A lot of Flipping Frenzy readers take the time to contact my office with their own suspicions surrounding real estate and mortgage fraud. One such reader, Lisa D. from Michigan, recently gave us permission to share her experience with the rest of our readers.

See if you can spot the fraud:

My husband Peter and I got married in 2002 when we were both 23-years old. Peter had a Bachelor’s degree in Fine Arts and was student teaching. We lived with my parents for a while and then moved into an apartment of our own. I previously worked waitressing a couple nights a week to help make ends meet. Peter eventually secured a job as a teacher at the local county jail. His pay was solid and steady, and he also went back to school to get his teaching license.

With our little family growing, we started looking around for a house we could afford (apartment living was fine but we needed more room). We finally came across the perfect house: A quaint little home in the town where Peter grew up. Since the home was in a state of foreclosure, we thought we might have a good chance to get the house at a discount. We tried to get approved through a traditional loan but were unable to. So we went through a private company and secured a land contract instead, and by Christmas of 2003 we were settling into our first new home.

We lived in the house for a year when Peter started hearing commercials on the radio for Rock Financial–a Quicken Loans Company. The company’s spokesperson promised to qualify people for a mortgage they could afford. We called Rock Financial, made an appointment, and got a really good feeling from our sales representative. He was a very nice man who seemed eager to help us get into a loan with a lowered interest rate. He was charismatic and told us not to worry about a thing.

At the time, after paying on our mortgage for a year and Peter having been at his job longer, Peter’s credit score was improving (it was in the 680’s). That was an important thing for us because my credit was blemished from uninformed college spending. We knew it would be important to keep Peter’s credit healthy so we could at least rely on it while we worked to correct mine.

The sales representative at Rock Financial was able to get us approved for a loan rather quickly. He arranged for an appraiser to come out and do an appraisal on our house and property, which they appraised at $135,000. Our sales representative wasn’t sure that he could get us straight into a 30-year fixed loan, so we started out with an adjustable and had to take out a second mortgage for $12,000 to help pay off some bills.

When we arrived at the closing, we learned that our Rock Financial sales representative was not able to be there. Two ladies that worked for Rock Financial were there instead to go over the closing materials. To say they rushed us through the closing process would be an understatement. We pretty much just signed paper after paper were they told us to do so. When we left, I told Peter I didn’t feel good about what had just happened; I felt rushed and uniformed, and Peter agreed. Together, we called our sales rep at Rock Financial and told him what had happened and how we felt. He apologized profusely and offered to come to our house and go over anything and explain everything we did not understand. We said that we didn’t want him to have to do that; talking to him put us at ease. A few days later we received a package from the sales rep that included a nice popcorn bowl from Crate & Barrel and a $5 Blockbuster Video gift card. That confirmed in our minds what a great guy the Rock Financial sales representative really was.

Our mortgage payment at this time was $720.94 (4.124%) with an adjustable rate mortgage and our payment on our second mortgage was $254 (5.75%), interest only. We felt that this was a good deal. Originally, we had paid $904.00 on our land contract. Even though our payment was a little higher we were able to pay some bills off and also build a garage. Peter and some of his friends built the garage, and we felt blessed to still be in this perfect little home of ours but at a manageable cost.

A year later we started hearing the commercials on the radio again from Rock Financial saying that interest rates were on a rise and homeowners with adjustable rate mortgages should consider a fixed loan. Peter called the sales rep to see what he could do about getting us a fixed loan. We had bought a used truck in 2004 and our payments were $359 a month, and since we were falling behind in the payments, our Rock Financial sales rep said we could take our more money on our second mortgage and that he could get us a fixed rate on both. All he needed, he said, was to get an appraisal on our home for $158,000. Accordingly, the Rock Financial sales rep sent out an appraiser who saw the new garage and the few minor updates that we had done in the past year, and lo and behold, the home appraised for $158,000. This was especially great news seeing that we bought the house for $114,000. We took out more money on our second mortgage to bring the loan to $34,000, and used the money to pay off bills and pay down other debts. Our Rock Financial sales rep got us into a fixed rate of 6.25% on our first mortgage and 5.25% on our second mortgage. Our payments went up to $771.19 on our first mortgage and $148.75 interest only on our second mortgage.

Shortly afterwards, we started having a difficult time coming up with our payments. Not having enough money and having to use credit cards that we had paid off with our second mortgage money back was getting us nowhere.

We called our Rock Financial sales rep who indicated that he wasn’t sure what he could do but that he would look into it and get back with us.

When the sales representative called back, he said that he could help us but only if the house appraised in the $170’s. Knowing our neighborhood as we do, we were apprehensive. A comparable house next door to our own–a two-bedroom with an asking price of $150,000–was on the market for nearly two years. When it finally sold, it fetched only $120,000 or thereabouts. But to our excitement, our appraisal came back at $178,000. The Rock Financial sales rep said we could get some money back on our second mortgage raising the loan amount to $45,000 and our interest rate to 12.8%.

While we were nervous about the interest rate and our payment, our Rock Financial sales representative assured us that using the money we’d get back to pay down our credit cards and giving it three to six months, he would be ale to lower the interest rate on the second mortgage considerably. So we went on to do that and felt an immediate sense of relief.

Several months had past and the new payment of $501.00 on our second mortgage and $1,049.90 on our first mortgage, got us into the same predicament of using credit cards for daily expenses. Peter called Rock Financial to see if enough time had passed to get our interest rate lowered on the second mortgage. Unfortunately the sales rep we’d been dealing with since day one no longer worked there and the person Peter spoke with said there was nothing he could do for us because our credit was so damaged and our debt too high. We were devastated. I had always worked through all these years at night so I could stay home with the kids during the day. I had to start picking up more shifts. I began working five to six nights a week, leaving little time for Peter and I to even see one another. Peter would come home from work and I would leave to go to work as soon as he did.

Long story short, we stopped paying on our credit cards with the thinking being that the most important bill was our house. All of our credit cads are now in collections with one of the credit card companies placing a lien on our house. We have creditors calling daily, but there is nothing to give them. We are not sure how much longer we will be able to keep our heads above water let alone save for our children’s future.

Our worst fear is having to walk away from a house we love so much and put so much time and energy into, but we also feel there may be no other answer. Our dream home has now become a nightmare that we may just have to walk away from, but with such bad credit I’m not sure we’d even be approved for a local apartment.

~ Lisa D.

From what you read, were you able to spot the fraud? If not, read on.

The first thing that should raise the hair in the back of your neck is that the loan officer at Rock Financial placed Peter and Lisa into multiple loans with the promise he would refinance and consolidate them into one fixed rate loan. The problem here of course is that situations change and no one can ever guarantee that you can refinance at a later date in time. This tactic is known as “churning,” like stock and brokerage accounts. Sadly, some mortgage loan officers insure repeat business by placing people into loans that require refinancing or have larger or rising interest rates. When the time comes and the borrower doesn’t qualify, it’s not the loan officer left holding a note they cannot afford to make payments on. In Lisa and Peter’s case, the loan officer did refinance the loans. He did so three to four times in 24 months and made about $17,000 in refi commissions.

Next, in order to get loans approved, some loan officers jack up the borrowers assets to give the false impression that the borrower is more solvent than actually is the case. Other times, a good loan officer gone bad may increase the homeowner’s income to get them qualified. Most often though—and this was the case with Peter and Lisa—the loan officer uses a known appraiser and simply tells said appraiser what s/he needs the value to come in at in order to get the borrower qualified.

Notice too that Peter and Lisa were not required to present any cash at closing. While this is not a problem, per se, when homeowners don’t have to pay the refi costs out of pocket, it is much easier to churn the loans. Instead of coming out of pocket with the dollars, the loan officer uses the house’s equity to pay himself, and the homeowner simply sees it as another number on a settlement statement.

You may think trusting your loan officer is a good idea—as did Peter and Lisa—but at a core level, your loan officer is not your friend. Sure, legally, a loan officer has an obligation to uphold the law and operate within certain guidelines and commonly accepted practices, but not all loan officers—or anyone else who is party to a real estate transaction—operates with integrity. When a loan officer works in coordination with an appraiser—as was the case at Quicken’s Rock Financial—any benefit to you is temporary at best.

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

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

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

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

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

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

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

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

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

Back at the beginning of February, Arizona Attorney General Terry Goddard said the mortgage industry “needed to reach out to more homeowners at risk of foreclosure if the nation’s housing crisis is to be brought under control.” Now, just three months later, Goddard isn’t letting up. Citing a new national report on subprime mortgages, Goddard last week said efforts of servicers and government officials to prevent foreclosures have increased but still fall short of the need to effectively respond to the foreclosure crisis and prevent millions of unnecessary foreclosures. The report, “Analysis of Subprime Mortgage Servicing Performance,” was issued last Tuesday by the State Foreclosure Prevention Working Group, a group of state Attorneys General and banking regulators working to prevent home foreclosures.

Major findings of the report include:

1. Seven out of 10 seriously delinquent borrowers are still not on track for any loss-mitigation outcome. The number of borrowers in loss mitigation has increased, but it has been matched by an increasing number of delinquent loans.
2. Data suggest that servicers’ loss-mitigation departments are severely strained in managing the current workload. The report noted that almost two-thirds of all loss-mitigation efforts started are not completed in the following month.
3. Homeowners who do receive loss-mitigation help are most likely to receive some form of loan modification. The Working Group said such modifications are a solution that seems to offer better long-term prospects for successful resolution of problem loans. Many servicers are replacing their use of repayment plans in favor of loan modifications.

The State Working Group said it believes “more robust approaches to avoid preventable foreclosures are necessary.” The Working Group said servicers, investors and state officials should work together on:

• Developing a more systematic loan work-out system to replace the intensive, individual, “hands-on” loss-mitigation approach. The Group says it continue to work with servicers to promote systematic solutions to modify loans in a more streamlined and efficient manner.
  

• Slowing down the foreclosure process to allow for more work-outs. Targeted efforts to slow down subprime foreclosures may give homeowners and servicers more time to find solutions to avoid foreclosure, the report says. Many states have enacted or are considering such measures, according to the report.

The State Foreclosure Prevention Working Group began as a cooperative dialogue of state officials and mortgage servicers in September of 2007. Since October of 2007, the Working Group has been collecting data from the largest subprime mortgage servicers, with 13 of the largest 20 servicers participating, representing approximately 60% of subprime mortgage loans serviced. The Group is led by representatives of the Attorneys General of 11 states, including Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas); two state banking departments (New York and North Carolina); and the Conference of State Bank Supervisors.

For more info, read Analysis of Subprime Mortgage Servicing Performance (Warning: clicking on the preceding link will download a 30-page PDF file).

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.

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

The six companies…

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

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

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

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

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

Here’s how the scam worked:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 weekends.
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The U.S. economy is suffering from a serious illness. The “doctors” in charge of treating this illness – Federal Reserve Chairman Ben Bernanke, Secretary of the Treasury Henry Paulson, and other economists and experts – are throwing every treatment imaginable at this illness in an attempt to cure it. Unfortunately, in the process of trying to cure the patient, these doctors may be killing it. In an attempt to do something, they may be doing too much.

They need to take the Hippocratic oath and pledge first to do no harm.

The truth about the current mortgage meltdown and foreclosure epidemic is that these problems are merely symptoms of a serious and life-threatening illness. The illness is more systemic than the experts are willing to admit. The problem is that the U.S. has been living far beyond its means for far too long. It simply can no longer sustain the fraud, corruption, and overspending that has become endemic to this great nation. Here are some of the deeper problems that the current solutions are failing to address:

• Loss of jobs with decent wages: In an attempt to boost business profits and keep inflation low, government policies rewarded companies for moving operations (and jobs) overseas. How can you have a consumer-driven economy if the consumers have jobs that don’t even provide them with enough income to pay for housing, groceries, medical care, and education?
• Increasing cost of healthcare and insurance: Fewer and fewer U.S. citizens can afford health insurance, and for those who can afford some sort of insurance, the coverage these policies offer is almost laughable. People are essentially paying thousands of dollars a year so the health insurance company can send out explanations of why their claims were refused. One serious illness is enough to send most families into foreclosure and perhaps even bankruptcy.
• Commissions-based compensation for loan originators: In the lending industry, brokers, loan officers, and sales executives at the banks were often compensated based on the number of loans they approved, not necessarily the number of good loans.
• Rampant fraud: Everyone seems to be ripping off the system nowadays – illegally flipping homes, arranging cash back at closing deals, falsifying information on loan applications, hijacking homes using counterfeit deeds, and so on. Some estimates show that over 80 percent of fraud involves industry insiders – people who should know better and who should be dedicated to the well being of their industries.
• Loss of home equity: In an attempt to stimulate the economy, the U.S. government inadvertently manufactured a housing bubble. Homeowners were tripping over themselves to buy bigger, more expensive homes and to cash out the equity in their homes, thinking that their property values would continue to appreciate forever. When the bubble burst, the equity went “poof.” No matter how much money the government pumps into the system, it can’t force that equity to magically return.
• Alt A and Subprime loans: With rapidly rising home prices, people were soon unable to qualify for traditional qualifying conventional loans. Instead of accepting this fact and possibly denying people loans, banks and other lending institutions “helped” people qualify by lowering the qualification standards and offering mortgages with low teaser rates. Borrowers could qualify for loans at the lower rates, but as soon as the rates adjusted up, many people could no longer afford the payments.
• Speculative buying: Some investors who mistakenly believed that property values would continue to rise forever purchased multiple properties at a time, hoping to flip them and score some quick cash. Some companies encouraged the speculation by offering condo conversions and hotel condominiums as low-risk, no-hassle investment opportunities. Banks and other lenders also encouraged this by offering easy qualifying programs with little or no cash needed.
• Rising fuel and food costs: Fuel costs have doubled and nearly tripled in a very short period of time, and nothing indicates that they will drop anytime soon. In fact, with demand growing from China and other developing countries, fuel prices are almost guaranteed to rise. And when fuel prices rise, so do the prices of just about everything else, including a gallon of milk and a loaf of bread.
• Deepening national debt: We have a national debt of over $9 trillion. The recent federal budget called for $3 trillion in spending. Where’s this money coming from? Other nations. As a result, the dollar is quickly losing its value and its purchase power, and this is happening at a time when the American worker is seeing very modest gains in pay.

Up to this point, the government has attempted to treat only the symptoms of the disease in an attempt to prevent owners from losing their homes and keep the banks open. Although some of these moves have had positive short-term results, most of them are very short sighted.

Here are some of the solutions the government has enacted:

1. The FHA (Federal Housing Administration) was given more flexibility to assist homeowners who have subprime mortgages.
2. FHA increased its loan limit to $271,050. In some counties, the limit can be as high as $729,750.
   Fannie Mae and Freddie Mac temporarily increase their loan limits – up to $729,750 in very few select markets.
3. Qualifying homeowners do not have to pay income tax on any debt that the lender chooses to forgive the homeowners as part of a short sale agreement.
4. The Federal Reserve has lowered the prime interest rate – the rate it charges banks to borrow money.
5. The U.S. government along with other central banks in Europe is going to exchange up to $200 billion in US Treasury securities for other debt including mortgage securities.

All of these solutions fall short, because they fail to treat the underlying problem – for various reasons, the U.S. is living beyond its means. Some of these solutions are very likely to cause additional problems. For example, any attempt at making loans easier to come by is going to facilitate fraud, irresponsible lending, and irresponsible borrowing. Having FHA, Fannie Mae, and Freddie Mac increase their loan limits selectively goes against reason – why not increase loan limits to allow more to refinance and save foreclosure. The current plan applies to 25 percent of homeowners in trouble.

In addition, some of the actions the government is taking are fiscally irresponsible. For example, lowering the prime interest rate simply cuts the government’s return on its investment to the benefit of the banks that caused much of the problem in the first place. The government is rewarding banks for their bad behavior. These banks are not passing the savings along to the consumer. In fact, as the government has cut the interest rate it charges banks, banks have been increasing the interest rates they charge customers. This is nothing other than a subtle way for the government to bail out the banks.

Also, as a taxpayer, I would like to know where a government that has a $9 trillion national debt and a $3 trillion annual budget is getting $200 billion to buy mortgage-backed securities. This kind of irresponsible spending is going to lead to massive inflation, further eroding the purchase power of the dollar.

I think we will recover from the mortgage meltdown and foreclosure epidemic, but we need to follow the Hippocratic oath and first do no harm. Throwing money at the problem is what drove us to this point. Easy money fuels greed and fraud and depletes our resources. The current treatments haven’t worked. We need a holistic treatment that cures the disease and adds real strength to our economy – not the smoke-and-mirrors illusion of strength we have bought into over the past decade.

Federal Reserve Chairman Ben S. Bernanke told a gathering of members of the Independent Community of Bankers of America (ICBA) today that they need to do more to help distressed homeowners, especially those facing foreclosure. Bernanke told the audience of ICBA-affiliated bankers that it’s time for a “vigorous response” to help stem the tide of rising home foreclosures, essentially saying that banks and lenders could do a heck of lot more to help ease the U.S. housing crisis and keep more American’s in their homes.

Bernanke’s remarks, which can be read in their entirety here, are very much in line with what Flipping Frenzy Guest Blogger Larry Rubinoff asked here on FlippingFrenzy.com this past weekend… namely, what’s the point in forcing people out of their homes when they can afford to pay their pre-ARM payments.

At the end of the day, if the bankers chose to respond vigorously, more of us will win. If they do not, Bernanke’s 3,175-word speech will have been for not.

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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 weekends.
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Last weekend–in my guest blog entry here on Flipping Frenzy titled “Taking the Foreclosure Crisis Personally,” I posed the following question:

Would it not be better to freeze a [interest] rate for a homeowner who has been paying at that rate rather than foreclosing and kicking the person (and his or her family) out on the streets? In the extreme, would it not be better to cut the rate in half rather than foreclose

Now, U.S. House of Representatives member Barney Frank (Massachusetts) has outlined a $15 billion plan to buy distressed mortgages from lenders, saying the “cascade of foreclosures will continue” without government action. Frank, who chairs the House Financial Services Committee, is also said to be working on another plan to provide as much as $20 billion in loans and grants to purchase foreclosed and abandoned homes at or below market value to stabilize home prices.

While I do not agree with some of his proposals, I do agree with this (courtesy of National Mortgage News Online:

Under Rep. Frank’s plan, the existing holder of a mortgage would be required to write down the loan to a level the homeowner could afford. The write down requirement would not apply to investor-owned and second homes.

Just as I was saying last week, let the banks and lenders take action on their own, give back some of the windfall profits they made, reduce the rate of foreclosures, and allow more people to keep their homes. Logically, what choice do they have? Kicking people out of their homes and writing off the debt is not a sustainable strategy. Keeping performing loans on the books and maintaining property values makes a heck of a lot more sense.

Win-win versus Lose-lose; that the decision we’re faced with. And with an estimated 1.8 million new foreclosures projected for 2008, what are government and the private sector waiting for?

With a recession looming (I believe it’s already here but the so-called “experts” say it’s too soon to tell), the dollar weakening in world markets, and inflation threatening the basic survival of the average American family, I say corporate American needs to actively participate in the downturn as much as it did in the upturn.

If the lenders/mortgage note holders want to offer solutions to borrowers, they can. To Bank of America–which itself is facing billions of dollars in loses to foreclosure–and to the other financial services organizations that members of Congress (like Barney Frank) have been talking to about the crisis, why must it take an act of Congress for you to make such an easy decision? Each and every day you wait, thousands of people lose their homes and face the prospect of a very uncertain future.

What solutions do you–the readers of Flipping Frenzy–have? Maybe we can compile them in the Comments area of this blog entry and send them to Rep. Frank!

The mortgage meltdown and resulting foreclosure epidemics are an American crisis that will require the united efforts of all citizens of the United States to come together and resolve. Professionals in the real estate and mortgage lending industries need to stop paying homage to the almighty dollar and limitless profits of those good years and hunker down with homeowners to get through these hard times. As I see it, this is the only hope we have to keep the American Dream of homeownership alive.

Fortunately, a large majority of professionals in the real estate and mortgage industries are trustworthy and dedicated to the long-term health of their businesses and careers. Unfortunately, too many professionals are focused entirely on their own short-term interests.

Recently, one of the true blue professionals in my industry called my attention to a situation in Arizona in which she suspects rampant fraud is taking place. She is an honest, well-informed real estate agent who is dedicated to doing her part to clamp down on fraud in the real estate industry, which she loves. She has witnessed other professionals, driven by greed, become involved in cash back at closing schemes that are designed to stimulate the sales of condos by providing buyers with $18,000 to $40,000 in cash (undisclosed to the lender) following closing.

To further hide what was really going on, the people involved in this alleged scheme adjusted it so the cash back would not be paid as a lump sum but paid out in installments in the form of guaranteed rental payments. This tactic did not fool our whistleblower. She tells her story here.

I am writing this because of my concern regarding all of the mortgage loan fraud that has been in the media specifically in the past year.

You are about to read my experience over the past year and what I believe to be a sophisticated case of loan fraud.

My background

I first started in the industry as a RE/MAX receptionist in 1990, since which time I have acquired over seven years experience in the new home arena, over seven years in the resale arena, and three years in the corporate office of a mortgage company.

January 2007

I interviewed for a position the first business day of the New Year and started the following week. I was excited as this gave me an opportunity to explore a whole new area within the new homes arena.

The community, Sunscape Villas, Scottsdale, AZ consisted of 442 units. Sales of the units began in early 2006, and over 210 units were closed on from May to Dec 2006.

Developer/Seller – Partners:

• Crown - California company
• MCZ Centrum - Chicago company

Sales and Marketing by:

• Urbis Properties, Cheryl King, Owner (Licensed)

We were told to get ready as they were in the process of finalizing a special program for one of their power brokers who worked with a lot of investors. We weren’t given much detail only that it was a program similar to what they were doing Landmark on Central (4750 N Central, Phoenix, AZ) that helped sell and close over 70 units. Landmark was Cheryl’s prior community, in the final stages of close out. The Developer/Seller was Crown (out of California) one of the partners at Sunscape Villas.

March 2007

The details had been ironed out and they were ready to launch the new program. A sales meeting was scheduled to go over this program along with two other similar programs that were going to be offered to different groups.

It was stressed to all of us the importance of these programs not getting out to the general public as they were only being offered to the select groups. Making matters worse, the three groups each had different deals set up and no one could know about the other.

Power Broker No. 1 - Moser & Perry

• Greg Moser, Realty Expert (Licensed)
• Jay Perry, Estate Planner (unlicensed)
• Moser & Perry’s Preferred (only) Lender: House 2 Home (Mike Low, Owner)

The program was set up to allow the investors to cash flow for the first couple of years. Two days after close of escrow an Option to Purchase agreement would be drawn up by Urbis and sent to the office of Moser and Perry for Buyer’s (now owner’s) signature and bank wiring instructions. The office of Moser and Perry returned signed Option and wiring instructions to Urbis who would forward on to Seller (Crown/MCZ Centrum) for a pre-determined amount (8-21% of purchase price) to be wired into the Buyer’s (now owner’s) bank account. All parties knew there was never the intent for the property to be (re)purchased per the agreement.

Editor’s Note: This was just a way to kick back money to the buyer under the guise of paying for an option to purchase the property from the buyer, when nobody had any intent of ever purchasing that property from the buyer.)

Greg Moser was set up on a graduated co-broke: 6% for the first 25 sold, 7% for the second 25 and 8% for everything thereafter. He felt confident that he could sell between 70 and 100 units.

The sales staff was instructed that there would be nothing in the purchase contract nor would there be anything in writing regarding the Option given to the buyer. They were told just to refer any/all questions from the Moser clients back to Greg Moser or Jay Perry, all sales needed to do was show the property and print out the contracts.

We were given strict instructions that this agreement COULD NOT be signed until two days after close of escrow. In addition we were told that since this happened outside of closing, neither the real estate broker nor the title company needed to know, as well as this ‘incentive’ was not to be disclosed to the appraisers coming to the sales office for comps of recent closings.

I recalled reading an article on AZ Central.com about Cash Back at Closing, I began questioning if this could be done. I forwarded a copy of the article to the Urbis team. (I had forwarded a few helpful articles before that). After several discussions around the office, a point was made to let everyone know that this was not the same thing as what was written about on AZ Central. We were assured that the attorney’s had looked at the agreement and said that it was legal. A gal in our office was mid-way through her real estate licensing classes and Cheryl King suggested she asked the instructor, which she did and was told that they couldn’t do that. When told what she had learned, Cheryl King brushed it off as not being explained the right way.

Having been in the industry for a number of years, I understood the mechanics of the Option to Purchase. This was not the way I recalled seeing this used in the past. I started to question my knowledge base, but, I didn’t push the issue. After all, who was I to question the corporate attorney or Cheryl with her MBA and paralegal background?

I wasn’t the point person for Urbis and the Option Agreements, as Cheryl had taken on three new listings, two of which I was in charge of the entire contracts & closings process, so I was very busy with those duties. It was out if sight, but never far from my mind.

Being a reader of all things real estate related, I’ve gained valuable insight through out the years. I always make sure I can back up what I’m saying in writing via various publications, statutes, and disciplinary orders. People in my office have referred to me as “a walking real estate encyclopedia,” and Cheryl gave me the nickname “Sherlock” and would come to me frequently to find out this and confirm that, as she was beginning to trust that I knew what I was talking about.

Summer 2007

MCZ Centrum had bought out Crown, making MCZ/Centrum the sole seller / developer for Sunscape. Roles and responsibilities that had been handled through Crown in California had been moved to various people / departments at MCZ/Centrum in Chicago. Shortly thereafter, Moser was informed that certain heads at Centrum were not comfortable with the Option program currently being offered, and it was just a matter of time before they pulled the plug on it.

Moser threw a fit, he was not happy. The Option program was what he was selling (40+ had already closed). Several contracts had been printed and were out to the buyers, and he believed many more were on the horizon. He didn’t understand why they would go back on their word and not let him continue selling under the program exactly the way it was. He had held many seminars, generated from his (and House 2 Home Lending’s) regular talk radio spot on real estate investing, which aired on Wednesdays at 4:00 p.m. on 1100 KFNX-Phoenix).

Then came all the talk of loan fraud becoming a felony starting in September. The change in events piqued my interest into revisiting my original feeling of this not being legal. Why would they s