged borrowers and billions of dollars of bad loans into the stream of commerce via the secondary market. Banks, lenders, and investors are now all suffering from their own bad judgment and poor oversight, while the rest of us–the taxpayers–are going to foot the bill that eases their suffering.

The house of cards we’re all surrounded by was always going to fall (for evidence of this, look no further than to the fact that real estate and mortgage fraud has been classified as the “fastest-growing white collar crime in America” by the FBI for last four years). And if you can’t see a direct correlation between real estate and mortgage fraud and the housing crisis, the failure of AIG, and this $700 Billion bailout, then you’re either completely naive or you’re just not looking hard enough.

Take AIG for example. A lot of people may be wondering how a major insurance corporation’s failure can be tied to real estate and mortgage fraud. Well, as Lehman Brothers suffered a significant decline in its own share price last week, analysts began comparing the types of securities held by AIG and Lehman, and guess what? They found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman. Hello, can you say “panic!”

And this just in: The FBI has now opened an investigation into possible fraud involving AIG, Fannie Mae, Freddie Mac, and Lehman Brothers. Meanwhile, Congress just passed by a vote of 350-23, HR 6853 EH, otherwise known as the “Nationwide Mortgage Fraud Coordinator Act of 2008,” which provides the FBI with additional and dedicated resources for fighting real estate and mortgage fraud.

Stay tuned… there’s lots more to report and comment on!

Details are now emerging from a Congressional subcommittee hearing that seem to suggest that the City of New York, along with the New York Yankees, may have committed real estate fraud in their attempt to pay for the construction of a new $1.3 Billion stadium in the South Bronx.

According to the Interim Report into Public Financial Assistance for the New Yankee Stadium, which was prepared for the House Oversight and Government Reform Committee’s Subcommittee on Domestic Policy by New York Assemblyman Richard L. Brodsky, City of New York officials intentionally misrepresented to the Internal Revenue Service (IRS) the value of the stadium’s property, which in turn helped the City secure special tax deals from the federal government.

Apparently, the City of New York used comparable land values in the borough of Manhattan rather than the Bronx to place a value for the new property upon which the stadium is being built. (The new ballpark is being constructed across the street from the current one, on the present site of Macombs Dam Park.)

Today’s House Oversight and Government Reform subcommittee hearing in Washington, D.C., was called by Congressman Dennis Kucinich (Democrat, Ohio), Chairman of the Subcommittee on Domestic Policy, to examine whether the use of the federal tax code to subsidize the construction of professional sports stadiums and arenas furthers the public interest. It was the third hearing held by Kucinich’s group on this subject and the first to examine alleged improprieties in the financing process of the New York Yankees new stadium.

“In the case of the new Yankee Stadium,” Congressman Kucinich said, “not only have we found waste and abuse of public dollars subsidizing a project that is for the exclusive benefit of a private entity, the Yankees, but also we have discovered serious questions about the accuracy of certain representations made by the City of New York to the federal government.”

Furthermore, Kucinich says that the Subcommittee on Domestic Policy has found substantial evidence of improprieties and possible fraud by the financial architects of the new Yankee Stadium.

As Flipping Frenzy readers know, inflated appraisals are often involved in the advancement of real estate and mortgage fraud. More often than not, a key player in an illegal flipping operation is the appraiser, who inflates the value of the house on paper to enable the buyer to qualify for a higher loan. Sometimes, a real appraiser is pulled into the scheme. In other cases, the appraisal is simply a phony document.

At issue for the City of New York, the New York Yankees, the IRS, and now the United States Congress, is the valuation of the land used for the site of the new stadium. Similar to residential real estate, municipal real estate developments require appraisals. In the case of Yankee Stadium, New York Assemblyman Brodsky and others–including members of Congress–believe that the value of the stadium land was grossly inflated and misrepresented to the IRS in order to justify more than $900 Million in tax-exempt bonds that were issued to finance construction of the stadium.

If in fact the allegations are true, the City of New York and the New York Yankees may just be key figures in the largest real estate fraud scam ever to be uncovered in the U.S.

A Baptist church pastor and radio show host and his mortgage broker wife were arrested today on charges stemming from a State of Florida investigation into a $1 Million real estate fraud scam.

Investigators with Florida’s Dept. of Financial Services’ Division of Insurance Fraud, along with the state’s Office of Financial Regulation, say the couple — Rodney McGill and Shalonda McGill — have been enjoying expensive leased vehicles, including a Rolls-Royce, and other luxuries while sticking their so-called clients with more than $1 million in mortgage debt. The two were arrested today on charges of Racketeering, Conspiracy to Commit Racketeering, Grand Theft (2 counts), and Obtaining a Mortgage by False Representation. The McGills are now being held in the Martin County (Fla.) Jail, with bond set for each at $1.4 million. Deputies with the Martin County Sheriff’s Department arrested the pair during a routine traffic stop.

Shalonda McGill and Rodney McGill sourced clients through various programs including the Young Millionaire’s Group, RSM Investment and Mortgage, and the New Hope Outreach Center, all of which operated out of a facility located at 2110 Arch St. in Jensen Beach, Florida. State corporation documents identify Rodney McGill as president and Shalonda McGill as vice president of the New Hope Outreach Center, which is incorporated as a nonprofit church with the McGills listed as pastors.

The investigation found that Rodney McGill, as president of the Young Millionaire’s Group, also solicited customers through a daily local radio program he hosted on WJFP 91.1 FM in Fort Pierce, FL. He told his listeners would teach teach and mentor them on how to buy and sell real estate without any out-of-pocket expense, with the goal of earning $50,000 in 90 days.

In July 2006, state investigators charge, Rodney McGill solicited listeners of his radio show to call in and qualify, based on their credit, to become one of his “Fab 5.” program. Callers allegedly were assured that they would learn McGill’s real estate investing “cash-out technique.”

The McGills purchased real estate in Martin and St. Lucie counties (Florida) by preparing and submitting fraudulent loan applications, and then flipped the properties to Fab 5 members for huge profits. Based on the fraudulent loan applications, four mortgages were obtained in excess of the property’s actual worth, and the McGills are said to have skimmed off the profits leaving three members of the so-called Fab 5 with more than $1.115 million in mortgage payments they were unable to make.

In one case, Florida investigators charge that the McGills paid $210,000 for a home at 1000 N.E. County Line Road in Jensen Beach, FL, in June of 2006. Three months later, they sold the home for $365,000 — a 74% increase at a time when home values in Florida were plummeting. In another scam, the McGills paid $147,000 for a house at 2814 S.W. Ann Arbor Road in Port St. Lucie, FL, according to property records, in August 2006. Three months later, they sold the house at a 56% increase ($229,000).

Florida officials say all of the McGills related properties are either in or are facing foreclosure. The buyers of course all believed they were part of the Fab 5 and were learning the McGill’s real estate investing techniques.

The investigation into Shalonda McGill and Rodney McGill’s fraudulent trappings is ongoing into other real estate transactions in which the McGills were involved. Anyone with information about the McGill’s is asked to contact Detective Ted Padich, (561) 837-5635, with Florida’s Division of Insurance Fraud, or Investigator Steve Brignola, (561) 837-5233, with Florida’s Office of Financial Regulation.

Scripps Treasure Coast Newspapers reported earlier this year that Rodney McGill was arrested in April on a child abuse warrant stemming from an incident involving allegations that beat his daughter with a household extension cord. The girl later recanted her story and the charges were dropped. The same newspaper service also reported that McGill led an October 2007 march from his church to his town’s city hall in which 300 people protested high utility bills.

John F. Wood, United States Attorney for the Western District of Missouri, announced that an Overland Park, Kansas, man was sentenced in federal court last Thursday (9/11/08) for his role in a nearly $16 million mortgage fraud conspiracy.

Monty J. Kinman, 27, of Overland Park, was sentenced by U.S. Chief District Judge Fernando J. Gaitan to two years and six months in federal prison without the possibility of parole. The court also ordered Kinman to pay a measly $2,500 fine.

Kinman was convicted at trial last November for the mortgage fraud conspiracy as well as one count of wire fraud related to the attempted sale of a residential property at 5034 Sunset Drive, Kansas City, Mo., at an inflated price. Kinman falsely represented to Fieldstone Mortgage that the sale price was $1.2 million, while in reality the actual sale price was $707,000 (by comparison, Zillow.com currently estimates the house to be worth $928,000). Kinman and others sought to obtain a loan to purchase the property through a fraudulent loan application and other fraudulent documents.

(5034 Sunset Drive, Kansas City, Missouri)

Kinman, formerly the regional manager and a loan officer at Soldi Financial in Overland Park, is the sixth co-defendant sentenced in this particular mortgage fraud scheme. Raymond Walter Zwego, Jr., 61, of Kansas City, Mo., pleaded guilty last October, to being the organizer and leader of the mortgage fraud scheme and awaits sentencing.

Zwego owned and operated Xpress Car Sales, Xpress Car Rental, North Mission Investments, Cobalt Blue, LLC, and Indigo Blue in North Kansas City. Zwego also pleaded guilty to 11 counts of wire fraud related to sending fraudulent documents in a series of facsimiles and email messages in furtherance of the conspiracy.

Zwego’s fraudulent real estate closings included 56 properties with loans totaling approximately $15.8 million. Each of the loans were structured in such a way that Zwego received excess funds from the loan closings as a result of inflated appraisals and numerous false and fraudulent documents. In total, the loans were financed by mortgages from 25 different lenders who sustained losses totaling approximately $6.2 million as a result of the scheme.

Seven other co-defendants have pleaded guilty and two were convicted at trial.

• Rick A. Peterson, 34, of Lenexa, Kansas, was sentenced to five years in federal prison without the possibility of parole. The court also ordered Peterson to pay a $2,500 fine. Peterson was convicted at trial on Nov. 7, 2007, for his role in the conspiracy and for wire fraud. Peterson was a title insurance officer and loan closer from 2004 to 2007, first at Parkway Title in Overland Park, then at Freedom Title in Kansas City, Missouri, where he was the manager of the office.




• James R. Rhoades, 48, of Kansas City, was sentenced to five years of probation and ordered to pay a $2,000 fine and more than $5 million in restitution $5,395,843 to be exact).




• Jeremy A. Plagman, 30, of Lee’s Summit, Missouri, formerly an appraiser doing business as JET Appraisals in Lee’s Summit, was sentenced to two years of probation, a $2,000 fine, and 30 days of home detention under electronic monitoring. As a condition of his probation, Plagman may not be involved in the real estate industry.




• Larry E. Barshaw, 57, and Linda M. Thompson-Barshaw, 59, of Kansas City, Kansas, were each sentenced to five years of probation, including six months of home detention. The court also ordered both to pay a $2,000 fine and $1,517,108 in restitution. The Barshaws were recruited as straw buyers, posing as purchasers of the property at 5034 Sunset Drive, Kansas City, Mo.. In reality, the Barshaws never intended to reside at the residence or to make payments on the mortgage. They were to be paid $40,000 for their role in the scheme. Linda Thompson-Barshaw (also known as Linda Barshaw or ) is the owner of Colormarc, Inc., a remodeling business that employs her husband, Larry Barshaw.




• James E. Coleman, 60, of Kansas City, pleaded guilty on May 21, 2007, to his role in the mortgage fraud conspiracy and to wire fraud, and awaits sentencing. Coleman, a Certified Public Accountant who formerly served as president of the board of a Kansas City magnet school, also pleaded guilty to four counts of wire fraud.




• Michael Rodd, 54, of Olathe, Kansas, pleaded guilty on June 27, 2007, to his role in the mortgage fraud conspiracy. Rodd was a real estate broker doing business as Heartland of America, Inc., in Olathe. Michael Rodd is currently a fugitive and a federal warrant has been issued for his arrest.

This case is being prosecuted by Assistant U.S. Attorneys Linda Parker Marshall and Gene Porter. It was investigated by the Federal Bureau of Investigation.

After reading the following article (from this week’s edition of Crain’s Detroit), see if you have the same reaction I had: Namely, that this is just the first of many lawsuits (between banks and mortgage originators) we’re likely to hear about:

Wells Fargo sues Quicken, claims fraudulent loans
By Tom Henderson and Daniel Duggan

Livonia-based Quicken Loans Inc. is being sued in U.S. District Court by Wells Fargo Bank N.A., in a dispute over what is claimed are fraudulent loans gone bad.

South Dakota-based Wells Fargo filed the suit in June, claiming that Quicken has refused to buy back more than $4 million in loans that didn’t meet underwriting standards, in violation of a 2001 contract between the two companies.

In August, Quicken filed its response, denying the allegations and demanding a jury trial.

In its complaint, Wells Fargo said that “Quicken made certain representations and warranties to Wells Fargo regarding the loans and lines of credit being sold, such as but not limited to the income and employment of the borrower and the fair market value of the real estate collateral.”

Wells Fargo said some loans had false representations and “were not eligible to be sold to Wells Fargo in the first place.”

The lawsuit said that as of June, the amount of bad loans Quicken refused to buy back totaled $4,047,000 and “to the extent additional repurchase demands are made by Wells Fargo and declined by Quicken, this sum will likely increase.”

There is currently no shortage of loans that are being disputed in the mortgage industry, said Tony Garritano, editor of Mortgage Technology, one of several niche publications focusing on the mortgage industry. It is owned by New York-based SourceMedia.

“It’s not uncommon right now for an investor to say “you misspelled this person’s name on line five, you have to buy the loan back,’” he said. “Lenders are being barraged by buy-back requests, and they’re all disputing them, saying they didn’t do anything wrong and were just following the guidelines.”

But Gibran Nicholas, president and chairman of the Certified Mortgage Planning Specialist Institute in Ann Arbor, an organization that certifies financial professionals to provide mortgage and real estate equity advice, said the lawsuit sends the wrong signal.

Nicholas said he’d expect such a dispute to be worked out before it hit federal court, and that it could spook other buyers of Quicken loans, who are already spooked by other developments in the mortgage industry.

“This could very easily turn into a crisis of confidence and have a domino effect. It’s like a run on the bank,” said Nicholas, who is also president and CEO of Nicholas and Co. Mortgage Planners.

Elizabeth Jones, Quicken’s vice president of communications, said the lawsuit won’t cause problems with others who buy its loans. She said Quicken merely followed Wells Fargo’s underwriting guidelines for the loans in question, that it was told it was not required to document income for borrowers who had high credit scores and whose loans had a low loan-to-value ratio.

“This matter, while it involves a very small number of loans originated and sold to Wells Fargo, most more than five years ago, still strikes a nerve as it is an attempt by Wells Fargo to retroactively rewrite its own underwriting guidelines more than five years after the fact,” she said.

“The Wells case is much worse than Monday-morning quarterbacking. … As long as the loans performed well, Wells enjoyed the income from the loans,” said Jones. “However, Wells apparently misjudged the increased risk associated with this type of stated income loan. As soon as Wells began to experience losses, they mounted a campaign of revisionist underwriting.”

Kevin Moss, executive vice president of Wells Fargo’s Home Equity Group, disputed Jones’ version.

“We disagree with these allegations. Wells Fargo has never demanded repurchase for loans from Quicken simply because they are stated income loans. The bulk of the loans that are the subject of this lawsuit involve substantial fraud. Contractually, Quicken Loans is responsible for the loans that they underwrote and sold to Wells Fargo.”

What a mess. On the one hand you have Quicken Loans saying it did nothing wrong, while on the other, Wells Fargo insists Quicken Loans blatantly ignored underwriting standards. I’ll be interested to see how this one plays out.

In the meantime, based on what you read above, who do you think is to blame and why?

A. Quicken Loans
B. Wells Fargo
C. Both
D. None of the above

Forged and counterfeit documents commonly play a role in real estate and mortgage fraud, and notaries form a front line of defense in these areas. With that in mind, the following email message arrived yesterday afternoon, and since it is categorized as an alert, I feel it is worth sharing here:

DATE: September 11, 2008
FROM: Tim Reiniger, Executive Director
TO: Concerned Notaries of Michigan
RE: Your Support Needed For Important Fraud-Fighting Legislation

As a Notary in a state where there is no record-keeping requirement, you know the importance of keeping Notary records. The FBI and law enforcement agencies across the nation have cited Notary records as vital evidence in the investigation and prosecution of mortgage fraud and identity theft crimes. Despite the downturn in the mortgage industry, mortgage fraud has actually risen. In fact, the Mortgage Asset Research Institute has ranked Michigan number three in the nation in mortgage fraud for the first quarter of 2008. Because you use a Notary journal, we are asking for your support of important fraud-fighting legislation currently pending in the state Legislature. Officially designated as HB 5448 (with similar companion bills HB 5379 and 5431), this bill would require Notaries in Michigan to keep a record of all their official acts to facilitate prosecution of identity thieves.

ACTION ITEM: Please contact your State Representative and urge this legislator to support HB 5448.

For information on finding and contacting your State Representative click here: http://house.michigan.gov/find_a_rep.asp

Curious about House Bill 5448, I visited the Michigan Legislature’s website. There, I found the entire Michigan Notary Public Act along with the proposed language referenced in Tim Reiniger’s email alert:

A NOTARY PUBLIC SHALL KEEP, MAINTAIN, AND PROTECT, UNDER HIS OR HER EXCLUSIVE CONTROL, A CHRONOLOGICAL PAPER OR ELECTRONIC OFFICIAL JOURNAL OF NOTARIAL ACTS. THE JOURNAL SHALL CONTAIN THE FOLLOWING ENTRIES FOR EACH NOTARIAL ACT:

(A) THE DATE AND TIME OF THE NOTARIAL ACT.

(B) THE TYPE OF NOTARIAL ACT.

(C) THE TYPE, TITLE, OR DESCRIPTION AND DATE OF EVERY RECORD NOTARIZED.

(D) THE NAME, ADDRESS, SIGNATURE, AND, IN THE CASE OF REAL ESTATE RECORDS, THE RIGHT THUMBPRINT OF EACH PERSON WHOSE SIGNATURE IS NOTARIZED.

According to the National Notary Association (NNA), each year, countless civil and criminal court challenges are made to documents after they have been legally notarized. Claims of fraud, forgery, coercion and other misdeeds, real or not, are common. In some cases, an original document’s loss or theft makes the issue even more difficult to resolve.

A Notary’s journal, says the NNA, can prevent the frauds and many of the baseless lawsuits that burden our courts as well as safeguard personal rights when a valuable document is lost or fraudulently altered. The NNA also says the Notary’s journal supplies independent physical evidence that a particular document was signed or acknowledged on a specific day by a person who was positively identified by a Notary. Other benefits of the Notary’s journal (again, from NNA):

• It deters forgers and impostors who are naturally unwilling to leave a signature (and a thumbprint) that would incriminate them.
• A Notary journal protects the signer and other involved parties in the event the document is lost, challenged or fraudulently altered.
• It protects the Notary from baseless allegations by showing reasonable care was exercised in identifying the signer and performing the notarial act.
• A Notary journal provides critical evidence to law enforcement authorities in prosecuting frauds.
• It discourages groundless lawsuits by showing that a signer appeared before the Notary and was properly identified.
• A Notary journal can avert or quickly resolve litigation, helping unclog our over-burdened courts.

As I point in my book “Protect Yourself from Real Estate & Mortgage Fraud: Preserving the American Dream of Homeownership,” given the right to notarize documents is a privilege that’s not to be taken lightly. To make notarization of documents less susceptible to abuse, in addition to what has been proposed for Michigan, I recommend the following:

• Requirements for becoming a Notary should be much stricter. In some areas, becoming a Notary is easier than getting a cash advance at an ATM.
• Notaries should have an electronic system that captures the signer’s information (thumbprint and driver’s license) and verifies the information.
• Notaries should be required to pass a fraud-certification exam.
• A notary’s thumbprint should be included on the notarized document or within the seal. (Notaries often claim that they are the victims of identity theft. Requiring a thumbprint would help prevent that from occurring.)
• Notaries should receive newsletters in print or electronically keep