Image by Getty Images via Daylife

I recently received the below question from someone who reads one of my other blogs–KeepMyHouse.com. In short, without going into too much detail, I think Flipping Frenzy readers–especially those of you who closely follow Countrywide–might appreciate knowing about this:

Question: We are a disabled couple who had a serious re-model which had to be done—-we were Countrywide customers, and never late with a payment. They made us come back 4 times in 4 years to get the funds, and they falsified our income. (I have the documents.) Now, they are sending me notices of ‘intent to accelerate’ and will not tell me what will happen if I cannot pay them the entire amount. They knew we were on fixed incomes, but went ahead each time as if we had all the money in the world. What can I do to?

Answer: Without knowing more, it sounds like you may have a cause of action against Countrywide. I’m not an attorney, but you may want to speak with one about your situation.

If you do not pay and they accelerate the loan, that means you have to come up with the full unpaid principal balance plus delinquencies and costs. If you don’t pay; Countrywide can foreclose. Depending on what state you’re in, that can take the form of a judicial foreclosure or a non-judicial foreclosure. You should find out what the foreclosure laws are in your state and familiarize yourself with the timeline for these proceedings.

Another approach you can take is to hire a company to complete a fraud and predatory lending audit on your loan documents, income, etc. This will cost you some money up front, but if it proves what you expect it to, you can then use that information to contact Countrywide and hopefully secure a modification to truly affordable payments. This audit will also be advantageous should you need to pursue legal action or arbitrate a settlement. The “bad acts” and documentation supporting those bad acts will be important when an attorney is deciding whether or not you have a legitimate claim against Countrywide.

You can always take the inexpensive road first. Try qualifying for a loan modification by calling Countrywide.

Make sure you explain your financial situation and have your income and expenses available and organized before you call. The modification rules have changed a bit under the Obama Plan, so you might find yourself qualifying for help.

There are also some other programs that can help you reinstate and come current. Ask Countrywide when you call whether you can qualify for the HomeSaver Advance Program–a loan that can be used to cure delinquencies and reinstate. It won’t solve the payment problems if you can’t afford to make your monthly payment, but it may allow you to avoid an immediate foreclosure and give you some time to investigate other ways to keep your house.

What ever you decide, act quickly, there may be a temporary moratorium on foreclosures but that will not last forever.

Image via WikipediaTalk about your loan modification myths… check out this commentary from TheStreet.com’s Glenn Hall:

The story went almost unnoticed and is already lost in the flurry of headlines about Bank of America’s extra $20 billion in bailout bucks and its quarterly loss.

Or maybe Bank of America would prefer to discuss “commercial puffery” in bankruptcy court?

The criminal investigation covering allegations of real estate and mortgage fraud at Countrywide Home Loans now includes a serious focus on a sweetheart loan program for members of Congress and others that Flipping Frenzy first told you about back on the 16th of June:

Feds probe Countrywide’s ‘V.I.P.’ program
By Lisa Myers & Amna Nawaz, NBC News

The wide-ranging criminal investigation into wrongdoing at Countrywide - once the nation’s largest mortgage originator - now includes serious scrutiny of a loan program that provided special mortgage deals to the well-connected and powerful, including two U.S. senators.

NBC News has learned that Robert Feinberg - a former Countrywide loan officer who handled what were known as the “V.I.P.” mortgages - spent six hours last Thursday with a six-person team from the Justice Department. The team included prosecutors from the Public Integrity section, which handles investigations of possible public corruption.

“The Justice Department is making very serious inquiry into any possible wrongdoing that may involve (former Countrywide CEO) Anthony Mozilo, other Countrywide employees, Sen. Chris Dodd, Sen. Kent Conrad, (former Fannie Mae CEO) Franklin Raines or other public officials,” said Feinberg’s lawyer, Anthony Salvano. “Robert has always cooperated thoroughly with authorities and is strictly a witness in their investigation.”

‘Friends of Angelo’s’

Salvano said the prosecutors and FBI agents seemed focused on whether the preferential treatment given to V.I.P. costumers was part of an effort by Countrywide to buy influence - as well as on the conduct of each public official who received a mortgage from Countrywide.

Feinberg says that Countrywide’s clients in this program were known by a nickname.

“We called them F.O.A.’s,” Feinberg told NBC News, “which were Friends of Angelo’s.”

“Angelo” is Countrywide’s then-CEO, Angelo Mozilo, who once called an ordinary borrower’s plea for help on his mortgage payments, “disgusting.”

But Mozilo seemed to have a different attitude toward people of influence. In fact, Feinberg says part of his job was to hammer home to the V.I.P. clients that they were getting special deals.

“You spoke in a manner that was different than you spoke with a regular customer,” said Feinberg. “‘Your loan has been specially priced by Angelo.’ ‘You’re getting special discounts because you’re in the V.I.P. loan department.”

So what would a “Friend of Angelo” get that an average customer would not? According to Feinberg, the possible benefits ran the gamut.

“They got a discount on the interest rate,” said Feinberg. “They got discounts on their fees. They got a free floatdown option before closing.”

In one instance of a “Friends of Angelo” deal, Mozilo sent an e-mail to Feinberg ordering him to “Take off one point” on a loan to Sen. Conrad. That one point equaled a savings of $10,700 in fees.

Feinberg’s client list also runs the gamut. Among those benefitting from the VIP program were four former Cabinet members spanning Democratic and Republican administrations: Henry Cisneros, Richard Holbrooke, Alphonso Jackson, and Donna Shalala. Two former CEO’s of Fannie Mae, James Johnson and Franklin Raines, heads of the government-sponsored entity which bought Countrywide’s mortgages - also received VIP mortgages from Countrywide.

All have denied impropriety and declined to elaborate to NBC News. Some say they had no idea they were getting favorable rates or any sort of discount.

But Feinberg insists part of his job was to make clear to VIP’s they were receiving special treatment.

“There were many, many taglines we used to let them know their level of importance to make sure that they understand where they’re located,” said Feinberg. “And nine times out of ten, once you mention ‘V.I.P’ the person’s gonna ask you ‘what am i getting for being in this V.I.P department?’ Or ‘what am I getting because I know Angelo?’ Or ‘I talked to Angelo and he said I’m getting this.’”

Senator Conrad says he never asked for, expected, nor was aware of any special treatment from Countrywide, and only found out about the discount after it had been reported in the press. He released and posted to his website all his mortgage documents, and donated all the money he saved to Habitat for Humanity.

Senator Dodd says he thought the VIP program just meant better customer service, and that he received market terms that he could have received from other lenders. The senator said in a press conference on the matter that if anyone had suggested at the time that he was receiving some kind of financial benefit on the loans because of his position, he would have terminated the relationship immediately.

Both Conrad and Dodd say they never sought any favors, and are cooperating with the Senate Ethics Committee investigation.

Feinberg says he’s not aware of any discounts linked to favors, but he did see e-mails noting the potential value of the relationships to Countrywide’s political and business interests. The e-mails noted one particular client was “of importance to Countrywide.” Another encouraged a discount, noting “they are incredibly important to us.” Yet another asked that the loan officer, “make an exception” in Countrywide’s lending rules, “due to the fact that the borrower is a Senator.”

Daniel Golden investigated the program for Condé Nast’s Portfolio magazine.

“There was a great variety of people who got special deals,” said Golden. “Many of them were figures in Congress or government or business partners of Countrywide - all of whom were in a position to help Countrywide in one way or another.”

To Golden, the company’s intention was clear.

“The purpose for Countrywide was to ingratiate itself with the people in Washington who might be able to help the company down the road,” said Golden.

But was any of it illegal? Legal experts say prosecutors will be looking into whether Countrywide was trying to buy influence, and into whether public officials were taking improper gifts, or gifts they should have disclosed.

A federal grand jury in Michigan has indicted four men–including a mortgage broker and an appraiser–for allegedly running a $1.9 million real estate/mortgage fraud scheme. Hassan Nagi, 30, of Dearborn Heights, Michigan; Ali Haidous, 24, of Dearborn; Safi Bzeih, 35, of Dearborn; and Hussein Aoun, 23, of Dearborn Heights reportedly conspired to secure fraudulent mortgages from Countrywide Bank, Washington Mutual, Fifth Third Bank, IndyMac Federal Bank, Net Bank, and Sun Trust for more than 15 properties between April 2005 and April 2008.

The indictment alleges that Hassan Nagi worked as a mortgage broker and was responsible for submitting false and fraudulent applications to obtain the mortgages. Ali Haidous was a real estate appraiser who provided fraudulent appraisals for the properties. Bzeih and Aoun recruited sellers and straw buyers for the properties.

According to the indictment, after the Nagi and Haidous identified a willing seller of a property, Nagi secured financing for a straw buyer. False income and employment information was provided to the lender using fraudulent W-2 forms. In support of each loan, Nagi also submitted an inflated appraisal, created by Haidous.

After the inflated mortgage was funded at closing, the seller received sufficient funds to pay off any existing mortgage as well as a bonus for participating in the real estate fraud scheme. The remainder of the proceeds from the inflated mortgage were shared between Hassan Nagi, Ali Haidous and one of the straw buyers.

Nagi, Haidous, and Bzeih were expected to appear in federal court before Magistrate Judge Virginia Morgan yesterday afternoon, for their initial appearances and arraignment on the indictment. Hussein Aoun is a fugitive in Lebanon. The case is being prosecuted by Assistant U.S. Attorney Leonid Feller.

When it comes to questionable business practices among real estate industry insiders, nothing quite beats the loan officer who purposefully chooses not to disclose critical information to the borrower. Simply stated, unethical loan officers don’t like to give borrowers the whole picture of what the final loan looks like before closing for fear that the borrower may do what they’re supposed to… namely, shop for the best deal.

Think about it for a second. If a borrower finds a loan that costs less, offers a better rate, or is a more stable product, they might decide to go with that loan instead of the one being offered by the loan officer who reveals little to no information about his or her loan offering. By not allowing the borrower to make a fully informed and educated decision, the unethical loan officer increases the chances that the loan–whatever its ultimate terms are–will close.

Some of the information commonly withheld or not given in a timely fashion–as you will see in the following homeowner’s story–includes a loan’s costs, fees, interest rate, and other crucial information about the loan product itself. As you read the story below, see if it doesn’t sound like an all too familiar one.

My husband and I live on a farm in the eastern part of Michigan. Soon after we purchased our place, we had well over 20% worth of “down equity,” and collectively, my husband and I had what we felt was a very good income. In 2000, after being told they could beat our current lending institution’s costs and rates, we switched our mortgage to Countrywide Home Loans, a division of Countrywide Financial.

Like many homeowners, we thought we could trust our loan officer (I’ll simply refer to him as “R.C.”); so much so that we recommended him to members of our family.

R.C. told us that a “No Doc” loan would be the easiest way to avoid looking for all the paperwork we would need to be approved for the new loan, and since my husband and Iwere busy with our lives, we determined that the No Doc route was the perfect option.

We told R.C. that we wanted a 30-year fixed loan, and we knew enough to ask for the costs associated with the mortgage upfront. Even though he was easy to talk to and seemed trustworthy, my husband and I had to pry every bit of information out of R.C. I asked several times for specific papers before closing, so I could review them, but was always told not to worry about costs because they were going to be attached to the back of the loan.

At the end of the day, despite asking repeatedly, we never received any of our costs in advance. It wasn’t until our closing—which R.C. did not attend–that I finally saw the true costs associated with the loan.

When we looked into refinancing—this time in 2005–we asked Countrywide. how much we could borrow, to which they replied, “How much to you want?” (apparently, a credit rating of 690 along with a solid income translated into the feeling that we could truly ask for any amount and get it). . At the time, we did not give them a figure but were really surprised when our appraisal came back showing that our home was worth a whopping $411,000. From our perspective, there was no way that amount was correct. At best, our home at that time was worth somewhere in the range of $315,000 to $325,000 (based on the sale prices of comparable homes in our immediate area). Again, we did not know any of this until the time of closing.

At our closing, we learned that we had another secondary equity loan on the property for $60,000. I was not happy and called our loan officer, R.C., again at the closing.

I asked to have the entire amount rolled into one loan and he made excuses about why they had to structure it this way to get the loan through. How could that be with a high credit rating, I wondered In addition, R.C. assured us that we could always consolidate the loans together after closing if we would like.

Another errant item I noticed at the closing was that Countrywide was trying to charge my husband and I for homeowner’s insurance, which I already had and had sent proof of to the company. If I had not caught it, we were sure to be paying for it.

By the time 16 months had gone by, the interest on the home equity loan jumped from 8.25% to 11%, often jumping as much as .25% in a month’s time for several months in a row As you can imagine, we just could not afford the payments on any longer. I tried to refinance again, but of course, our credit score had lowered as a result of struggling to make payments. Like many other people, we were told it wasn’t possible to refinance because our house wasn’t worth as much now. In other words, our house was now upside down in its value.

Countrywide posts everywhere–on all their paperwork and strategically throughout their website–that they can help if you are struggling with payments and that they have “counselors” you can talk to. They even sent us letters to that effect. My husband and I called many times to try to work things out with them and they just demanded money and made harassing threats. Countrywide representatives often called us six or more times a day demanding payment, and even went so far as to harass us at work. They even told my secretary of my situation and harassed her!

During our time of trying to make the payments, I was often driven to tears and hysterics by Countrywide’s harassing phone calls, threats and no help whatsoever from their customer service department. It was just awful! They didn’t give us any alternatives; just threats if we did not make the payments. We were told we would face criminal charges, be tossed out on the street, lose everything we have, and be marked as debtors forever on our credit reports and more. They humiliated us at every chance they could and treated us like dirt. I cannot begin tell you the stress it created at an already stressful time.

~ Jean and Steven Sample

When you stop to consider the lack of information given to some borrowers and the tactics used by some loan officers to “get the loan done,” it is not all that difficult to see why there are so many problems with loans in the market today. The refinancing party ultimately comes to an end, leaving the borrower to pick up the shattered pieces.

Adding to its recent rash of disappointments, Countrywide Financial is back in the news… this time for a security breach that put the confidential information of approximately 19,000 customers at risk.

Despite the fact that it publicly states that “…the confidentiality and security of our customers’, both current and potential, personal information is a priority for Countrywide and its family of companies,” one of the company’s own senior financial analysts–36-year-old Rene L. Rebollo Jr.–was arrested this morning on charges of illegally accessing company computers containing personal identification information of Countrywide Home Loan customers, and the illegal sale of the data. A second man charged in the case–25-year-old Wahid Siddiqi–was also arrested today by FBI agents on suspicion of purchaing the stolen data.

Rene Rebollo is charged with exceeding authorized access to the computer of a financial institution, a charge that carries a statutory maximum penalty of five years in federal prison. Siddiqi is charged with fraud and related activity in connection with access devices, a crime that carries a statutory maximum penalty of 15 years in prison.

According to a criminal complaint filed last night, the FBI, as well as investigators with Countrywide Financial, discovered a security breach at the company and initiated a joint investigation. The complaint alleges that Rene Rebollo was employed as a senior financial analyst for Countrywide Home Loan’s subprime mortgage division, Full Spectrum Lending in Pasadena, Calif. In his position, Rebollo had access to Countrywide computer databases, many of which contained sensitive information of Countrywide clients. Countrywide terminated Rebollo’s employment just days ago.

According to the complaint, Rebollo was interviewed by FBI agents last month and acknowledged that he was responsible for giving out account information belonging to Countrywide customers to third parties over the course of two years.

Rebollo said he obtained the information from Countrywide computers at his workspace and saved the reports to personally owned flash drives, according to the complaint. After he saved the Countrywide Home Loan data on the flash drives, Rebollo left the Countrywide Home Loan premises with the intent to sell the data.

Rebollo opened a personal bank account specifically for the purpose of depositing and holding the illegal proceeds of the Countrywide data sales, and he estimated that he profited approximately $50,000 to $70,000 from the sale of the Countrywide-owned data, according to the complaint.

Rebollo was requested by other individuals to obtain specific types of data from Countrywide, and he was able to provide the information because of his access to many of Countrywide’s databases that contained information about clients from around the United States, according to the complaint.

Wahid Siddiqi was recorded by a confidential witness working for the FBI when he placed an order for personal profiles at a negotiated price, according to the complaint. Siddiqi subsequently met the confidential witness and delivered the data, in exchange for cash. Copies of the discs were provided to Countrywide investigators for verification and authentication. Countrywide investigators are currently analyzing evidence to determine if any of their customers’ identities may have been compromised so that they can be formally notified and assisted in the immediate future.

As a United States Senator, I would never ask or expect to be treated differently than anyone else refinancing their home. This suggestion is outrageous and contrary to my entire career in public service.

When my wife and I refinanced our loans in 2003, we did not seek or expect any favorable treatment. Just like millions of other Americans, we shopped around and received competitive rates.

~ U.S. Senator Christopher Dodd

What you just read is a statement issued last Friday by U.S. Senator Christopher Dodd (D-CT), who according to Portfolio.com’s Daniel Golden, is one of two members of Congress that we now know received loans from Countrywide Financial through a “little-known program that waived points, lender fees, and company borrowing rules for prominent people.”

From Portfolio.com’s Daniel Golden:

Countrywide VIPs: In the Senate and Beyond

Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. Shalala, who received two loans in 2002, had by then left the Clinton administration for her current position as president of the University of Miami. She is scheduled to receive a Presidential Medal of Freedom on June 19.

Holbrooke, whose stint as U.N. ambassador ended in 2001, was also working in the private sector when he and his family received V.I.P. loans. He was an adviser to Hillary Clinton’s presidential campaign.

James Johnson, who had been advising presidential candidate Barack Obama on the selection of a running mate, resigned from the Obama campaign Wednesday after the Wall Street Journal reported that he received Countrywide loans at below-market rates.

Most of the officials belonged to a group of V.I.P. loan recipients known in company documents and emails as “F.O.A.’s”—Friends of Angelo, a reference to Countrywide chief executive Angelo Mozilo. While the V.I.P. program also serviced friends and contacts of other Countrywide executives, the F.O.A.’s made up the biggest subset.

According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.

Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the “Friends of Angelo” discount, and that Mozilo had personally priced their loans.

The V.I.P. loans to public officials in a position to advance Countrywide’s interests raise legal and ethical questions. Countrywide’s ethics code bars directors, officers and employees from “improperly influencing the decisions of government employees or contractors by offering or promising to give money, gifts, loans, rewards, favors, or anything else of value.” Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.

Why is it that the people who seem to need extra help the least often receive it the most? Here’s more from today’s issue of The Wall Street Journal:

The Countrywide Financial sweetheart loan scandal continues to grow, spreading to Senators and other Beltway potentates. We are about to find out if Congress’s passion for investigating business ethics extends to conflicts of interest and cash that involve fellow Members.

Take Senator Kent Conrad, the North Dakota Democrat whose office issued a Friday statement saying that “I never met Angelo Mozilo.” What he did not say then but admitted under later questioning by a Journal reporter is that, although he may not have had a face-to-face meeting with the Countrywide CEO, Mr. Conrad had called Mr. Mozilo and asked for a loan. The result was a discounted loan on his million-dollar beach house and a separate commercial loan of a type that residential lender Countrywide did not even offer to other customers, regardless of the rate.

So after calling the CEO of a company with various matters before the Senate, asking for a loan and then receiving at least two sweetheart deals, Mr. Conrad now says: “I did not think for one moment – and no one ever suggested to me – that I was getting preferential treatment.” Lawyers will immediately wonder if this isn’t a version of the “ostrich defense,” which judges describe during jury instruction as willful blindness or deliberate ignorance. For what other reason, besides preferential treatment, would one call the CEO of the mortgage company? Does Mr. Conrad call August Busch IV when he wants to buy a six-pack?

Almost as breathtaking is Senator Conrad’s attempt to use a charitable contribution for the estimated amount of any mortgage savings – $10,500 – to make the issue go away. So while the Senator says he did nothing wrong, now that his nonmistake has been discovered he’ll nonetheless give away the nonspecial treatment cash. There is ample evidence here to warrant an investigation, including subpoenas for relevant documents.

The same goes for Senator Christopher Dodd (D., Conn.), who chairs the very Banking Committee responsible for drafting the laws that govern Countrywide’s market.

You can rest assured that Flipping Frenzy will cover this story in further detail in the weeks and months to come. For now, feel free to leave a comment or two of you own. Do you think politicians deserve breaks like the ones Senators Christopher Dodd and Kent Conrad received?

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

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

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

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

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

Are you kidding me?

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

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

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

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

A federal judge in Philadelphia, Pennsylvania, has thrown out a lawsuit against lenders who supplied funds to a mortgage broker who previously pled guilty to charges of mortgage fraud, finding that lenders are not obliged to monitor mortgage broker actions. The decision is a major setback for 842 victims of Wesley A. Snyder’s company, Personal Financial Management, who could have used the strategy to recover some of their losses, had it succeeded. The victims are said to have approximately $30 million in the scam.

The claim rejected by U.S. District Judge James Giles started in the fall of 2007, when a Fleetwood, Pennsylvania, couple–Douglas and Andrea Jones–filed a lawsuit, hoping to have it certified as a class action suit. According to paperwork filed with the court, defendants in the complaint included:

• ABN AMRO Mortgage Group, Inc.
• Chase Home Mortgage Corporation
• Citimortgage, Inc.
• Citicorp Home Mortgage Services, Inc.
• Countrywide Home Loans, Inc.
• Fifth Third Mortgage Company
• Florida Capital Bank Mortgages
• GMAC Mortgage Corporation
• GMAC Mortgage Asset Management, Inc.
• GMAC Mortgage Group, Inc.
• HSBC Mortgage Corporation (USA)
• Indymac Financial Services Corporation
• Moorequity, Inc.
• National City Mortgage, Inc.
• nBank, N.A.
• Provident Funding Group, Inc.
• Saxon Home Mortgage
• Saxon Mortgage, Inc.
• Sovereign Bank
• SunTrust Mortgage, Inc.
• U.S. Bank, N.A.
• Wachovia Mortgage Corporation
• Washington Mutual Home Loans, Inc.
• Wells Fargo
• Home Mortgage, Inc.
• John Doe Mortgage Companies

In their suit, Douglas and Andrea Jones alleged that several Pennsylvania companies, owned or controlled by Wesley Snyder, offered them Equity Slide Down Mortgages as part of what they say was a mortgage servicing Ponzi scheme. The Joneses said Snyder failed to monitor and supervise his companies, which did not credit them properly for payments and pre-payments of interest and principal on their mortgages. They further alleged that, following the bankruptcy of Snyder’s companies, the defendants in the case–the companies listed above–failed to notify them properly that they had taken over as servicing agents on the mortgage loans and demanded payments from them in amounts substantially higher than owed on the loans serviced by Snyder’s companies. The Joneses also claimed that each defendant was guilty of having committed numerous RESPA violations.

Specifically,the Joneses alleged that they applied for and closed on two separate Equity Slide Down mortgages through Snyder’s companies–one for each of their two properties–in 2002 and 2005, respectively. They alleged that at all times after closing they remitted their monthly mortgage payments to Snyder’s company and that they were current on all payments owed and had pre-paid a large portion of the principal balance by way of a large principal reduction payment made soon after closing.

They further alleged that in September 2007, after the bankruptcy filing of the Snyder’s company, they learned for the first time that SunTrust and Countrywide claimed to hold their respective mortgages and notes. According to the Joneses, SunTrust and Countrywide demanded payment for amounts that were duplicative and excessive and that failed to credit properly the payments and pre-payments they had made to the Snyder. The Joneses say that the Snyder’s companies were the “servicing agents” of each Defendant, as defined by the Real Estate Settlement Procedures Act (RESPA), and that Snyder’s companies were otherwise the Defendants’ agents under Pennsylvania agency law.

More specifically, the Joneses alleged that:

1. Each defendant employed one or more of the Snyder’s companies to originate, close, and service all the mortgage loans at issue.
2. Each Defendant knew the Joneses were making all mortgage payments to the Snyder Entities.
3. Each Defendant knew it was sending all mortgage statements and federal tax forms to Snyder rather than to the Joneses.

In dismissing the suit, U.S. District Judge Giles said the Joneses’ recollections were trumped by documents they signed stating payments would be made to mortgage bank ABN Amro Mortgage Group, meaning, Snyder was not ABN’s agent and ABN had no duty to oversee him.

We learned some interesting things today about the FBI’s probe into real estate and mortgage fraud at some of Wall Street’s top financial institutions. According to FBI Director Robert S. Mueller, III’s testimony before the U.S. Senate Committee on Appropriations, Subcommittee on Commerce, Justice, Science, and Related Agencies, the Bureau’s investigation of real estate fraud in the mortgage industry now encompasses 19 companies, up from 17 just one month ago. In Mueller’s own words:

• “We’ve had a tremendous surge in cases related to the subprime mortgage debacle. We currently have almost 1,300 cases that have grown exponentially over the last several years and we expect them to grow even further.”
• “We have also 19 cases involving institutions themselves where mortgage fraud may have contributed to misstatements and the like.”.

Mueller, who was testifying on Capital Hill in defense of the FBI’s budget request for 2009, also said that when the Bureau’s budget request was originally drafted, the subprime mortgage mess had not yet “grown to the point where we could see the extent of the surge,” and that he was not certain at this point when we can expect to see the extent of the surge.

Additional information, from Reuters:

Bureau officials declined to name any additional companies targeted in the probe. “We’ve always said it was a fluid number,” FBI spokesman Stephen Kodak said. “It could change at any time.” He said the bureau has publicly acknowledged only one company as involved — Doral Financial Corp (DRL.N: Quote, Profile, Research). A former Doral treasurer was indicted for investment fraud last month. He denied the allegations and the company declined to comment.

The largest U.S. mortgage lender, Countrywide (CFC.N: Quote, Profile, Research), also is under FBI investigation, authorities have said, although the FBI has declined to comment and Countrywide said it was unaware of any investigation. When the FBI disclosed its industry investigation, major investment banks Goldman Sachs (GS.N: Quote, Profile, Research), Morgan Stanley (MS.N: Quote, Profile, Research) and Bear Stearns Cos (BSC.N: Quote, Profile, Research) each said the government had asked them for information, but there was no confirmation of any FBI role. Beazer Homes (BZH.N: Quote, Profile, Research) said last year it had received a federal grand jury subpoena related to its mortgage business.

Today’s New York Times features a lengthy article (more than 3,000 words) asserting that as the number of foreclosures grows, a small group of law firms and default servicing companies, who represent mortgage lenders, have been raking in mounting profits. These firms, according to the Times, assess legal fees and a host of other charges, calculate what borrowers’ owe and draw up the documents required to remove them from their homes. The only problem is, in a growing number of cases, the firms involved have not been following the the law.

In many cases, paralegals and “nonlawyer employees” do all the work, which only increases the chance of mistakes being made, and that’s just the tip of the iceberg, according to The New York Times’ investigation.

Of particular interest to FlippingFrenzy.com readers (courtesy of The New York Times)…

1. Law firms, paid by the number of motions filed in foreclosure cases, have sometimes issued a flurry of claims without regard for the requirements of bankruptcy law, several judges say.
2. Court documents say that some of the largest firms in the industry have repeatedly submitted erroneous affidavits when moving to seize homes and levied improper fees that make it harder for homeowners to get back on track with payments. Consumer lawyers call these operations “foreclosure mills.”
3. John and Robin Atchley of Waleska, Ga., have experienced dubious foreclosure practices at first hand. Twice during a four-month period in 2006, the Atchleys were almost forced from their home when Countrywide Home Loans, part of Countrywide Financial, and the law firm representing it said they were delinquent on their mortgage. Countrywide’s lawyers withdrew their motions to seize the Atchleys’ home only after the couple proved them wrong in court.
4. Joel B. Rosenthal, a United States bankruptcy judge in the Western District of Massachusetts, wrote in a case last year involving Wells Fargo Bank that rising foreclosures were resulting in greater numbers of lenders that “in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system.“
5. Last month, almost 225,000 properties in the U.S. were in some stage of foreclosure, up nearly 60 percent from the period a year earlier.
6. Fidelity National Default Solutions, a unit of Fidelity National Information Services of Jacksonville, Fla., is one of the biggest foreclosure service companies. It assists 19 of the top 25 residential mortgage servicers and 14 of the top 25 subprime loan servicers. Citing “accelerating demand” for foreclosure services last year, Fidelity generated operating income of $443 million in its lender processing unit, a 13.3% increase over 2006. By contrast, the increase from 2005 to 2006 was just 1 percent.
7. A recent analysis of 1,700-plus foreclosures across the country by Katherine M. Porter, associate professor of law at the University of Iowa, showed that questionable fees were added to borrowers’ bills in almost half the loans.
8. A generation ago, home foreclosures were a local business, lawyers say. If a borrower got into trouble, the lender who made the loan was often a nearby bank that held on to the mortgage. That bank would hire a local lawyer to try to work with the borrower; foreclosure proceedings were a last resort. Now foreclosures are farmed out to third-party processors who hire local counsel to litigate. Lenders negotiate flat-fee arrangements to try to keep legal bills down.
9. The September 2006 issue of The Summit, an in-house promotional publication of Fidelity National Foreclosure Solutions, another unit of Fidelity, trumpeted the efficiency of its 18-member “document execution team.” Set up “like a production line,” the publication said, the team executes 1,000 documents a day, on average.
10. The Texas law firm of Barrett Burke has come under intense scrutiny by bankruptcy judges. Overseeing a case last year involving James Patrick Allen, a homeowner in Victoria, TX, a judge examined the firm’s conduct in eight other foreclosure cases and found problems in all of them. In five of the matters, documents show, the firm used inaccurate information about defaults or failed to attach proper documentation when it moved to seize borrowers’ homes. The judge imposed $75,000 in sanctions against Barrett Burke for a pattern of errors in the Allen case.

Just yesterday, Countrywide Financial Corp. announced that it was partnering with the community advocate group, ACORN (Association of Community Organizations for Reform Now) to expand relief for its borrowers who are facing foreclosure. Today, the Bush administration followed up with its own foreclosure relief expansion plan — “Project Lifeline” — giving distressed homeowners an additional 30 days to work out more affordable payment options with their lenders.

The new program is designed to help all homeowners who are having trouble making their monthly mortgage payments, instead of restricting assistance to those with high-interest, subprime loans. Project Lifeline was developed through the collaborative efforts of six of the largest lending institutions in the United States, which collectively service nearly half the mortgages in the U.S. The banks that have agreed to participate in the program so far are:

• Citigroup
• Countrywide
• Bank of America
• JPMorgan Chase
• Washington Mutual
• Wells Fargo

According to this new program, lenders will contact homeowners who are more than 90 days delinquent in their mortgage payments and offer them the option of delaying the foreclosure for 30 days while they explore options for making the mortgage more affordable.

Who does not qualify?

• Homeowners already in foreclosure.
• Those who have a foreclosure date within the next 30 days.
• Investors who took out the mortgage loan to purchase an investment property or vacation home.

Both of these expanded relief programs are steps in the right direction, both for homeowners and for neighborhoods and communities. Hopefully, more mortgage lenders will follow suit to cover 100% of those who are in jeopardy of losing their homes and their equity as a result of foreclosure. It is only right that the lenders who contributed to creating the current crises do their part to fix it.

Some mortgage fraud cases will not be criminally prosecuted!: Amid all the anguish arising from the swelling volume of home foreclosures in and around Stockton, California, there has been much talk about real estate fraud. But most of the complaints cannot be criminally prosecuted, representatives of the San Joaquin County Office of the District Attorney said yesterday.

Foreclosure vultures prey on Portland, Oregon, homeowners: As national foreclosure rates hit their highest levels ever, people calling themselves “foreclosure consultants,” are filling Craigslist, billboards and mailers with offers to “save your home.” Detective Liz Cruthers, who investigates white-collar crimes for the Portland, Oregon, Police Bureau, says she’s spending much of her time learning the intricacies of “mortgage rescue fraud” and chasing down the bad guys.

Utah seeks stiffer penalties for real estate fraud: A Utah legislative committee is recommending the passage of a bill aimed at increasing criminal and civil penalties against people involved in mortgage fraud. The Senate Business and Labor Standing Committee on Tuesday unanimously approved SB134 for further consideration by the state Legislature.

FBI targets mortgage fraud in Hawaii: The FBI has opened multiple mortgage fraud investigations in Hawai’i as a result of the fallout from the nation’s subprime mortgage crisis, the bureau’s director said yesterday. FBI Director Robert S. Mueller III, speaking to reporters on a stopover following a trip to Asia, confirmed the subprime mortgage mess has reached Hawai’i.

Countrywide accused of mortgage fraud: Already burned in the subprime mortgage meltdown, lending giant Countrywide Financial Corp. is now under investigation in Florida for possible unfair and deceptive trade practices, state officials said Thursday. Officials say they have received more than 150 formal complaints about Countrywide since setting up a mortgage fraud hotline last year.

Arrest made in Erie, Pennsylvania, real estate fraud case: A key figure in an ongoing federal investigation into suspected mortgage fraud in the city of Erie, Pennsylvania, will plead guilty to fraud and money-laundering charges. The U.S. Attorney’s Office in Erie on Thursday filed criminal charges against Frank Kartesz II. Kartesz, 39, is accused of one count each of mail fraud and criminal conspiracy to commit mail fraud, wire fraud and bank fraud. The government alleges he was part of a scheme in which he and others bought run-down houses and sold them at artificially inflated prices. Most of the buyers were low-income people who knew little about the home-buying process.

Illinois mortgage broker in jail for selling credit histories: Homeowners already worried about with a slumping real estate market and tighter restrictions on home loans should look to the case of an Illinois mortgage broker as another cautionary tale.

Georgia real estate appraiser sentenced to prison for mortgage fraud: After submitting fraudulent appraisals on incomplete houses as part of a mortgage fraud scheme, a Georgia real estate appraiser has been sentenced to prison.

The people selling real estate investment opportunities in Cay Clubs Resorts were slick. They didn’t just ensnare unseasoned investors in their web of lies, but they also managed to catch some fairly sophisticated real estate investors who were already experienced.

Recently, I heard from Jamie and Joe Castagna. Jamie was a loan processor at the time, who, as this story unravels, became a licensed mortgage broker. Her husband, Joe, is an electrician who had experience investing in real estate. They knew what they were doing, but as Jamie says, they were so impressed with the Cay Clubs Resorts promises and presentation and the professionalism of their sales reps, that they had few reservations about “drinking the Cay Clubs Cool-Aid.”

Here, Jamie relates Part 1 of the story about how Cay Clubs and Partners turned her and Joe’s lives upside down.

Jamie and Joe met in October of 2002 at Fort Myers Beach. We became good friends and eventually dated. Joe’s main career was an electrician, but in 2001 he started to invest in real estate. Jamie was involved in the real estate industry since high school and at that time was a loan processor. We both had a passion and love for real estate.

We eventually got married in December of 2003 and had our first child May 15, 2004. During this time we started to invest together in different real estate properties and it was a big success. With Joe having gone to real estate training and his previous experience working for a very large real estate education company and Jamie’s background in the financing, we made the perfect team!

As a newly married couple and new parents we had a serious drive to do the best for our family. In January of 2004, Joe secured a job at Findwhat.com and was in the facilities operations department. We continued to search for good real estate deals and worked hard to support our family. In approximately October or November 2004, one of Joe’s co-workers, Colin Brechbill approached him at work one day and said:

“How does a guy like you afford an Escalade on a Findwhat salary?”

Joe proceeded to tell Colin that we invested in real estate. After that point, Colin latched onto Joe like a leach. Joe had brought home different brochures from EarthMark Companies and talked to Jamie about these investments that Colin was offering. Joe said to Jamie, “I know that these investments are a little out of our price range, but please look them over.” Jamie reviewed the brochures and really did not know what to think, due to the limited information provided. The information that was in the package was for property at Mariner’s Club Bahia Beach and Mariner’s Club Key Largo. It included floor plans, aerial views of the waterfront property, an Appreciation Analysis–(showing an average of overall appreciation of 73.22% to 158.54%)–and the history of the company. It seemed like they were established developers with a great amount of success. Jamie figured that it was at least worth taking a look at.

A few weeks later (October 2004), we decided to take a trip up to the Tampa, Florida area to check out the two new developments that Colin Brechbill had told us about. The first place that we visited was at the Mariner’s Club Bahia Beach in Ruskin, Florida. This was a pre-construction opportunity which required 10 to 20% down as a deposit. You then had to close once the construction was complete. The property was shown to us by Jodi Zartman, and she even gave us a coupon to treat us to lunch at the beachfront restaurant that was located there.

After leaving Bahia Beach, we went over to the Clearwater property located in the Grand Venezia. We were told that this was a condo conversion, originally built by the same company as the high end Bellagio Casino/Hotel located in Las Vegas. Colin Brechbill steered us more in the direction to purchase at the Clearwater Cay Club, due to the fact that Dave Clark was splitting from EarthMark and was going to be running Cay Clubs. He also sold us on the fact that we would be getting a 15% leaseback check at the time of closing to pay our mortgage payment over the next 24 months while the amenities were being built. The property at Clearwater was a beautiful condominium complex, and with the added amenities we only saw the upside potential.

After many long talks, looking up information on EarthMark and SunVest (Cay Club’s parent company), and doing our due diligence, we decided based on the information provided and history of the companies’ success we would put down a $5,000 reservation deposit.

We had decided to purchase Unit #1130, even though we had never stepped foot inside the condo. Based on us looking at the outside and imagining what the type of view we were paying for, we trusted that we were getting a great deal. The reason why we could not go inside is because it was currently occupied by tenants and they did not want us to disturb them.

During the next several months we kept reviewing the paperwork that had been given to us showing the professional artist renderings and plans for our future condo. Jamie had also been working hard contacting the “preferred lenders” on the list given by Colin Brechbill. On Thursday, October 28, 2004 Colin emailed Joe some answers to questions that we had and everything sounded good. We first talked to John Garafola, a home loan consultant for Countywide Home Loans, and he told us that he was purchasing a unit in Clearwater too. He was very excited and said that we were getting a great deal. He proceeded to pull Joe’s credit and pre-qualified us for a loan in the amount of $550,000 on November 1, 2004. We then just sat back and waited for the green light to move forward with getting a fully executed sales contract.

During this time, we were so excited about our new investment that we decided to hold a meeting at our home and allow Colin Brechbill to come over and do a presentation on the property and Cay Clubs. We invited our friends, family members, and a Realtor that we knew. Colin arrived late dressed in a suit and said that he had just flew in from Las Vegas (he seemed like a pretty busy guy with the ultimate real estate investment). He delivered his Power Point presentation on our back lanai and distributed marketing materials and his contact information.

Towards the end of November 2004, we were waiting to get our sales contract finalized. Jamie was in contact with Kim Miller in making sure that the contract was written up correctly, as the price had changed from $400 per sq. ft to $350 per sq. ft. (Now we really thought that we were getting a deal!) But there was a discrepancy in the price, as I calculated the price per sq. ft dropped by $50/sq. ft x 1140 sq. ft. = $57,000 difference. So in an email I broke down the numbers for Kim Miller, showing that $350.00/ sq. ft. x 1140 sq. ft. = $399,000 plus $61,600 View Premium, less their initial discount on the condo being $17,700 which totaled $442,900. Needless to say they did not give us the discount, and we purchased the property for $459,900 plus $14,000 towards closing costs which totaled $473,900, final sales price.

They did encourage you to roll in your closing costs and membership fee into the purchase price. (Looking at the bigger picture now, they were doing this to increase the sales prices and to make the comps look better.) The contract that was sent to me was not very professionally prepared, as I would assume it would be. There were blanks left everywhere in the contract. I requested these blanks to be filled in prior to executing any agreement. They did as I requested, so I signed it, and Fed Ex’d it back to the main office in Clearwater with the remainder of our deposit, $43,142.00. In addition to the sales contract, there was an Agreement to Lease with CC 701, LLC. This lease showed that our unit would be rented for 24 months in the amount of $68,985.00.

Now we had a 10% ($48,142.00) NON-refundable deposit sitting with their escrow agent, Stump, Story, Callahan, Dietrich, & Spears, P.A. Again, Jamie was following up with Countrywide to see where we were at with doing the closing. John Garafola at Countrywide kept telling Jamie that we could not close until Clearwater Cay Club/Grand Venezia had received its condo Fannie Mae Approval. There was some problem with the way that the condo docs were written and the developer holding control of the garage units. (Now we believe that it was because they needed somewhere to store the furniture, hotel supplies, and whatever else they needed to run the property as a nightly rental complex.)

After months of waiting, Jamie, a licensed mortgage broker decided to start shopping for a loan ourselves. During this time, Colin Brechbill advised Jamie on whom to use as an appraiser for the property/condo. She was directed to Benchmark Appraisals out of Naples, Florida. It seemed a little odd that they would use an appraiser over 3 hours away from the property, but again trusting Colin (who had befriended us at this time) we proceeded to order an appraisal from Benchmark on 04/14/2005. The appraisal came in at $540,000 ($66,100 above full sales price).

We eventually closed with First Guaranty Mortgage Corp. on May 13, 2005 at the Clearwater clubhouse with Kim Miller, the closing coordinator. We signed all of the mortgage documents, closing documents, and our final 24-month lease agreement with CC 701, LLC. The attorney’s office was going to do a mail-away closing, but since we had never seen our unit we thought it would be best to drive to Clearwater (2.5 hours away from our home). Then we would do the closing and see the unit that we were getting ready to purchase. After consummating the purchase, Kim took us to our unit, which was being renovated at the time.

Then on May 26, 2005 we received a Fed Ex package with our check from CC 701, LLC for $68,985.00. At this time, we thought our responsibility was to just manager the mortgages and pay the bills. We were under the impression that Cay Clubs, “the developer,” was managing the process of fixing up the condos, putting in the world class amenities, and getting a rental pool put together so that when our leaseback ended we would have tenants that wanted to stay in our unit.

Our timeframe on this project was to hold the property 1 year and 1 day (to avoid capital gains) or a maximum of 24 months. During this time, all of the amenities would be complete and we would have a condo with a great amount in equity at a prime location. It was, as Colin always told us “a no brainer.” You did not have to think about the deal because it was so good!

During this time, Jamie wanted to refinance the 2nd mortgage, as we had done a 100% financing, and the rate on the 2nd mortgage was very high. So, in August of 2005 (just 3 months after our original purchase), Jamie ordered an appraisal to be done, by a local Tampa appraiser whom she found in the Yellow Pages. This appraiser was not referred by anyone at Cay Clubs. The appraisal had come in at $627,500. This was unbelievable; we had acquired $153,600 in equity in just three short months. This seemed like a deal of a lifetime.

As a result, we started to talk to more of our friends and family members about this excellent opportunity that we had found with Cay Clubs. None of our family members were really into real estate investing, but they had seen our history and trusted our advice. So by the end of 2005, Jamie’s mom and step dad had closed on a unit in Clearwater, Joe’s brother and sister-in-law had closed on a unit in Clearwater, Jamie’s mom’s best friend closed on a unit, friends from our church closed on a unit, and another friend closed. We were so sure of this deal.

In September 2005, Colin Brechbill again was talking to Joe about the next few projects that Cay Clubs would be rolling out of their portfolio. Colin had graciously set up a meeting for us to meet the #3 Block Buyer, Mr. Ricky Stokes. Ricky met Joe and Jamie at Page Airport in Fort Myers, Florida on September 7, 2005 to fly us on his private plane down to Islamorada to check out their new pre-construction project.

On the way in the airplane down to the Florida Keys, Ricky proceeded to tell us that he was a commercial airline pilot, CPA, and investor just like us. He also made it a point to tell us how he attends McGregor Baptist Church, sings in the choir, and is an auto dealer and gives all of the money that he makes to charity. So he painted a very nice picture of himself. We felt like we were dealing with an honest Christian man. So, after the trip down to the Keys we had strong reservations about putting a deposit down on the property.

The property was an old strip mall that still had commercial rental tenants, who were waiting for their lease to end, and the timeframe seemed too long. Since Ricky did not sell us on the Islamorada property, he started talking about what a good deal the Las Vegas property was. It offered all of the same things as the Clearwater property that we had already invested in, 15% leaseback check, $25,000 worth of furniture, converting the property from a three-star complex to a five-star complex, the agreement with the Rio Casino and Hotel for the tram and overflow guest, etc. He sold us, and we put a $15,000 deposit down that day, not even knowing what unit we were buying. He created urgency to get into the position before it filled up. We took the bait and were into another Cay Club property.

At this point, we were drinking Cay Club Cool-Aid. They had us so convinced that we had found the best deal in real estate! Stay tuned to see how this great deal turned upside down!

Jamie is currently busy composing Part 2 of the story and hopes to have it completed by the end of the week.

I would like to thank both Jamie and Joe for having the courage to share their story and warn other prospective investors about Cay Clubs Resorts and similar operations across the country that are doing their utmost to scam honest people out of the hard-earned cash.

[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 does not necessarily reflect the views or opinions of the management of FlippingFrenzy.com. You can read Larry's thoughts here on FlippingFrenzy.com most Saturdays or Sundays.]

There has been a lot of talk, news and rumors lately about the state of the mortgage industry. Some of what is being said is effectively “bashing” the industry and in particular “mortgage brokers” in the subprime market. I think it is time to look at the realities and ramifications of what is happening.

To understand the subprime industry, which I prefer to refer to as non-conforming loans, we first need to examine the difference between conforming and non-conforming loans:

• Conforming loans adhere to guidelines set by Fannie Mae and Freddie Mac. They typically require a larger down payment and are offered to borrowers who have good credit histories, solid income, reasonable debt-to-income ratios, and a couple months worth of payments in savings.
• Non-conforming loans do not adhere to the guidelines set by Fannie Mae and Freddie Mac. They are designed to allow borrowers who are at a greater risk of defaulting on a loan to borrow money to purchase a home. Borrowers who take out non-conforming loans typically pay a premium in the form of increased interest and points.

The federal government is somewhat responsible for creating a market for non-conforming loans. Its purpose was to make it more affordable for lower income families to purchase homes. After all, homeownership is one of the primary forces behind a healthy economy: The government spurred the creation of the non-conforming mortgage loan market through the following two actions:

• Subprime was actually created back when the GI Bill of Rights was created, which resulted in the VA loan at 100% financing. While VA loans are not considered subprime, any time you have 100% financing, it falls outside of the limits of conforming loans.
• Next came FHA in the 1950’s—an effort by the government to help low-income and not so credit worthy borrowers who had little or no cash available to buy homes. It stretched the debt-to-income ratios, lowered cash-down requirements, allowed less then perfect credit, and eased qualifying requirements.

The dreaded “Neg Am” loan (negative amortization loan) was created by FHA back in the early 1980’s when we had double-digit interest rates. They created the 7-1/2 percent Neg Am adjustable with no caps.

Around 1992, Congress asked the banks to come up with alternative mortgage programs to allow once again more low income people and minorities to own homes. They did so by offering incentives to the banks as well as some penalties. The banks responded, but they could not finance the programs through their banking operations, so they set up subsidiary companies to offer these loans. One of the early subprime lenders was Ford Motor Credit along with Chase and others. In no time at all, I witnessed literally hundreds of new companies/lenders emerge from banks around the country that I had never even heard of.

At that time, these programs were truly subprime; some had interest rates up to 16 percent for those with truly bad credit. These loans were called B/C loans. You might think that B/C is an acronym for Bad Credit, but B/C really referred to the credit grade. Conforming loans generally carry a rating of “A,” while non-conforming loans can carry ratings of B, C or D. These non-conforming loans were attractive to investors who could purchase high-risk investments that promised a high rate of return, kind of like junk bonds. Many private mortgage companies began to form to meet the increased demands for securities backed by non-conforming mortgages.

The large banks got in on the action, too. Bear Sterns, for example, markets non-conforming loans under its name as well as subsidiaries such as EMC. Merrill Lynch markets under its name as well as other subsidiaries like First Franklin, their latest acquisition and one of the largest subprime lenders in the country. Countrywide, a major California bank, and HSBC, the world’s third largest bank, market through subsidiaries. Lehman Brothers, JP Morgan Chase, Wachovia, GMAC and a host of other large banks are also involved in the subprime market.

In the midst of the current mortgage meltdown, many of these banks and the mortgage brokers and loan officers who have sold their products are being labeled as “loan sharks.” Don’t be misled. The people involved in the mortgage industry did not conspire to rip off homeowners. The mortgage industry was simply trying to supply people with mortgage loans to meet their needs and supply investors with mortgage-backed securities that were in high demand. The government was trying to encourage homeownership, consumers needed money to purchase homes, and lenders and investors wanted to profit. It was supposed to be good for everyone.

Unfortunately, the media is generating a lot of negative press about the mortgage industry and everyone involved in it. Mortgage brokers and loan officers have been cast as the villains, selling products that placed consumers in jeopardy simply to score some quick cash. The truth is that everyone involved is responsible for what happened, from the consumer on up to the federal government, and now we are all paying the price. Make no mistake, lenders, brokers, loan officers, and everyone else who earns a living on mortgage loans are feeling the pain.

Sure, we have had real abuses in our industry and some real incompetence as the industry grew too fast too quickly, but that occurs in every industry. Every industry, including real estate, has a few bad apples that cast a shadow on the entire group. What I am saying is that the current mortgage meltdown was not caused by a massive conspiracy of mortgage brokers, loan officers or even some lenders. It was caused by a system failure. Failed economic policy capitalized on by our largest financial institutions (Fannie Mae and Freddie Mac included) to increase profits, stock values, salaries, bonuses and commissions. In one word, GREED.

Is the country in a real foreclosure mess? Yes, there are more foreclosures now and will be even more in the future. Is this as disastrous as published? Not necessarily so. Reports are being released that 12% of the market is in this sub prime trouble and that many people are in jeopardy of losing their homes. Is this altogether true? Foreclosures have been happening as far back as the first loan was ever made with the property as collateral. There have always been thousands upon thousands of foreclosures in this country. Even those good credit people that got all those low interest rate conforming bank loans lost homes in foreclosure. The press would have you think that only the sub prime borrowers are losing their homes due to unscrupulous mortgage brokers.

The market ran wild in the last few years and we all made money–the real estate agent, the seller, the contractor, the lumber mills, the appliance manufacturers, the plumbers and plumbing supply industry, the lawn guy, and let’s not forget all of the municipalities whose tax bases have doubled, tripled, and more.

Yes, we are all in for a correction. This happens in the stock markets around the world, but you never see them close down. It happens in the retail markets, but retailing never ends. And now it is happening in our industry but real estate and mortgages will never die and disappear.

We are in a correction period–one that will overall be good for each of us and for our economy. We have lost most of the real estate investors/speculators out there, but many of them never should have been in the game to begin with. In fact, I think most of these investors are the ones that account for the increase in foreclosures. Yet, we still have non-conforming loans, and I do not expect them to go away. 100 percent financing, stated income, high debt to income ratio programs, no doc programs, no money down programs, and other non-conforming mortgage loan products are alive and well. They will simply carry more restrictions going forward.

Here is a list of lenders that have gone out of business or eliminated divisions or departments.

(Don’t misunderstand, not all of the lenders above closed down due to fraud or mismanagement. Many were good viable companies but became victims of the “meltdown” as well. This list is from www.lenderimplode.com)

All of these programs are good if used correctly in the right situation for the right borrower with their full understanding and education. These programs all fill a need, even the 2/28 that is now being touted as the worst mortgage program in the world. It is a second chance mortgage, a temporary mortgage, a starter mortgage, a mortgage that the borrower/buyer should know is only good for them for the 2 years of fixed interest, but, if they abuse their credit, make late mortgage payments, or overspend in other areas during these two years, then the blame is theirs. For those whose jobs are lost or who have major economic and personal upheaval in their lives beyond their control, they would have the same problem with any mortgage. Steps are now being taken by Congress and even by the lenders themselves to help out in these situations. You will see new lower rate financing available, no-interest soft seconds available and more.

There is still a market, people are still buying and selling and refinancing. New buyers are being created each day by virtue of our kids reaching home buying age and, for here in Florida, we are still getting 1000 new people a day moving here, and the baby boomer migration has not even started yet.

Are we (mortgage industry professionals) the bad guys? No we are not. We fueled the economy with the tools made available to us. Without us, most of the sales would not have occurred, and real estate agents throughout the country would not have made money. Whether we work for a bank, a private mortgage broker company, or private lender are here to continue to offer the products made available to us. This, in turn, makes buyers available to the real estate industry and keeps the “circle of life” going in our industry.

We will see some changes in the industry to prevent the mistakes that have occurred over the past few years, but otherwise, business will go on as usual. Real estate in the United States has been and will continue to be one of the best and safest long-term investments in the world.

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On the heels of news from the Mortgage Bankers Associations that the the delinquency rate for mortgage loans now sits at its highest since 1986, President Bush today announced what the White House is spinning as a major initiative to “limit the rise in foreclosures that would have negative consequences for our economy” (said differently, the President’s plan targets the estimated 1.2 million American homeowners who can afford their mortgages at the current rate, but not at the higher interest rate that their adjustable-rate loans are about to reset to).

First up on the President’s plan: “FHA Secure.” A program that gives the FHA greater flexibility to offset refinancing to homeowners — to offer refinancing to homeowners who have good credit histories but cannot afford their current payments. In just three months, according to the President, the FHA has helped more than 35,000 people refinance. And in the coming year, the FHA expects this program to help more than 300,000 families.

Next up: “HOPE NOW Alliance.” in August, President Bush asked members of his Cabinet to work with trade associations, lenders, loan servicers, mortgage counselors and investors (including American Financial Services Association, American Securitization Forum, Assurant, Inc., Bank of America, CCCS Atlanta, Inc., Citigroup Inc., Consumer Bankers Association, Consumer Mortgage Coalition, Countrywide Financial Corporation, Fannie Mae, The Financial Services Roundtable, First Horizon National Corporation, Freddie Mac, GMAC ResCap, Homeownership Preservation Foundation, Housing Partnership Network, The Housing Policy Council, HSBC North America Holdings, Inc., JPMorgan Chase & Co, National City, NeighborWorks America, Mortgage Bankers Association, Option One Mortgage, PMI Mortgage Insurance Co., Securities Industry and Financial Markets Association, State Farm Insurance Companies, SunTrust Mortgage, Inc., Washington Mutual, Inc., Wells Fargo & Company.) on an initiative to help struggling homeowners find a way to refinance. HOPE NOW, according to the President, is an example of government bringing together members of the private sector to voluntarily address a national challenge — without taxpayer subsidies and without government mandates.

According to the President, representatives of the HOPE NOW Alliance plan to help homeowners who will not be able to make the higher payments on their sub-prime loan once the interest rates goes up — but only those who can at least afford the current, starter rate. HOPE NOW members have agreed on a set of industry-wide standards to provide relief to these borrowers in one of three ways:

1. By refinancing an existing loan into a new private mortgage
2. By moving them into an FHA Secure loan
3. Or by freezing their current interest rate for five years

Lenders, President Bush says, are already refinancing and modifying mortgages on a case-by-case basis. With this systematic approach, HOPE NOW says it will be able to help large groups of homeowners all at once. This will bring relief to more homeowners more quickly, says President Bush. The HOPE NOW Alliance estimates there are up to 1.2 million American homeowners who could be eligible for their assistance.

Finally, according to the President, the federal government is taking several regulatory actions to make the mortgage industry more transparent, reliable and fair (sorry, no catchy name for this program). President Bush says later this month, the Federal Reserve intends to announce stronger lending standards that will help protect borrowers. At the same time, HUD and federal banking regulators said to be taking steps to improve disclosure requirements — so that homeowners can be confident they are receiving complete, accurate and understandable information about their mortgages.

As the federal government take these steps, President Bush indicated that the Department of Justice will continue to pursue fraud in the banking and housing industries — so we can help ensure that those who defraud American consumers face justice.

So there you have it. This is how President Bush and members of his Cabinet intend to stop foreclosure-related bleeding in the housing market and save our current economy. While homeowners with good credit scores are going to be able to refinance their loans (with some lenders reportedly ready to waive prepayment penalties), the millions upon millions of Americans with poor credit — regardless of why the have a low credit score — and many of those American’s already facing foreclosure, are most likely going to be bounced to the curb.

While response to the President’s plan is sure to be swift, you yourself may be wondering how all of this impacts you (that is, if you are currently facing foreclosure or rent a property that is facing the same). For more on that, I am going to quote an often reliable source, BusinessWeek:

Can you get your mortgage payments lowered because of the bailout?

It depends. If you’ve got an adjustable-rate mortgage, you may qualify under certain conditions. If you’ve got a standard mortgage with a fixed interest rate, you’re not affected.

Which adjustable-rate mortgage holders are affected?

Only a small group. To qualify, you need to have received your loan sometime between Jan. 1, 2005 and July 31, 2007, and you need to be facing a reset of your interest rate sometime between Jan. 1, 2008 and July 31, 2010. If you’re within this range, you may be eligible to have your interest rate frozen, so you can keep your current, lower rate for five years.

Who qualifies within that range?

The bailout is really designed for homeowners who could run into trouble if their mortgage payments are raised sharply and face the prospect of losing their homes. If you’re well enough off that you can afford the higher mortgage payments after a reset, you won’t qualify. And if you’re in bad enough shape that you can’t handle the current low interest rate, you won’t qualify. For example, if you’ve already fallen behind on your mortgage payments, you’re not eligible for the rate freeze.

Do you need to live in your home to qualify?

Yes. The plan excludes people who don’t live in the homes for which they have mortgages so that speculators can’t benefit.

Why is there going to be a bailout?

Bush, Paulson, and the Administration are concerned about the fallout from the housing slump. If many people fall behind on their mortgages and have to give up their houses, there will be a series of negative repercussions. First, tens of thousands of Americans could be forced to leave their homes. They would lose whatever equity they had. Consumer spending more broadly would likely slow, hurting the economy overall. In addition, home prices could fall even more quickly than they are now. That could hurt consumer confidence well beyond those people directly affected.

Is the bailout going to be enough?

It depends on your definition of enough. The deal will add some stability to the housing market, but it won’t stop all the problems in the troubled sector. The same day Bush unveiled his plan, the Mortgage Bankers Assn. said that foreclosures had reached a record high in the third quarter. The share of mortgages that have entered foreclosure hit 0.78% in the quarter, up from the previous high of 0.65% set in the previous quarter. At the same time, delinquencies for all mortgages rose to 5.59%, from 5.12%, in the second quarter. None of the people who are delinquent or facing foreclosure will be helped by the plan.

Questions, comments, concerns? Please click on the “Comments” link below and let’s get some dialogue started on this one. We have a lot of experts that read and comment on a daily basis, as well as a lot of homeowners in need of help!

I received a press release the other day announcing that The U.S. Conference of Mayors would be holding a special meeting in Detroit tomorrow to address the “growing foreclosure crisis and its impact on American families, property values, neighborhood blight and crime.”

Outstanding, glad to here it… may I attend?

Nope… it’s a closed door meeting for a “select group of mayors” and leading non-profit counseling agencies, mortgage providers, and financial institutions to discuss crisis intervention strategies, loan modification and rescue programs and the maintenance and management of foreclosed properties to mitigate their negative effects on neighborhoods.

How interesting… why are Realtors not invited? (Sorry, I was told when I called; that is just the way it is.)

The press release goes on to say:

During the meeting, mayors will also release a report highlighting the economic ripple impact of the foreclosure crisis on U.S. cities/metros — specifically cities in Arizona, California, Michigan, Nevada and Ohio where the effects of the crisis are most prominent.

So in addition to discussing strategy, The U.S. Conference of Mayors is going to release a report telling us what RealtyTrac tells us in mind-blowing detail each and every quarter… namely, that the foreclosure crisis is worsening and is getting really, really bad in states like Arizona, California, Michigan, Nevada and Ohio? Well, thank God, because the cavalry is about to arrive… The U.S. Conference of Mayors is about to tell us how the bad the problem is, and better yet, how to fix it, boys and girls!

Here is a suggestion for the U.S. Conference of Mayors:

Update your precious Mayors 10-Point Plan: Strong Cities, Strong Families for a Strong America to include something–anything–related to protecting homeowners facing foreclosure.> The fact that your widely publicized and circulated plan contains not one single word related to the mortgage meltdown, foreclosure crisis, and Real Estate and Mortgage Fraud just goes to show how significant out of touch you really are!

How on Earth could these so called “leaders” have developed and released a 10-point legislative agenda on issues impacting cities and families back at the beginning of 2007 and not made any plans whatsoever to address foreclosure, the impact of mortgage payment reset, or Real Estate and Mortgage Fraud? For years now the FBI has been telling us that the fastest-growing white-collar crime in the United States is Real Estate and Mortgage Fraud, yet the much-heralded U.S. Conference of Mayors completely ignored the trend and chose instead to promote the following in its 10-point plan:

1. Energy and Environment Block Grant

2. Federal-Local Partnership on Crime Prevention (violent crime, not white-collar, in case you were wondering)
3. Community Development Block Grants
4. Affordable Housing Fund
5. Public Housing
6. Infrastructure Tax Incentive and Bonds
7. Competitive Workforce
8. Children and Youth (children’s health insurance, and summer and after-school youth programs)
9. Homeland Security
10. Unfunded Mandates/Preemptions

“The fastest-growing white collar crime in the United States.”

I’m not making that up–that statement comes directly from the FBI and has been repeated in 2006 and 2007, and yet the U.S. Conferences of Mayors doesn’t think to include boo about it in its 2007 10-point legislative agenda on issues impacting cities and families. Unreal. Simply jaw-dropping.

Here is another suggestion for The U.S. Conference of Mayors:

Rather than grandstand and issue hollow statements about how bad the problem is and that you’re now on the scene taking care of business, do something tangible:

• Start by doing what California recently did… negotiate with leading loan servicing companies–like Countrywide, GMAC, Litton, and HomEq–to streamline “fast-track” procedures that result in helping keep more sub-prime borrowers in their homes.
• Spur loan servicers to publicly commit to modifying loans in a streamlined and scalable manner.
• Bring Realtors to the table. Do not ignore us–we are a part of this mess too, and if you are sincere about moving forward with an educated base of homeowners, you must involve us.
• Commit to funding public awareness campaigns aimed at educating the masses on their rights, how to avoid foreclosure, and the warning signs associated with Real Estate and Mortgage Fraud.

Yes, this is a rant but an extremely timely and relevant one. When an organization as powerful and representative as The U.S. Conference of Mayors holds a meeting to discuss the growing foreclosure crisis and its impact on our families, property values, and crime, and fails to include Realtors as a part of the discussion, well, they should be called out and told what to do about it!

With California impacted more than any other state by the current mortgage meltdown and foreclosure crisis (seven of the top 16 metropolitan areas with the highest rates of foreclosures in the nation are in California), Governor Arnold Schwarzenegger announced last week that his office has reached an agreement with Countrywide, GMAC, Litton, and HomEq to streamline “fast-track” procedures to help keep more subprime borrowers in their homes. Together, Countrywide, GMAC, Litton, and HomEq service more than 25 percent of issued subprime mortgage loans in California.

With this type of cooperation from loan servicers, thousands of homeowners may be saved from being added to California’s growing list of foreclosures. Governor Schwarzenegger’s efforts appear to have resulted in a common-sense approach that does not involve any government subsidy or bailout.

“Borrowers need to do their part too,” said Governor Schwarzenegger in a prepared statement. “If these lenders are willing to meet more than halfway, it’s important that consumers don’t run when they reach out. It was a two-way street that got us into this mess and it will be a two-way street that gets us out.”

The agreement the Governor’s office negotiated with lenders builds off a proposal put forward by the FDIC (Federal Deposit Insurance Corporation) that encourages lending agencies to keep subprime mortgage borrowers at their initial interest rate if they are living in their home, making timely payments, but can’t afford the loan re-set or jump to a higher rate.

A half million Californians have subprime loans that will jump to higher rates in the next two years. The FDIC’s proposal has been endorsed by the Wall Street Journal and New York Times as well as public and community leaders. California is the first state to spur servicers to publicly commit to modifying loans in a streamlined and scalable manner.

California also announced additional steps the state is taking to help homeowners avoid foreclosure:

• Through a statewide outreach campaign, which will include public service announcements, California will help reinforce the importance for consumers to reach out to their lender if they are at risk of foreclosure.
• Governor Schwarzenegger will also lobby Congress to raise federal loan limits so that more California families can take advantage of secure products, rather than relying on subprime loans.
• The State’s “HOPE Hotline” (1-888-995-HOPE) now provides free mortgage counseling 24 hours a day, seven days a week, and can even be reached online at www.995hope.org.

“Losing your home in a foreclosure is an emotional crash that can take years to recover from, but we don’t have to sit idly by and watch the American dream turn into the American nightmare. We must take steps at both the state and federal level to make sure future mortgages are on more sound economic footing. In the meantime, by working together, we can protect the American dream and our economy without hurting the American taxpayer,” said Governor Schwarzenegger.

Earlier this year, Governor Schwarzenegger signed legislation to increase protections for Californians who own or plan to purchase homes and to expand affordable housing opportunities, and directed his staff to form the Interdepartmental Task Force on Non-Traditional Mortgages. California was one of the first states in the nation to form a task force to examine the alarming developments in the non-traditional mortgage market.

According to the latest data, in the Stockton, Riverside/San Bernardino, Sacramento, Bakersfield, Oakland, Fresno and San Diego metropolitan areas, there is an average rate of approximately one foreclosure filing for every 60 households.

You have been reading about the mortgage meltdown and seeing daily news reports about the record number of foreclosures. Mortgage lenders and dropping like flies. Even large companies such as Countrywide Mortgage are feeling the crunch, having to borrow billions of dollars to keep their doors open. Based on what you have read, heard, and seen in the media, maybe you feel as though you have a pretty good grasp of what is going on and what caused it, but how much do you really know?

To find out how savvy you really are about this mortgage meltdown, take the following single-question quiz:

Why have so many mortgage lenders gone out of business?

1. Homeowners are unable to make their payments.
2. Massive amounts of real estate and mortgage fraud.

If you are among the multitudes of the ill-informed, you probably chose A. And if this were the 1950s, perhaps you would have been correct. Back in the 1950s when banks loaned money directly to people who were unable to repay the debt, the banks took a direct hit to their bottom line. They felt the pain.

In the current system, most banks rely on brokers to originate the mortgage loans. These brokers typically have loan officers who work for them and are in charge of selling loans to consumers, helping the consumers fill out their loan applications, and performing other tasks to expedite the loan process. Loan originators receive a commission for every loan that’s approved, and because they are lending someone else’s money, they take on risk only indirectly.

When someone borrows $300,000 to purchase a home, for example, the broker receives 2 points at closing for a total of $6,000. They then package the loan with other loans and sell it to the market at 104 percent or $312,000. In this case, the originator just “earned” $18,000 off the mortgage loan–the $6,000 commission plus the $12,000 markup.

When bad loans are traced back to mortgage fraud, misdeeds and misrepresentations, originators takes a double hit. They are forced to buy back the bad loans, and the lender cuts off access to future transactions. With huge chunks of money flowing out and little or no money flowing in, the mortgage originator is forced to close up shop. That is what is currently happening and why we are now seeing a mortgage meltdown.

When interest rates were low and housing prices were soaring, mortgage fraud was rampant, but the problem remained hidden because homeowners were awash in equity. Credit was easy to get, and mortgage brokers and loan officers made it even easier. If an applicant couldn’t qualify for a particular loan, the loan officer would simply encourage the applicant to fudge the numbers or would fudge the numbers on the applicant’s behalf. If a home buyer wanted a larger loan to cash out some money at closing, you could always find an applicant to accommodate–inflating the appraisal to make the property appear to be worth more than it really was. Loan officers were tripping over each other to approve risky loans and nab their commissions.

Mortgage Investment Lending Associates (MILA), a subprime wholesale lender that was based in Mountlake Terrace, Washington shut down during the spring of 2007, primarily due to the fact that its loan officers were responsible for huge numbers of fraudulent loans. Several employees who refused to go on the record reported that they passed along proof of fraud committed by at least one of the company’s loan officers. This person made so much money for the company that instead of firing its employee, MILA relocated and promoted the person.

Now that the housing market is in a slump, it’s as though the water has been drained out of the pond, and now we can what is at the bottom… a whole lot of muck.

The following post was written by Carola Von Hoffmannstahl-Solomonoff.

Poor mortgage fraud. It still doesn’t get the big eyeball. What does a white collar crime have to do to get real paparazzi action? Sleep with an A list celeb and become rehab material? OK. If that’s what it takes here goes: according to the FBI, mortgage fraud is hooked up with the same lending practices that pumped the housing bubble–on the way up and on the way down. And fraudsters continue to invent new ways to get high on the spread.

The FBI skinny goes something like this: when the bubble was inflating, the mortgage industry hydroplaned loans over the home plate sans sufficient quality control. Mortgage fraud went along for the ride. By the time the bubble began to deflate, industry players were used to mega profits and didn’t want no stinking housing correction. The last shreds of quality control vanished in efforts to pump up the volume. Mortgage fraud rode that one too, right into foreclosure land. By 2006, one in every 92 households across the mortgaged plain was filing for foreclosure. Many of the souring loans were adjustable rate mortgages (ARMs) carried by subprime borrowers.

Note to those just out of a coma: subprime borrowers typically have poor or insufficient credit histories. Lenders cover subprime risk with high interest rates and servicing fees, and by uploading subprime loans to the secondary market as mortgage backed securities (MBS). During the bubble daze, nonprime mortgages (the mortgage lending tier which includes subprime and its more upscale cuz Alt-A) were massive money makers for lenders and investment marketeers–with some investment firms supplying lines of credit to the same lenders whose MBS they marketed. In the effort to turn everyone, no matter how broke or brain dead, into grist for the mortgage mill, more and more wacky loan products and derivative investment instruments were employed. ARMs, which start out with low interest rates, were promoted as an affordable mortgage product. Borrowers were encouraged to gamble that housing values would continue to soar, allowing them to refinance at better rates or flip before their ARMs exploded. For awhile, the gamble paid off. Then it didn’t. The fallout is being felt on Main Street and Wall Street.

Mortgage fraudsters dug ARMs too. Still do. Less money up front is a major bennie when you have no intention of sticking around for the bill. And fraudsters go with the flow. Foreclosure? Bring it on. Mortgage fraud flourished when ARMs were golden and continues to thrive in the lingering afterglow. Foreclosures free up more cheap properties for illegal flipping (as opposed to the legal kind shown on HGTV) and homeowners who want to get out from under are ripe for exploitation. Foreclosure rescue frauds are the newest twist on the housing bubble hit parade.

Attention parents! Is your teenager hanging with jive talking Realtors, value jacking appraisers, fly by night mortgage brokers, document juggling attorneys, and easy lay lenders? If so, get the kid into rehab. Not the kind used as a beard for home equity stripping refi scams–but a substance abuse facility staffed by caring counselors who know mortgage fraud is an addiction. One found not in only in subprime circles but in Alt-A subdivisions. Folks who lie on mortgage loan docs, or who look the other way when real estate pros do it for them, can’t help themselves. THEY HAVE TO HAVE THAT HOUSE. God isn’t making any more land, any more land, any more land…

That John and Jane Doe’s addiction to what the FBI calls “fraud for property” has caused no and low doc mortgages to be labeled “liars’ loans” is distressing. Still, the most degenerate junkies are real estate industry insiders who indulge their addiction over and over in groups. Committing “fraud for profit” with multiple properties in multiple places. Mainlining mortgages supplied by pusher lenders. Including ones insured by the U.S. Department of Housing and Urban Development. Aka HUD. The enabler of many a mortgage fraud addict. Never never forget that HUD spelled backwards is DUH.

Mortgage fraud addiction takes its toll. Addicts can end up strung out, turning real estate tricks in crack(ed) houses. Soliciting unwilling appraisers. A fate embodied by Aaron R. Dare of Albany, New York. Albany is the state capital. Aaron Dare is the former head of the Urban League of Northeastern New York. In 2001, the League collapsed under a government enhanced Dare development deal turned ethical swamp. By 2006, Dare was copping a plea to federal fraud charges involving several major HUD backed properties. One was Historic Pastures, a multi-family complex covering blocks of inner city Albany. Aaron Dare’s co-conspirator was Berne Watkins, a regional developer and tech entrepreneur from an affluent Albany County suburb. When Watkins was busted his attorney said Watkins was just another victim of big bad Aaron Dare. In July 2007, Watkins pleaded guilty to charges that mirrored Dare’s.

In 1997, Berne/Bernie/Bernard Watkins in the form of his wife and Pastures LLC, bought 43 buildings in Historic Pastures from the Albany Local Development Corporation (ALDC) for $1.04 million. The ALDC is the quasi-public arm of the City of Albany. The ALDC had taken over Pastures in 1991, after a local bank threatened foreclosure. In 2002, Watkins sold 39 buildings in Pastures to Aaron Dare for $4.2 million. The appraisal value was faked, as were the proofs of Dare’s finances which Berne supplied through his companies. The mortgage was by AMI Capital through Fannie Mae’s Delegated Underwriting and Servicing (DUS) program and was insured by HUD. After closing, Dare pulled an EPD. As in–early payment default. A neon sign of mortgage fraud. Foreclosure followed. Apres auction, taxpayers swallowed nearly $2 million in losses on Pastures and the other Berne/Dare HUD properties. Meanwhile, Berne plowed his profits into other real estate ventures.

Aaron Dare kept on going too. Fraudulently flipping 31 subprime properties in and around Albany with the alleged assistance of Albany Police Detective Kenneth Wilcox and unidentified others. Among the “others” were drug dealers allegedly recruited by Wilcox to serve as fake buyers–or “straw buyers.” Officer Wilcox’s actions will remain alleged: he died in a car crash in 2006. Berne Watkins’ current attorney, who has represented a number of law enforcement officers in the Albany area, says Wilcox was “probably one of the most dishonest dirty cops the city has had.”

The feds are taking their time with co-operating witness Aaron Dare: he hasn’t been sentenced and until recently, was out on bond. Dare’s plea deal was set to bring him less than 4 years. But dang if Dare didn’t go and endanger the deal for an alleged hit of his favorite thing. In August, the New York State Police busted Dare on fraud and forgery charges related to recent real estate deals. Plus, Dare was reportedly seen in an Albany inner city nabe, soliciting appraisers to pump up the value of haggard properties.

The mortgage fraud-for-profit addicts of upstate New York tend to be locals with historic connections. The downstate scene can be more exotic. Though still connected. Take the case of United States of America v. Aleksander Lipkin aka Alex aka Shorty aka Melekiy. Twenty two other people follow Lipkin on the indictment issued in January 2007, by the U.S. Attorney for the Southern District of New York State. Three more names were added in July. The full 26 were affiliated with three mortgage brokerages based in Brooklyn: AGA Capital, its successor Lending Universe, and related entity Northside Capital. Aleksander aka Shorty was a mortgage broker. As was Igor Mishelevich aka Ryzhiy and Igor Buzakher aka Jeff. Yup “Jeff.” Galina Zhigun, who was indicted in July, is an AGA owner. Then there’s mystery man Oleg Anokhin (no aka) of Staten Island. Oleg, who has disappeared into the Dostoevskian night, allegedly supplied the capital which floated the mortgage frauds of Igor and Igor and Aleksander and Masha and Lyosha and Marina and Mariya and Faina and so on and so forth. Not to suggest all the indicted are Russian. Callahan, Ciafolo, Acosta, Neustein, Ellison, and Carr also appear on the list.

The AGA indictment sprang from investigations by the FBI, Homeland Security’s Immigration and Customs Enforcement Division (ICE) and the NYPD, and covers frauds allegedly done between 2004 and the end of 2006, the years when nonprime was starting to tank. The indicted include mortgage brokers, bank officers, loan processors, settlement agents, and property appraisers, plus assorted straw buyers and their recruiters/handlers. The AGA crew allegedly perped over 1000 (known) fraudulent mortgage and home equity loans in the five boroughs of New York City, and in Sullivan County in the Catskill region. New Jersey was hit as well. Impacted lenders included nonprime biggie Countrywide Financial, plus BNC Mortgage, Washington Mutual, National City Bank, and the late New Century Financial. (New Century sank under subprime in early 2007.) Many–though not all–of the frauds flowed through lender branch offices in White Plains and Tarrytown in Westchester County.

The alleged game went like this: the AGA crew employed the usual fake appraisals and straw buyers. Proof of income, assets, residence, heartbeat, etc. were forged. When necessary, AGA insiders at banks altered docs. Some buyers only existed on paper–the product of identity theft. Deals typically involved 100 percent financing, via one or more mortgages and/or home equity loans. Properties were secretly controlled by players. The spread between inflated loans and actual sales price was skimmed. AGA professionals collected commissions on crooked transactions. Straw buyers either milked properties for more loans and/or rental income, or defaulted immediately. The AGA crew surfed that wave too. Staging foreclosure rescues by flipping defaulting properties to other straw buyers. Some lenders bought back properties from straw buyers at less than the face amount of the inflated loan. And several individuals named in the federal indictment have been sued by homeowners in South Brooklyn, who say the AGA players tricked them out of their property titles. A neon sign of foreclosure fraud.

During the years when they were allegedly scamming it up, AGA was touting their creative mortgage solutions at professional gatherings and in press releases. In September, 2004, an AGA president appeared before the Flatbush Real Estate Board at the Flatbush Council Building in Brooklyn. Accompanied by a chief investigator from the New York Department of State’s Division of Licensing Services. According to an AGA press release, the man from AGA and the man from the Department of State were there to announce a “Major Breakthrough in Real Estate Buyer Broker Transactions.” In April 2005, AGA issued a press release (Creative Mortgage Puts $3 Million in Owner’s Pocket at Closing) about their special touch with mortgage arrangements. Such as high loan to value, and no doc and low doc loans. Claiming “AGA Capital’s commitment to providing extraordinary results is earning a reputation like no other.”

Like most PR poop, kind of a brag. While the AGA/Lending Universe crew is indeed alleged to have a monster mortgage fraud habit, their reputation is not “like no other.” According to the FBI, New York is among the top 10 states for mortgage fraud. There are plenty of other addicts in the Empire State, each with their own mega monkey. And as ARMs explode all over the place, the rescue rush is on.

Copyright (c) 2007 by Carola Von Hoffmannstahl-Solomonoff. This material may be distributed only subject to the terms and conditions set forth in the Open Publication License, vX.Y or later (the latest version is presently available at http://www.opencontent.org/openpub/).