Approximately 200 Washington homeowners who paid for a service they thought would help save their homes from foreclosure will receive partial refunds under a settlement announced yesterday by the Washington Attorney General’s Office. The homeowners each paid between $1,200.00 and $1,500.oo to Foreclosure Assistance Solutions LLC, of Clearwater, Florida. More than 70% of homeowners who signed up with Foreclosure Assistance Solutions ended up losing their homes anyway. The company went out of business in fall 2007.

From Washington State’s Attorney General, Rob McKenna:

“We believe Foreclosure Assistance Solutions used coercive tactics to pressure consumers into paying for a service they really couldn’t afford and then doing little or nothing to actually help those consumers save their homes,” Attorney General Rob McKenna said. “Today’s settlement puts some money back into the pockets of those who bought into the company’s false promise of hope.”

The Attorney General’s Office accused Foreclosure Assistance Solutions of violating the state’s Consumer Protection Act, Credit Services Organization Act, and Commercial Telephone Solicitation Act. According to the state’s complaint filed with the settlement yesterday, Foreclosure Assistance Solutions sent letters and postcards to consumers whose homes were in foreclosure. Some of the solicitations mimicked official government notices. The messages instructed the consumers to call the company for help.

More from the Attorney General’s Office:

“Foreclosure Assistance Solutions employees delivered a deceptive sales pitch to frighten consumers into believing they needed to act quickly. Homeowners who paid for the service were then presented with a contract that prohibited them from contacting the mortgage lender that initiated the foreclosure for any reason. And for consumers who paid Foreclosure Assistance Solutions with a credit card, the contract prohibited them from trying to dispute the charges by contacting their credit card provider before Foreclosure Assistance Solutions. Consumers who did would not receive a refund.”

Foreclosure Assistance Solutions did not admit to any wrongdoing in the settlement but agreed to pay $78,125 in restitution to Washington consumers, as well as $20,000 in attorneys’ fees. The settlement also includes injunctive provisions limiting how the company does business, should it offer services again in the future, as well as an additional $100,000 in civil penalties for failure to comply with the agreement.

Foreclosure Assistance Solutions will be providing the Attorney General’s Office with contact information for Washington consumers who purchased its services. The state will mail checks to eligible recipients within the next three months. The total restitution will be divided among all eligible recipients; individuals will likely receive $300-$500 each. Anyone who has questions about the settlement can contact the State of Washington Attorney General’s Consumer Resource Center at 1-800-551-4636 between 10 a.m. and 3 p.m. weekdays (Pacific Time).

In related news, the Texas Attorney General’s Office reached a settlement with Foreclosure Assistance Solutions and its operators earlier this month. A court agreed in September 2007 to freeze the defendants’ assets on conjunction with Texas’ investigation, and the company subsequently went out of business.

The Washington Attorney General’s Office introduced legislation this past legislative session to help protect homeowners from foreclosure rescue scams where the “rescuer” agrees to purchase a distressed property then sell or lease it back to the original homeowner. Washington House Bill (HB) 2791 takes effect June 12, 2008. The new law will require that the purchaser prove the homeowner is able to make the payments and provide a written contract with clearly disclosed terms. The new law also gives the homeowner the right to cancel the contract within five (5) business days, and also requires that the original homeowner receive at least 82% of the difference between the property’s fair market value and the underlying mortgage should the home be sold to a third party.

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

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

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

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

In particular:

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

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

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

Florida’s Attorney General today announced a multi-pronged initiative to combat mortgage fraud and rescue foreclosure scams, and the filing of a lawsuit asserting South Florida-based National Foreclosure Management and multiple affiliates defrauded at least 80 homeowners out of approximately $1.7 million in home equity.

Beginning in October 2004, National Foreclosure Management–which now does business as American Home Rescue, Inc.–selected homeowners who had substantial equity in their homes but were in the process of being foreclosed upon. The company would offer to hold the titles to the homes for a year, refinance the debt, and provide cash and credit repair counseling to the homeowner, all while allowing the homeowner to remain in the house. The company claimed it would deed the property back at the end of the year after the foreclosure had been avoided and the homeowner’s credit was repaired.

Once the company had obtained the title to the house, the Attorney General’s lawsuit alleges the company would strip the equity from the homes by refinancing them at inflated prices and by assessing fraudulent fees and costs, leaving little or nothing for the homeowner to recoup. The home would then be sold outright to an investor or a straw buyer who would lease the home back to the homeowner at a rental rate far exceeding the original mortgage payment, virtually ensuring the homeowner’s eventual eviction. According to the lawsuit, the homeowners would end up with neither the titles to the homes nor the equity that rightfully belonged to them.

The lawsuit, which is the first filed by the Attorney General’s Mortgage Fraud Task Force, seeks restitution to the affected homeowners, dissolution of the rescue foreclosure companies, and revocation of the mortgage brokers’ licenses revoked. Florida’s mortgage fraud task force has been in operation since September and is made up of 25 lawyers and investigators in the Attorney General’s Office, stationed in locations throughout the state.

In addition to filing the lawsuit, Florida’s Attorney General today announced the filing of the “Foreclosure Rescue Fraud Prevention Act,” sponsored by Senator Mike Fasano (R–New Port Richey) and Representative Clay Ford (R–Gulf Breeze). The proposed legislation will ensure, among other things, homeowners are properly informed about their rights when they are signing a contract with a foreclosure rescue entity. Specifically, the proposed legislation offers the following key provisions:

1. A five-day right of cancellation period that allows the consumer to cancel the agreement with the foreclosure rescuer.
2. Requirements that foreclosure rescuers include in the contract clear and conspicuous notice to homeowners of this right of cancellation as well as a recommendation that the homeowner contact the lender or mortgage servicer prior to the signing of the agreement and a provision that states the consultant is prohibited from accepting any form of payment until all services are completed.
3. Definitions of such terms as “Equity Purchaser,” “Foreclosure Consultant,” “Foreclosure-related Services,” and “Foreclosure Rescue Transaction.”
4. That all violations of the new Foreclosure Rescue Fraud Prevention Act are defined as an unfair and deceptive trade practices and are subject to the penalties included in Part II of Chapter 501, Florida Statutes.

Parties named in today’s lawsuit include:

• National Foreclosure Management, Inc.
• American Home Rescue, Inc.
• National Property Holding Group, LLC
• The Mortgage Practice, Inc.
• Southeast Capital Mortgage Company
• Barrister Title Services, Inc.
• GMC Land Services of Florida, Inc., doing business as Richmond Abstract, Inc.
• Bernard Williams
• Wyman F. Roberts
• Lakeisha Marion
• Anna Silva
• Albert Nae
• Linda Rubinchik
• Rhona Oliver
• Tracy Needleman
• Gina Rock
• John Sarlo
• Dianna Brown-Flournoy
• Reina Roman

A copy of the lawsuit against National Foreclosure Management is available here.

Mortgage Fraud Surging in Florida: More potential mortgage fraud cases were reported by lenders in Florida in 2007 than in the entire country the previous year, William Stern, a supervisory special agent with the FBI, said today. And Tampa, he said, ranks seventh on the agency’s top 10 list for mortgage fraud, joining another Florida city on the list, Miami, which is No. 4.

Several face charges in Canadian real estate fraud probe, including…: Ready for this one? Hold onto your hat… A 70-year-old Canadian man is among five people charged and police are looking for others in connection with a massive real estate fraud totalling nearly $4 million. Toronto, Canada police laid 135 fraud-related charges this against five people, and Canada-wide warrants have been issued for two more suspects.

Las Vegas escrow officer arrested for mortgage fraud: Sheila Katherine Williams (pictured below), a Las Vegas, Nevada escrow officer, was arrested after fraud investigators say she pocketed more than $500,000 in escrow funds. Authorities say this case is just the tip of the iceberg in what they believe will be a deluge of mortgage fraud cases in the weeks and months ahead, and that this particular arrest is another ripple effect of Nevada’s worsening foreclosure crisis.

Gary, Indiana attorney sentenced for real estate fraud: According to the AP, Gary attorney Willie Harris has been sentenced to four-and-a-half years in prison for his role in a real estate fraud scheme. Harris was convicted in September on fraud and tax evasion charges for skimming $50,000 from the profits of a 2000 real estate deal involving a now-defunct local enterprise association. The Indiana Supreme Court suspended Harris’ law license earlier this month.

Woman receives $3.5 million judgment in mortgage scam case: A Great Neck, New York woman victimized by mortgage fraud when she unknowingly gave away her house has won a $3.5 million judgment against the mortgage broker who scammed her. Priscila Nano, 66, said she was “scared” and on the brink of losing her longtime home to foreclosure in 2004 when she received an advertisement from a company called Foreclosure Options Inc., and called the company’s number. In court papers, Nano’s attorneys described her as “an underemployed, senior citizen and immigrant with a modest command of the English language … desperate to keep her home.”

Maryland expects significant rise in mortgage and foreclosure scams: A dramatic rise in foreclosures and related scams is expected in Maryland in the coming year, prompting that state’s governor and the General Assembly to roll out several initiatives intended to help people keep their homes and avoid mortgage fraud. Governor Martin O’Malley this week proposed a set of emergency regulatory reforms and bills to target predatory lending and mortgage fraud, more efficiently inform homeowners about foreclosures, and create stricter licensing regulations. In addition, there are at least five more foreclosure-related bills that have originated in the state’s legislature this year. Maryland had 6,969 foreclosures in October and November 2007 alone.

16 People Indicted in Austin, Texas Mortgage Fraud Scheme: The United States Attorney for the Western District of Texas announced that a federal grand jury has returned an indictment charging sixteen individuals for their roles in a multi-million dollar mortgage fraud scheme.

Under a new plan announced earlier this week by the State of Missouri, anyone who commits real estate or mortgage fraud against Missouri homebuyers could soon be living in a new home themselves: prison.

Missouri Governor Matt Blunt announced new initiatives to protect his state’s homeowners and strengthen the penalties against anyone who commits real estate or mortgage fraud. He also established a free hotline for Missourians to report fraud and access information to protect themselves against foreclosure.

As we’ve been preaching here on FlippingFrenzy.com since day one in our effort to raise awareness of the problems associated with real estate and moretgage fraud, homeownership is an essential part of the American dream, and for many families, buying a home is the biggest financial investment they will ever make. Missouri’s plan is aimed at helping at-risk homeowners keep their homes by providing new consumer protections and creating stiff penalties for the scammers who commit real estate and mortgage fraud.

Governor Blunt’s proposal includes legislation that will further enhance consumer knowledge, protect against unscrupulous businesses that prey upon at-risk homeowners, and create new punishments for mortgage fraud. In particular, the Governor has proposed:

• Giving the state’s Real Estate Commission and Real Estate Appraisers Commission power to suspend or revoke industry insider’s licenses for mortgage fraud
• Creating the crime of mortgage fraud, a class C felony, punishable by up to seven years in prison
• Enhancing notice requirements for foreclosure by requiring that homeowners at-risk are provided with a clear statement informing them of the hotline so that they may receive more information on how to avoid foreclosure
• Enhancing consumer protection laws to protect Missourians from exploitative foreclosure consultants
• Providing the state’s commissioner of the Division of Finance power to issue cease-and-desist orders to stop real estate and mortgage fraud or exploitative business practices against at-risk Missouri homeowners

Missourians at risk of foreclosure or who suspect they are victims of real estate or mortgage fraud can call a toll-free hotline (1-888-246-7225) to obtain information, materials, and contact information to help avoid foreclosure and report fraud.

• Nightmare on Highbury Court: A dispute over bricks led to bankruptcy, eviction, jail and fractured lives; first of two parts. Life was good for Roland and Marie Dreilich in the summer of 1999. In their mid-30s at the time, they’d already purchased two homes, taking advantage of the booming real estate market of the 1990s to acquire equity and move up the housing ladder.
• Real estate lawyers asleep at the fee switch: Most puzzlingly of all, is the fact that real estate fraud is actually less prevalent today, than it was when Bill 152 was a glint in the McGinty government’s eyes. Over the past two years, lawyers and title insurers have put into place far more stringent controls and fraud has declined accordingly.
• Mortgage meltdown linked to fraud: The desire to make a “quick buck,” along with extremely lax lending practices, are considered to be among the chief reasons for the recent decline in the nationwide mortgage and housing markets, according to a Utah title company executive.
• Grandview man gets one year for mortgage fraud: The second of three defendants in the mortgage fraud scheme involving former Kansas City Councilwoman Saundra McFadden-Weaver was sentenced Thursday to one year in federal prison. Ricky Hamilton, 53, of Grandview, also was ordered by U.S. Chief District Judge Fernando Gaitan of the Western District of Missouri to pay $144,234 in restitution.
• Stock Market & Stocks: Fraud a Major Concern as Economy Worsens: The people who pay the price for Wall Street abuse need to know what to do if they have been victims of Wall Street or mortgage fraud and abuse, what to do to protect themselves so they can live now, sustain and grow for a secure future, and other steps they can take to best prepare for what we believe is the inevitable recession.
• FBI Launches Mortgage Fraud Task Force in the Nation’s Capital: The FBI is launching a mortgage fraud task force in its Washington field office, joining a widening net of state and local investigators digging into the market crisis. Investigators are seeking to uncover evidence of overvalued home appraisals, shoddy lending practices and alleged irregularities in the packaging and sale of groups of loans that were marketed to ordinary investors, state investment funds and big Wall Street banks.
• Foreclosure Fraud: Freddie Mac Warns Borrowers with Video Dramatization on ‘YouTube’: Can a custom made video posted to YouTube keep troubled borrowers from losing their homes to fraud artists? Freddie Mac aims to find out. One of the nation’s largest investors in residential mortgages, Freddie Mac decided to produce an Internet video dramatizing a common foreclosure fraud scheme after a new survey found one in four delinquent borrowers go to the Internet before their bank or lender for information about avoiding foreclosure. Freddie Mac’s anti-fraud video can be found at http://www.youtube.com/AvoidFraud.
• Six face federal indictments in Provo, Utah mortgage fraud scheme: Six people have been indicted on federal charges for an alleged mortgage fraud scheme that inflated the value of high-end homes in an affluent Provo neighborhood. Prosecutors say the six formed a network of mortgage brokers, investors, real estate agents, appraisers, straw buyers and escrow agents to fraudulently obtain loans secured with property worth less than the loans.
• In Modesto (Calif.), Fraud Destroyed The American Dream For Many: The terms of the loans may have been unusual. But for many of the immigrants who signed up for them, they were simply a way to afford the $300,000 and $400,000 new homes along streets with names like Rancho Encantado and a litany of saints.
• Lousy credit? Buy somebody else’s: The Bush administration came up with one fix for some sub-prime borrowers who are in trouble. A San Diego company offers another: Buy a better credit score. With one or more of the “seasoned primary accounts” that TradeLine Solutions Inc. began selling this week, the company’s website says, you can “dramatically increase your credit score” for as little as $1,199.

South Florida has long been a hot spot for real estate and mortgage fraud. From yesterday’s edition of the Palm Beach Post:

Slow housing market speeds up scam

Predatory buyers are borrowing more than what a house is worth, pocketing the difference, then foreclosing.

By JEFF OSTROWSKI
Palm Beach Post Staff Writer

Sunday, October 28, 2007

Even after the South Florida housing market peaked in 2005, Johnson Cuffy knew how to score big profits in real estate. First, the Broward County real estate investor found a Fort Lauderdale house for sale for $245,000. Then, inflated appraisal in hand, he convinced the lender that the home was worth $340,000.

Cuffy, a 29-year-old who works with his father and siblings at a family-run mortgage company, landed a loan for $340,000, paid the seller $245,000 and pocketed the $95,000 difference, state investigators say. Profits secured, Cuffy let the home go into foreclosure.

He was arrested in July after the seller alerted officials to the scheme.

An isolated case? Not by a long shot. Cuffy is one of the few to be caught, but the lucrative scam, known as “cash back at closing,” became rampant in South Florida as the combination of a slowing housing market and easily available mortgages created an opportunity to fleece lenders. No one knows how many times other scammers used this rip-off throughout South Florida, but investigators and real estate experts say the dubious deals have been common in the past two years.

“My phone has been ringing daily with people wanting to report suspicious real estate sales,” said Detective Ted Padich of the Florida Department of Financial Services in West Palm Beach. “This is going on in every neighborhood in Palm Beach County.”

The Mortgage Asset Research Institute of Reston, Va., backs that assertion. Florida has moved to the top of its list of fraud-riddled states, based on lenders’ complaints. Losses from mortgage fraud hit a record $1 billion last year nationwide, according to the FBI, which lists Florida among the hot spots.

The mortgage swindles add a sinister story line to the flood of foreclosure filings that have followed the real estate bust. Although politicians, consumer advocates and the media often portray foreclosure as the inevitable collision of overreaching borrowers and overeager lenders, some defaults are caused by predatory borrowers rather than predatory lenders.

Buyers who see a chance to make a quick buck fuel the fraud. They typically work with appraisers, mortgage brokers and title agents to present phony documents to lenders, investigators say. For mortgage brokers, the paydays are generous: subprime lenders pay hefty fees to brokers who bring them business.

Although nothing is illegal about cash-back-at-closing deals in which all the details are disclosed to lenders, the arrangement veers into fraud when the sale is arranged to trick mortgage companies into lending far more than the house is worth. The sellers typically are little more than innocent bystanders. Desperate to sell in a soft market, they receive strangely generous offers even as the imploding housing market has put most buyers in a bargain-hunting mode.

“Everybody walks away with their coin, and the bank is left holding the bag,” said John Swope, the Florida Department of Financial Services detective who arrested Cuffy.

Anatomy of a swindle

The state’s investigation of Cuffy offers a glimpse at how the scam works: Cuffy paid for an appraisal showing the inflated price. He recruited a “straw buyer,” Kervyn Harris, whose name appeared on the deed and the mortgage. Then he arranged for Fremont Investment & Loan of California to lend Harris $340,000, according to police reports.

When the sale closed on Dec. 30, 2005, Cuffy walked away $95,000 richer. State investigators say Cuffy divided the proceeds among his father, Sylvester, 58; his sister, Lillia, 35, (the Cuffys run BlueKap Financial of Tamarac); and another man who provided Harris as the straw buyer.

Now in foreclosure, the small house sits in a down-at-the-heels neighborhood in Fort Lauderdale. A chain-link fence guards the front yard, and the for-sale sign screams, “BANK OWNED.” The Florida Department of Financial Services’ fraud division arrested Johnson, Sylvester and Lillia Cuffy in July and accused them of theft.

Johnson Cuffy didn’t return calls seeking comment, but when he was arrested, he admitted to the scam, Swope said.

South Florida long has been a hot spot for mortgage fraud, and the chicanery comes in a variety of flavors, from borrowers fudging their income to qualify for a loan to massive scams using straw buyers to create phantom transactions. The latest brand of scam, the type that Cuffy and countless others have pulled off, combines a legitimate seller with a not-so-forthright buyer.

Stanley Foodman, a forensic accountant in Miami, calls the scheme the real estate world’s version of the penny-stock pump and dump. The new book Protect Yourself from Real Estate and Mortgage Fraud dubs it “cash back at closing.”

“As with most deals that seem too good to be true, cash-back-at-closing schemes are just another way of scamming someone - in this case the lender, who’s fooled into making an under-collateralized loan,” write authors Ralph Roberts and Rachel Dollar.

One homeowner who’s trying to sell a house in Wellington’s Black Diamond development says she has been contacted repeatedly by buyers looking to do cash-back-at-closing sales. Another seller in a development west of Lake Worth said he, too, was solicited by a buyer hoping to inflate the appraisal. Wary of being involved in a shady deal, both refused to do so.

Investigators say they typically don’t target sellers in their investigations. Padich, the state detective, said he usually treats sellers as witnesses, not suspects. Although there have been no Cuffy-like arrests in Palm Beach County in recent months, real estate agents say there is no shortage of eyebrow-raising transactions where a legitimate seller’s house fetches more than the asking price.

Sellers be wary

One such sale came in the Black Diamond development last year. Steve and Gina Peters listed their spacious home at 10553 Galleria St. for $549,000 in 2006, as the market weakened. When the house didn’t move, they dropped the price to $500,000. The couple finally accepted $490,000 for the house, according to the Multiple Listing Service.

But according to a deed filed with the county, the buyers, Natacha and Isaac Antoine, paid $585,000 in October 2006. They received loans for the full amount, according to mortgage records. In January, they resold the home in the gated community along State Road 7 for the same price to Anthony Champagne, who likewise took out first and second mortgages totaling $585,000. The property now is in foreclosure.

Reached by phone, Natacha Antoine referred questions to her husband. Isaac Antoine couldn’t be reached for comment. Neither could Champagne.

Gina Peters said last week that the family had moved to Colorado when the offer came in for their house. “We sold it from a long distance, so we didn’t really have any contact with them,” she said. Peters said she had no reason to be suspicious about the deal.

The Peterses’ real estate agent, Patrick Heagney of Realty Associates, acknowledged this month that the terms of the deal seemed odd. The seller agreed to assign the difference between the $490,000 purchase price and the $585,000 loan to the buyer, a $95,000 payday. But, Heagney said, so far as he knows, the arrangement was fully disclosed on the closing documents filed to the lender. “I said, ‘I don’t know where you’re getting the appraisals from,’” Heagney recalled. “But how can I tell my seller, ‘You can’t sell it’?”

Boomtime prices tell tale

Although mortgage scams often are associated with low-value properties in sketchy neighborhoods, Palm Beach County real estate agents say they’re seeing dubious deals in shiny new developments such as Black Diamond, Olympia, Versailles and Nautica Isles.

And in spite of a housing market that has seen a shortage of buyers since late 2005, prices are being recorded at boomtime levels. “A house is on the market for $450, and all of a sudden it sells for $525, and you’re like, ‘Huh? How did that happen?” said Eric Grainger, an agent at Keller Williams Realty.

Some examples, according to MLS documents and publicly recorded deeds:

• In Black Diamond, a home listed for $479,000 in January sold for $575,000 in March.
• Also in Black Diamond, a home listed for $489,900 sold for $580,000 in October 2006, even though the MLS reports the sale price as $479,900.
• West of Lake Worth, a home listed for $645,000 last year sold in March 2007 for $699,900. In a phone interview, the seller credited a “bidding war.”

For mortgage scammers, cash back at the closing table is just one potential payday. Mortgage experts say the big commissions that accompany risky loans can encourage questionable transactions. If a borrower with stellar credit uses a mortgage broker to take out a conventional loan, the lender pays the mortgage broker about 1 percent of the amount of the loan as an origination fee. But if a borrower with poor credit uses a mortgage broker to arrange a subprime loan, the lender pays the mortgage broker much more: 5 percent, 8 percent, sometimes more. So a $600,000 loan could generate $30,000 or more in origination fees.

“The subprime mortgage fees can be as much as a third of the value of the home,” Swope said. “It’s ridiculous.”

Now that the market for mortgage-backed securities has dried up and subprime mortgage lenders have been rocked with massive losses, the easy money that fueled the cash-back schemes has disappeared. But not before untold damage was done in the form of fraudulent loans.

The U.S. Attorney’s Office for the Southern District of Florida announced a crackdown on mortgage fraud in September. It has indicted alleged scammers in Miami-Dade and Broward counties, and U.S. Attorney R. Alexander Acosta promised more charges in the coming months.

But investigators acknowledge that Johnson Cuffy remains the rare mortgage skimmer arrested. Mortgage fraud investigations move at a glacial pace, and Padich, the state fraud detective, admits many schemers get away with it because few cops have the time and expertise to find clues in phone-book-thick stacks of closing documents.

The irony is that a criminal who robs a bank with a gun can expect to be surrounded by a SWAT team in minutes. But, Padich said, a thief who robs a bank with a bogus appraisal and doctored closing documents can expect to get away with it.

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EDITOR’S NOTE (12/27/07): Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted
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Every spring and summer, you are sure to spot stories in the press about shark attacks off the cost of Florida, Long Island, and California. You rarely see a story, however, about the loan sharks attacking homeowners all across the United States.

Many people believe that the current mortgage meltdown has been caused primarily, if not exclusively, by homeowners whose appetite for credit far exceeds their ability to repay their debts. This is far from the truth. Mortgage originators acting more like street toughs than representatives of lending institutions have contributed far more to the current crisis. Instead of acting as professionals, they have led homeowners out into the water and essentially bitten off their arms and legs.

Read this comment, which was left here on Flipping Frenzy just yesterday afternoon by Lisa Ashton, from Saunderstown, Rhode Island:

“I am a single mom of two kids–one in college, one in high school. I have raised my kids alone in my home for all this time. I have owned my home for 21 years, actually built it with my ex husband. I hold down three jobs currently to try and make ends meet. I am a registered nurse in a school system.”

“I refinanced my mortgage in April of 2006 with Aegis Lending Corporation. They did a ‘no doc’ loan and lied about how much I made to make a high mortgage amount work. I was trying to take out $25,000 to finance my daughter’s college needs at the time. They said I made enough to cover a $493,000 mortgage! In reality I earn only about $55,000. I now have house payments that eat up about 98 percent of my monthly income.”

“They also hired an appraisal company (Macloud Appraisers in Narragansett, RI ) who somehow agreed to appraise my home for $560,000 when the town only values my property at $320,000, and it would probably sell for about $400,000 on the market today.”

“To bring my interest rate down to 6.5 percent, Aegis charged me $30,893 in discount points at closing. That would have meant that their standard interest rate was 14 percent! What sort of ARM starts out at 14%?”

“Now you may wonder why I would agree to such an arrangement. Well, Aegis advised me to stop paying my mortgage while they were refinancing me, because it would screw up the payoff amount they received. Admittedly, I was naive in following their advice–I stopped paying my mortgage. After all, they had already approved my loan.”

“Aegis failed to provide me with a closing packet prior to the closing date to review. They didn’t even tell me what to expect in terms of a monthly payment. I discovered all of this on closing day, when I was already two payments behind on my existing mortgage. I realized that if I refused to sign for the new mortgage, I would be in big trouble with my previous mortgage company, so I signed the papers.”

“Aegis told me not to worry. Within six months, I could refinance with them again and lower my payment to $2918 per month. (I currently earn about $3600 take home.)”

“Instead of refinancing my loan, Aegis sold it within a week after closing to GMAC Mortgage company and then filed for Chapter 11 Bankruptcy. Now I was really stuck.”

“I have gone through all of my retirement ($30,000) and all of my savings ($15,000) and maxed out every credit card to stay current with my mortgage for this past year or so. No one will refinance me, and now since I’m so maxed out on credit cards, I’ve watched my credit scores plummet well over 100 points in the past four months.”

“GMAC has told me they will NOT work with me to help me out. I have called them for the past three months asking about some way to help me, so I don’t end up in foreclosure. They have told me that they rather have my home.”

“September 2007 was the first time in 21 years I’ve ever missed a payment on my home, and I’m just sick about it. I did receive something from the court stating I could file a claim against Aegis Mortgage–a ‘proof of claim’ form–but who knows how long that will take to work through the system. By that time, my children and I will have been evicted from our home.”

“So that’s my story. I can’t lose this home. I’ve worked so hard to keep it. It’s my children’s safety net. This is all they’ve known, and I can’t take it away from them. I won’t. But I don’t know what to do.”

This is just one story, but it is representative of what has been happening in every state in the Union–lenders preying on homeowners who have been duped into trusting the system and the professionals who run it. It is the equivalent of going into a doctor’s office and intentionally been diagnosed as having cancer. The “doctor” prescribes a host of expensive tests, medications, treatments, and therapies just to jack up your fees, and then flies out of the country when you’re money runs out.

When you seek the advice of any professional–a doctor, attorney, accountant, Realtor, or whoever–you expect that the person is going to give you accurate information and reliable advice. You do not expect the person to flat out lie to you.

We have to stop blaming homeowners for the current mortgage meltdown and start holding loan originators to the same standards we set for doctors and other professionals. We also need to start placing the blame where it belongs–not with the homeowners but with the loan originators who know better.

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EDITOR’S NOTE (12/27/07): Because of the intense and often off-topic nature of many of the comments left for this blog entry, commenting has been turned off, and all unrelated comments have been deleted
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With one out of every 1,370 homeowners in her state facing foreclosure, Washington’s Governor, Chris Gregoire, yesterday announced the formation of a task force to evaluate instability in the national subprime mortgage market and ensure that the impact is minimized in Washington.

While the economy in Washington is relatively strong and the state is not yet seeing foreclosures and defaults at the same rate as other states, Governor Gregoire is concerned for Washingtonians who may be at risk of losing their homes due to the unstable lending market. Governor Gregoire has directed the group, called the Task Force for Homeowner Security, to provide evaluation and recommendations for action to her on:

• The extent of the problem and impact in Washington for current and new home buyers
• Ways to facilitate sensible refinancing options from responsible lenders for homeowners in default or at risk of default
• Consumer education to those in foreclosure or at risk of foreclosure
• Consumer education to potential new home buyers
• Reforms to Washington lending practices

The task force is scheduled to deliver recommendations to Governor Gregoire no later than December 31, 2007.

Just two weeks after Texas’ Attorney General convened the Texas Residential Mortgage Fraud Task Force–a strategic partnership intended to improve collaboration among residential mortgage regulators and law enforcement officials–some progress has been made. Last Friday, Attorney General Greg Abbott charged Foreclosure Assistance Solutions, LLC (a Clearwater, Florida-based company) with operating an unlawful foreclosure rescue scam that targeted struggling Texas homeowners, and seized of $13,000,000.00 worth of the company’s assets.

As a result, the 408th District Court in Texas issued a temporary restraining order and froze assets belonging to three businessmen who organized the scheme. According to court documents, the defendants fraudulently advertised that they could save homeowners from imminent foreclosures.

Defendants named in the petition:

• Foreclosure Assistance Solutions, LLC of Florida
• Herb Zerden, co-owner of Foreclosure Assistance Solutions
• Adolfo Quintero, co-owner of Foreclosure Assistance Solutions
• J.W.W. Services, Inc. of California
• John Woodruff, owner of J.W.W. Services

According to the State of Texas, the defendants mailed cards and letters to homeowners whose mortgage payments were delinquent and thus facing foreclosure. Their correspondence with homeowners promised established relationships with mortgage companies and banks nationwide. As a result, they claimed, Foreclosure Assistance Solutions could stop the foreclosure process.

Homeowners who contacted Foreclosure Assistance Solutions were urged to sign a $1,200 contract immediately. Under the contract, Foreclosure Assistance Solutions strictly prohibited homeowners from contacting their lenders. After homeowners paid the fee, they rarely heard from the company’s representatives again. When homeowners repeatedly called the company for answers, they were ignored. As a result, many homeowners still lost their homes to foreclosure.

Last Friday’s action prohibits the defendants from making false representations to homeowners. Specifically, Foreclosure Assistance Solutions is prohibited from claiming that a home is at risk without providing proof of that risk. The court also ordered the defendants to stop assisting homeowners without describing the alleged assistance.

The Office of the Attorney General’s petition states that Foreclosure Assistance Solutions deposited over $13 million in Bank of America accounts between 2005 and 2006. Most of those funds came from homeowners who faced foreclosure. That account and others are subject to last Friday’s asset freeze.

The Attorney General is now seeking court-ordered restitution for homeowners who were harmed by the defendants’ acts, as well as civil penalties of up to $20,000 per violation of the Texas Deceptive Trade Practices Act. Additionally, the Attorney General is requesting up to $5,000 per violation for the defendants’ failure to register the business as one that conducts telephone solicitations.

As I mentioned at the outset of this post, the State of Texas is engaged in a variety of efforts involving residential mortgages. Last week, Attorney General Abbott launched the Texas Residential Mortgage Fraud Task Force, a partnership that involves key state regulatory agencies. The task force, established by Texas House Bill 716, is required “to take a proactive stance towards tracking and prosecuting mortgage fraud and the perpetrators of mortgage fraud statewide.”

Earlier this year, the state secured $21 million in restitution for Texas homeowners who were harmed by lending giant Ameriquest Mortgage Co. That case resolved allegations that the company and its affiliates did not clearly disclose certain terms to homeowners, including unpredictable adjustable rates.

Homeowners who believe they have been harmed by Foreclosure Assistance Solutions, LLC, or similar fraudulent businesses in Texas may call the Office of the Attorney General’s toll-free complaint line at (800) 252-8011.

Massachusetts Attorney General, Martha Coakley, has filed a regulation with her state’s Secretary of State’s Office that permanently bans for-profit foreclosure rescue transactions in the state of Massachusetts. The Massachusetts Consumer Protection Act authorizes the Attorney General to promote regulations to identify unfair or deceptive conduct that violates the act. The new regulation, which goes into effect immediately, prohibits predatory, for-profit foreclosure rescue transactions.

Foreclosure rescue transactions between family members or arranged by a non-profit community or housing organization are not banned under the new regulation.

The new regulation also makes it an unfair or deceptive act to market foreclosure-related services without a precise description of exactly how the company will assist homeowners in avoiding or delaying foreclosure. (The regulations define a “Foreclosure Rescue Transaction” as a transaction designed to avoid foreclosure and where the homeowner transferring the property maintains an option to reacquire the home by maintaining a legal interest in the home.)

On June 1 of this year, Massachusetts’ Attorney announced emergency regulations that placed a temporary ban on these types of unfair and deceptive foreclosure rescue schemes as part of her multi-faceted plan to address the foreclosure rescue crisis in Massachusetts. The regulations went into effect immediately and were valid for 90-days. After a public hearing held last Thursday in Boston, the regulations were promoted as final.

As everyone who reads Flipping Frenzy should know by now, foreclosure rescue schemes are typically initiated when businesses or professionals claim to assist homeowners who are facing foreclosure by convincing them to convey their property to straw purchasers. The straw purchasers then obtain mortgage loans, permitting the individuals facing foreclosure to continue living in their property for a limited time, and promising the individuals that they will be able to later reacquire their homes. Far too often, the promises of maintaining home ownership are illusory and homeowners lose their home to the so-called “rescuer.”

In addition to permanently banning foreclosure rescue transactions, Attorney General Coakley announced earlier this month regulations to address unfair and deceptive tactics used in the mortgage industry. Hearings will be held across the state on the proposed regul