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

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

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



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

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

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

The latest foreclosure statistics from RealtyTrac are out, and the news isn’t very good. According to the Q1 2008 U.S. Foreclosure Market Report, which tracks foreclosure filings (including default notices, auction sale notices and bank repossessions), 649,917 properties were foreclosed upon during the first quarter of the year, a 23% increase from the previous quarter and a 112% increase from the first quarter of 2007. The report also shows that one (1) in every 194 U.S. households received a foreclosure filing during the quarter.

Foreclosure activity in the quarter increased on a year-over-year basis in 46 out of the 50 states and in 90 of the nation’s 100 largest metro areas, demonstrating that most regions of the country are seeing more foreclosures. In some areas there are also some unusual, non-market factors impacting the foreclosure numbers. For example, the city of Philadelphia in late March issued a temporary moratorium on all foreclosure auctions for April, and the city has since adopted a program that will delay foreclosure proceedings on owner-occupied properties until the owners have met face-to-face with lenders to attempt a loan workout plan that would prevent foreclosure.

While programs like those in Philadelphia are certain to have a positive long-term impact, they could be simply deferring another flood of foreclosures, and that could extend the length of time it takes the market to recover from the current downward cycle, in which we’ve already seen seven consecutive quarters of increasing foreclosure activity.

Click on the map to the left for a close up view of exactly where foreclosure-related activity is playing out across the United States. As you’ll see, one (1) in every 54 Nevada households received a foreclosure filing during the first quarter, the highest foreclosure rate in the nation and 3.6 times the national average. Foreclosure filings were reported on 19,595 Nevada properties during the quarter, up 3% from the previous quarter and up 137% from the first quarter of 2007.

Foreclosure filings were reported on 169,831 California properties during the first quarter, the highest total in the nation at a rate of one (1) in every 78 households — the nation’s second highest foreclosure rate. Foreclosure activity in California increased 32% from the previous quarter and was up nearly 213% from the first quarter of 2007.

Arizona documented the nation’s third highest state foreclosure rate, with one (1) in every 95 households receiving a foreclosure filing during the quarter. Foreclosure filings were reported on 27,404 Arizona properties during the quarter, up 45% from the previous quarter and up nearly 245% from the first quarter of 2007.

Foreclosure filings were reported on 87,893 Florida properties during the first quarter, the second highest state total and giving Florida the nation’s 4th highest foreclosure rate — one (1) in every 97 households received a foreclosure filing during the quarter. Foreclosure activity in the state was up 17% from the previous quarter and up 178% from the first quarter of 2007.

Colorado foreclosure activity increased 33% from the previous quarter and 78% from the first quarter of 2007, and the state’s foreclosure rate ranked No. 5 among the states. Foreclosure filings were reported on 18,996 Colorado properties during the quarter, a rate of one in every 110 households.

Other states with foreclosure rates among the top 10 were Georgia, Michigan, Ohio, Massachusetts and Connecticut.

The FBI calls it the “latest scam on the block,” but for years now we’ve been warning people and reporting about scam artists who steal your identity and then your home. Now, after years of reporting and writing about this sinister act, the FBI is stepping up its efforts to make homeowners aware of the horrible connection between identity theft and real estate fraud.

Here’s how the scam typically works:

(Image courtesy of the FBI)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The six companies…

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

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

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

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

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

Here’s how the scam worked:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Highlights in the Mortgage Fraud Case Report include:

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

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

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

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

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

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

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

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

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

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

The Securities and Exchange Commission (SEC) has charged three people who targeted military families in a multi-million dollar real estate fraud scheme that forced victims into personal bankruptcy and their homes into foreclosure. The scam also targeted other affinity groups, including members of Southern California’s Filipino community and the accused’ fellow church members. James Duncan, Hendrix Montecastro, and Maurice McLeod stand accused of soliciting investors investors in Southern California, Arizona, and elsewhere using sham investment seminars and “referral partners” including a member of the Air Force who solicited his fellow servicemen.

The SEC’s complaint alleges the three men gained control over investors’ finances by offering them securities in the form of real estate investment contracts, and purporting that the money investors earned would help make mortgage payments on investment homes purchased on their behalf. Instead of investing client funds as promised, Duncan, Montecastro, and McLeod operated a Ponzi scheme by using money from new investors to make mortgage payments on previously purchased investment homes. When the scheme unraveled, it cost more than 75 investors an estimated $10 million.

With the type of fraud Duncan, Montecastro, and McLeod operated (commonly referred to as “affinity frauds”), con artists infiltrate tight-knit groups by showcasing a respected member of that community as one of their successful investors, giving the false illusion of a safe and secure investment opportunity and conning new investors into their Ponzi-like schemes.

Between October 2004 and June 2006, Duncan, Montecastro, and McLeod operated through Murrieta, Calif.-based Pacific Wealth Management, LLC (PWM) and Stonewood Consulting, Inc., to defraud investors from several affinity groups. The SEC’s complaint alleges that all three falsely promised investors that their funds would be invested in real estate and various other investments that would subsidize their investment homes. The SEC’s complaint further alleges that Duncan, a recidivist, raised $1.2 million in a separate offering of preferred membership units in Total Return Fund, LLC, to approximately 20 investors. The complaint alleges that the proceeds raised in both offerings were commingled and used to run a Ponzi-like scheme that fell apart and left investors with homes in foreclosure and forced some investors to declare bankruptcy.

According to the SEC’s complaint, Duncan, Montecastro, and McLeod failed to disclose several key facts about the purchase of the investment homes. They charged exorbitant real estate transaction fees financed by the investors, and submitted false mortgage loan applications on behalf of investors. The complaint also alleges that Duncan, who was touted as a financial genius, failed to disclose his prior securities laws violations.

The SEC’s complaint further alleges that Duncan and Total Return Fund misrepresented how investor money would be used. Specifically, while the Total Return Fund offering documents stated that 95 percent of investor funds would go towards the purchase of real estate, business assets, or accounts receivable, in fact, investor funds were used to pay returns to prior investors, and were used as part of the PWM fraud.

The SEC’s complaint charges Duncan, Montecastro, and McLeod with violating the antifraud and registration provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of ill-gotten gains, and civil penalties. The complaint also names Christopher Oetting, Anthony M. Contreras and Biocybernaut Institute, Inc., as relief defendants, alleging that they received ill-gotten gains from the defendants’ fraudulent conduct.

The Santa Clara County (California) District Attorney’s Office has been hit with a surge in complaints about real estate and mortgage fraud, even as funding to prosecute these cases is plunging. From The Mercury News:

The district attorney’s office opened 125 new investigations into mortgage scams last year, four times as many as in 2006, prompting one prosecutor to call 2007 “the year of lending dangerously.” The total loss to victims topped $40 million during the 2006-07 fiscal year, the office said.

Funding to prosecute these cases is tied in part to the real estate market, so the slowdown in home sales has led to a drop in the amount of money coming into the district attorney’s office.

The situation has led to grumbling in the legal community over the pace of prosecutions.

Ron Rossi, a San Jose real estate lawyer who said he is seeing more mortgage-fraud cases now than in his 39 years of practice, is “convinced the DA is probably overwhelmed with the number of cases. They are very hard to prosecute and are not normally what DAs do. DAs are normally involved in hard crime. The staffing is probably not enough to even get close to what’s going on in the industry.”

‘Slow,’ ‘frustrating’

“It’s incredibly slow, it’s incredibly frustrating,” said a civil attorney who has dealt with the district attorney’s office on real estate fraud matters; he asked not to be named because he expects to do so in the future.
“The cases are streaming through the door, and we’re doing our best to cover it,” said Deputy District Attorney Mike Fitzsimmons, one of only two lawyers assigned full time to real estate fraud. Fitzsimmons said he’s working nights and weekends to keep up with the volume.

The budget shortfall could exacerbate the problem. If funding continues to decline, the office may have to cut staffing, the district attorney said in a report to the board of supervisors this month.

The primary funding source for the district attorney’s real estate fraud unit is a $2 portion of a county real estate document recording fee. The money declined from $1 million in previous years to $544,000 last fiscal year because fewer documents were recorded due to the record slowdown of home sales.

That’s the same amount of money the district attorney’s office had nine years ago with a much lighter caseload, Fitzsimmons said.

Fitzsimmons has drafted legislation, sponsored by the California District Attorneys Association, that would give county boards of supervisors the option of doubling the amount set aside for real estate prosecutions to $4.
The legislation, SB 1396, was introduced by Sen. Dave Cox, R-Roseville.

Complicated cases

The cases pose a particular challenge for prosecutors because they tend to be complex. A typical criminal real estate fraud case involves multiple parties, voluminous documents and three to five search warrants, according to Deputy District Attorney James Sibley, the other lawyer assigned full time to real estate fraud.

“That means that from when somebody walks in the door, it could be six months” before charges are filed, he said.

The unit has 2 1/2 investigators and a paralegal.

The cases are a mixture of identity theft, misrepresentation of loan terms, loan applications with exaggerated statements of income and assets, and flippers who illegally skim equity from homes they never intended to occupy or pay for.

A recent case involved 90 boxes of seized records, according to the real estate fraud unit’s annual report. Another involved 100 boxes of evidence, along with seized computers.

In one case, Sibley said, a minister who signed his name to a home loan for one of his parishioners had his identity stolen by the mortgage agent, who used it on two other properties.

In another case still under investigation, elderly victims lost their life savings to a man who falsely claimed the money would be used to fund loans on Bay Area property. Victims’ total loss in that case is more than $43 million, the district attorney said.

A husband and wife are facing prosecution on an illegal flipping scheme in which the couple bought 10 homes in the San Jose area worth $8.5 million, qualifying for the loans with false statements of income and assets.
Some of the workload is being shifted to other deputy district attorneys, and larger cases may be referred to the U.S. attorney “because it just chews up too many of our man-hours,” said Scott Tsui, supervising attorney for economic crimes.

Other district attorney’s offices around the state have been hit with similar floods of cases, according to Stanislaus County Deputy District Attorney Marlisa Ferreira, who compared notes with other prosecutors at a recent meeting of the state association.

In Stanislaus County, “We’re completely overwhelmed with complaints,” Ferreira said.

Imagine buying your dream home. Your credit is a bit shaky but you manage to secure a subprime loan with an adjustable rate mortgage. A few years later, interest rates jump and you can no longer afford to pay your mortgage. You see an advertisement in a local newspaper for a business that’s willing to help–the ad states they can pay your mortgage for a modest monthly fee while you take the necessary time to get back on your feet. But here’s the bad part: It’s a scam. The company just takes your money and runs!

This is just one of the real estate and mortgage fraud-related schemes the FBI is concerned about, and according to senior criminal investigators at the Bureau, the problem is only going to worsen over the next 18 months. These scams–which I write about in my latest book, Foreclosure Self-Defense For Dummies–include plenty of shenanigans with mortgages and subprime loans and are costing this great nation of ours tens of billions of dollars a year, if not more.

“Greed is definitely not good for our economy right now,” says Ken Kaiser, the FBI’s top criminal investigative executive. “It’s hurting homeowners. It’s hurting honest businesses. And it’s hurting investors and markets around the world.”

With those thoughts in mind, the FBI says it is now squarely focused on proactive initiatives designed to crack down on the largest of these financial crimes, and is even shifting resources as trends emerge, all the while working hand-in-hand with a host of government and private sector partners.

In particular:

• As we wrote last week, the FBI is now investigating 14 corporations involved in subprime lending as part of its “Subprime Mortgage Industry Fraud Initiative” launched last year. The companies being investigated come from across the financial services and real estate industry, from mortgage lenders to investment banks that bundle loans into securities sold to investors.
• The Bureau now has more than 1,200 open real estate and mortgage fraud cases (that’s up about 40% from last year), mostly involving fraud for profit, where straw buyers and real estate industry insiders rig schemes to buy properties that are illegally flipped or allowed to go into foreclosure.

The FBI also says suspicious activity reports–for potential real estate and mortgage fraud–have increased from 3,000 in 2003 to 48,000 in fiscal year 2007, and are projected to reach more than 60,000 such reports in 2008.

Finally, the FBI’s latest “hotspot list” for real estate and mortgage fraud includes: California, Texas, Arizona, Florida, Ohio, Michigan, and Utah (Utah is new to the list); and, on a somewhat surprising note, the Bureau now says it sees no links whatsoever to organized crime syndicates, street gangs, or terrorist groups in its real estate and mortgage fraud case portfolio.