Rita Gosselin, 58, was arrested and charged with one count of continuing criminal enterprise (racketeering) at her Grosse Ile house early Thursday morning by investigators from the Michigan Attorney General’s Office and the Southgate Police Department.

Gosselin is accused of orchestrating a real estate investment Ponzi scheme in the Detroit metropolitan area between April 2007 and September 2008.  The allegations include defrauding up to 20 people of $500,000.

Gosselin was arraigned Thursday, December 3, 2009 in 33rd District Court in Woodhaven, Michigan on charges related to an alleged real estate Ponzi scheme.

If convicted, she faces a 20-year sentence for the racketeering felony, and 10 years each for three counts of false pretenses over $20,000.

Gosselin allegedly enticed investors with claims that she could purchase foreclosed and distressed properties in bulk, renovate them and sell them for a profit. Gosselin allegedly promised investors regular monthly payments.  As security for these investments, Gosselin allegedly provided investors with promissory notes.

A preliminary examination of the evidence against Gosselin is set for 9 a.m. Dec. 15 in 33rd District Court.

Judge Michael McNally set bond at $300,000.

The Continuing Criminal Enterprise statute defines a criminal enterprise as any group of six or more people, where one of the six occupies a position of organizer, a supervisory position, or any other position of management with respect to the other five, and which generates substantial income or resources, and is engaged in a continuing series of violations of Title 21 of the United States Code.

Just When You Thought it was Safe to go into the Water

This is not a follow-up story about hurricane Katrina.

One out every three home owners today in America is drowning.  According to Mark Fleming, chief economist for First American CoreLogic, more than 15.2 million U.S. mortgages, or 32.2% of all mortgaged properties, were in a negative-equity position on June 30, edging down from 32.5% at the end of March, according to the real-estate information company, which tracks data on about 90% of mortgage loans nationwide.

The combined total property value for loans in 2008 in a negative-equity position was $3.4 trillion, according to the report.  Negative equity can occur because of a decline in property value, an increase in mortgage debt or a combination of both. Equity levels are important to people who can’t make their mortgage payment since it affects their ability to sell or refinance.

“The slight drop from 2008 to the figures of 2009’s first 2 quarters in the portion of under-water loans reflects the recent flattening of home price changes, which is “great news” for the housing market as negative equity has been increasing for a number of periods,” Fleming said.

Still, he stressed that this decrease is a quarterly comparison and not the yearly comparison typically used in house prices.

Negative equity is a strong driver of foreclosures, Fleming said, and the stunted growth rate in the second quarter is a positive sign that foreclosures may moderate in the future. First American CoreLogic made “very crude” estimates that the foreclosure rate will peak a bit higher than 4% in early 2010, he said.

Is there Regional competition to be in Second Place?

According to business columnists in Arizona and Florida, they both report that their state has the number two spot sewn up for the most homes under water with negative-equity mortgages.

According to Jan Bucholz of the Phoenix Business Journal, her headline read:

“Arizona second in underwater loans”

On the other coast of the United States, the South Florida Business Journal with a statistical quote from CoreLogic posts the following headline:

“Florida No. 2 in mortgages under water”

For the sake of preventing another Civil War, let’s call it a tie.  We’ll look at the raw figures in a moment.  For right now, here is a look at what everyone agrees on:

The number one state leading the country in under water (negative-equity) mortgages is Nevada where 65 percent of homeowners have negative equity in their homes. (I still am quoting data from First American CoreLogic, based in Santa Ana, Calif.)

The percentage difference between the two states “coveting” the number two position, Arizona and Florida, is a fraction between 49% and 48% respectively.

Fourth on the list of under water mortgages is Michigan with California rounding out the top five.

Can anyone say:  Tsunami?

Nationwide, we have one-third of all mortgages in an “under water” position with a total property value for loans at $3.4 trillion. California led states with $969 billion, followed by Florida with $432 billion, New Jersey and Illinois each with $146 billion and Arizona with $140 billion.

Looked at by city, Los Angeles topped the list with more than $310 billion of total property value under water, followed by New York with $183 billion, Miami with $152 billion, Washington with $149 billion and Chicago with $134 billion, according to CoreLogic.

Michigan Attorney General Mike Cox today announced that his office has filed charges against seven individuals at the forefront of a major mortgage fraud operation in Southeast Michigan.  The charges resulted from a year-long investigation by the Michigan Mortgage Fraud Task Force and included efforts from the Michigan State Police, U.S. Secret Service, and the Attorney General’s office. 

“Mortgage fraud is a serious threat to Michigan’s economy, killing jobs and hurting residents’ pocketbooks,” said Cox.  “By committing wide scale fraud, these defendants have contributed to the declining home market that is ruining family finances.”

Arraigned today is Eddie Zaben, 39, of Dearborn.  Zaben is charged with one count of continuing criminal enterprise (racketeering), a 20-year felony, and eight counts of false pretenses over $20,000, each a 10-year felony.  The joint investigation revealed Zaben used his business, MYA’s Investment Group, LLC, to perpetrate large scale mortgage fraud.  The scheme involved the financing of at least eight Wayne County homes in 2006 and 2007. 

For each property, a straw buyer was recruited and asked to sign the closing papers.  Zaben presented fraudulent mortgage applications on their behalf containing falsified employment and income information.  Records indicate that some or all of the proceeds disbursed at the closing went to Zaben.  As a result of the scheme, each of the properties has been foreclosed or is in the process of foreclosure.

Six others were charged earlier for crimes including ID theft, false pretenses, and uttering and publishing: Dagoberto Reyes, 53 of Detroit, Evelyn Santana, 53 of Union City NJ, Mohamed Beydoun, 27 of Detroit, Memoud Makky, 29 of Dearborn, Ali Hassan Haidous, 25 of Dearborn and Balil Hashem, 26 of Dearborn. 

Zaben was arraigned this morning in the 19th District Court in Dearborn before Judge Hultgren.  The court imposed a $20,000 personal recognizance bond and Zaben is next due in court for a preliminary examination scheduled for July 31.   Other arrests could come shortly.

“I would like to thank the Michigan State Police and the Secret Service for their hard work over a significant period of time to help build this serious case,” said Cox. 

Attorney General Mike Cox has made prosecuting mortgage fraud a priority for his office.  In 2008, Cox created a mortgage fraud unit and teamed up with the Michigan State Police and other law enforcement agencies to tackle the problem.  In the last six months alone, Cox has charged 12 people with mortgage fraud-related offenses.  Cox’s office has also held seven mortgage foreclosure forums to help families stay in their homes during these difficult times.

This is the kind of story you’d expect to hear about on April Fools Day, but sadly it’s true. Michigan’s Office of Financial and Insurance Regulation (OFIR) has ordered an entity claiming to be a mortgage company to cease and desist from doing business. OFIR believes Southfield, MI-based Capita Management Group, through its website, www.capitamanagementgroup.com (which has since been shut down by OFIR has contacted Godaddy.com), was as a legitimate mortgage company in an attempt to steal consumers’ money and identity. The fraudulent company encouraged customers to apply for loans by providing personal information including social security and financial account numbers.

“OFIR will continue to make it our business to put these fake companies out of business,” OFIR Commissioner Ken Ross said. “Michigan consumers need to be on the lookout for these classic advance loans scams, where they are lured into paying upfront fees for services they never get in return.”

OFIR found that Capita was not licensed under the state’s Mortgage Brokers, Lenders and Servicers Licensing Act.

To find out if a mortgage company in Michigan is licensed to do business in the state, contact OFIR toll-free at 877-999-6442 or visit the agency’s website www.michigan.gov/ofir and click “Who We Regulate.”
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As a result of a tip his office received from FlippingFrenzy.com founder Ralph R. Roberts, Michigan’s Attorney General today filed charges against four people for conducting what the AG’s office is calling a “million-dollar mortgage fraud scheme”. According to Michigan Attorney General Mike Cox, the following people are charged with racketeering:

• Dequincy Hyatt, of Detroit
• Seaesther Thompson-Hayes, of Flat Rock
• Aaron Brooks, Jr., of Southgate

The fourth person, Pietro Biundo, of Washington, Michigan, is charged with filing false documents when selling a home in one of the mortgage fraud transactions.

Today’s actions were a direct result of information Ralph R. Roberts, founder of FlippingFrenzy.com and a real estate-focused consumer advocate, provided to the Michigan State Police and Attorney General Cox’s office!

An investigation by the State Police and the AG’s office revealed that in 2006 Dequincy Hyatt, managing partner of J.B. Homes/Construction, LLC., Seaesther Hayes, a mortgage broker, and Aaron H. Brooks, Jr., a former service representative for the People’s Trust Credit Union (PTCU), partnered together to perpetrate a large scale mortgage fraud.

In short, two properties were involved in this case. In the first case, it is alleged that Dequincy Hyatt, Seaesther Hayes, and Aaron Brooks secured a $710,000 mortgage for a $510,000 home in Shelby Township, MI. After paying fees, the three scammers were able to skim more than $163,000 off the transaction.

In the second case, it is alleged the defendants secured a $785,000 mortgage though the straw buyer for a $515,000 Clinton Township, MI, home. The seller of the home in this case, Pietro Biundo, is charged with filing false documents related to the transaction.

Attorney General Mike Cox alleges that the defendants sought and obtained a straw buyer for the two targeted luxury properties. The straw buyer was told that her name and credit, which was boosted by grossly inflated income and asset data, would be used to purchase the properties. The mortgage payments would be made for her by the defendants and her name would later be removed from the mortgages. In return, the straw buyer was promised compensation.

About a year after the transactions, however, Dequincy Hyatt, Seaesther Hayes, and Aaron Brooks stopped making the mortgage payments. The straw buyer was left with two mortgages in her name, and was not able to make payments. Not surprising, both houses went into foreclosure.

Hyatt, Hayes, and Brooks are charged with one count of continuing criminal enterprise (racketeering), a 20-year felony, and two counts of false pretenses, each a 10-year felony. Biundo is charged with one count of false pretenses based on the filing of a falsified deed in the sale of his home, a 5-year felony. Hyatt, Hayes, and Brooks have been arrested and arraigned. Biundo is expected to turn himself in to police shortly.

In 2008, Michigan Attorney General Mike Cox created a mortgage fraud unit and teamed up with the Michigan State Police and other law enforcement agencies to tackle the problem. Cox’s office has also held four mortgage foreclosure forums to help families stay in their homes during these difficult times.

California REALTOR® Jose Oliva Sentenced for Real Estate Fraud: A real estate agent from Fontana, Calif., who was arrested in July of this year on felony charges connected to real estate fraud, has finally been sentenced… to six (6) months in jail followed by three (3) years probation.

John Matouk pleads guilty in Michigan of quitclaim deed fraud: According to the Wayne County Prosecutor’s Office, in February 2004, Matouk, who owned half a property in the 1100 block of Telegraph in Dearborn, forged a quitclaim deed from an elderly couple that transferred the entire property to his company, LM Investments of Dearborn LLC. Before his sentencing last week, Matouk was ordered to pay $26,000 in real estate taxes, the outstanding balance on a $650,000 loan, and court and probation costs. Because of his plea, Matouk received a sentence of two (2) years’ probation.

Rockland County, New York, task force targets mortgage fraud: Rockland County, NY, officials are trying to fight the worsening mortgage fraud problem by forming a Real Estate Fraud Investigation Task Force. The task force, a joint effort of Rockland District Attorney, County Clerk and County Sheriff, will investigate and prosecute cases involving recorded real estate documents, with an emphasis on instances in which the victim’s home is at risk of foreclosure.

U.S. Attorney charges Missouri mortgage brokers with cash-back-at-closing fraud: John F. Wood, United States Attorney for the Western District of Missouri, announced that several mortgage brokers are among six Missouri residents indicted by a federal grand jury last week for participating in several related mortgage fraud schemes. Charles M. Davis, 34, of Rogersville, Mo., Cheryl Joan Kassebaum, 42, and her husband, Scott Allen Kassebaum, 42, both of Ozark, Mo., Randall Lee Hall, 59, and Shanda Lynn Moore, 44, both of Springfield, Mo., and Steven Ray Spencer, 47, of Carl Junction, Mo., were charged in a 55-count indictment returned by a federal grand jury in Springfield. Davis, a former mortgage broker, was the owner of Master Marketing Consultants. The Kassebaums, former mortgage brokers, were owners of Metro Consulting Group. Hall is a former mortgage broker.

Westport, Connecticut, mortgage broker Fred Stevens pleads guilty to mortgage fraud: Stevens, 53, of Easton, Conn., is charged with submitting fraudulent mortgage applications with IndyMac Bank and other financial institutions resulting in losses of over $1,000,000.

Florida real estate appraiser Juan Gonzalez guilty of mortgage fraud: Gonzalez fraudulently obtained loans on more than 40 properties, victimizing numerous lenders and grossing over $5,000,000 in the process. As a result, the 51-year-old will spend the next 30 years in federal prison and pay a $1 million fine.

The U.S. Attorney’s Office for the Eastern District of Michigan has finally created a multiagency task force to deal with real estate and mortgage fraud in eastern Michigan. As mortgage fraud continues to have significant consequences that affect the housing market, law enforcement in Michigan has decided now is the time to formally step up its commitment to fighting what for the last three years has been the fastest-growing white collar crime in America.

Participating agencies and financial institutions include:

• Bank of America
• Federal Bureau of Investigation (FBI)
• Federal Deposit Insurance Corp. – Inspector General Office
• Flagstar Bank
• Internal Revenue Service
• JP Morgan Chase Bank
• Oakland County Register of Deeds
• Small Business Administration- Office of Inspector General
• State of Michigan Attorney General’s Office
• State of Michigan Office of Financial Regulation
• U.S. Department of Agriculture- Office of Inspector General
• U.S. Dept. of Housing & Urban Dev. – Office Inspector General
• U.S. Trustee Program
• United States Postal Inspection Service
• Washtenaw County Clerk/Register of Deeds
• Wayne County Register of Deeds – Deed Fraud Unit
• Wayne County Sheriff’s Department
• Wayne County Prosecuting Attorney

The acting U.S. Attorney for the District, Terrence Berg, issued a press release stating:

“I want to commend the leadership of the FBI in Detroit for taking the initiative on this project, and also recognize the participation of our private sector partners. I am very encouraged by the commitment of the Task Force members.“

Rather than congratulating themselves for the task force’s formation, as Berg does above, perhaps the U.S. Attorney’s office for the Eastern District of Michigan — along with the other agencies and the banks involved in this new effort — should apologize to the residents of Michigan for taking this long to act in a coordinated way.

As Flipping Frenzy has relentlessly reported over the years, Michigan’s real estate and mortgage fraud woes are legendary. In August of this year, the Mortgage Asset Research Institute (MARI) reported Michigan ranked 3rd in the nation for loans containing alleged fraud or serious material misrepresentation (and just in case you’re wondering, MARI ranked the state #12 in 2001, #8 in 2003, and #5 in 2004). For its part, the FBI’s most recent index of the worst states for mortgage fraud puts Michigan in the slot: #3.

Recognizing that roughly 90% of all reported real estate and mortgage fraud losses involve collaboration or collusion by real estate industry insiders, the Mulit-Agency Mortgage Fraud Task Force will concentrate their efforts on fraud for profit, which everyone knows by now involves the skimming of equity, falsely inflating the value of the property through false appraisals, and the issuance of loans on fictitious properties.

To report real estate and mortgage fraud in Detroit or anywhere in Michigan, Flipping Frenzy readers can call the Detroit Metro Mortgage Fraud Hotline at (313) 237-4530, or contact the Wayne County Register of Deeds’ Deed Fraud Hotline at (313) 224-5869.

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

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

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

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

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

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

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

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

(B) THE TYPE OF NOTARIAL ACT.

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

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

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

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

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

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

• Requirements for becoming a Notary should be much stricter. In some areas, becoming a Notary is easier than getting a cash advance at an ATM.
• Notaries should have an electronic system that captures the signer’s information (thumbprint and driver’s license) and verifies the information.
• Notaries should be required to pass a fraud-certification exam.
• A notary’s thumbprint should be included on the notarized document or within the seal. (Notaries often claim that they are the victims of identity theft. Requiring a thumbprint would help prevent that from occurring.)
• Notaries should receive newsletters in print or electronically keeping them informed of their responsibilities and any new fraud schemes that may exploit the powers of a notary.
• Notaries should be legally prohibited from notarizing real estate or loan documents for family members.
• Notaries should be legally prohibited from notarizing documents in transactions in which they have a direct or indirect beneficial interest. (Some states prohibit Notaries from notarizing documents in transactions in which the notary has a direct interest but provide no wording dealing with indirect interests.)
• An additional witness should be required to verify the identity and signatures of those signing the documents and then sign as a witness.
• Notaries should be required to obtain the thumbprint of the signatory in all transactions involving real property.
• Notaries should be provided with the legal discretion to refuse to notarize a document if the Notary believes that the signer is under duress or the victim of fraud.
• As is proposed in Michigan, all states should mandate that notorial logs be maintained.

Con artists will always find ways to exploit vulnerabilities in the system, but the system can and must fight back.

Reported incidents of mortgage fraud in the U.S. increased by nearly 50% in the first quarter of 2008 from a year ago, according to a new report released this week. The report is based on data submitted by Mortgage Asset Research Institute (MARISM) subscribers about loans that were originated in the first quarter of this year and have since been classified as fraudulent, and shows a whopping 42% increase in filings. At the local level, Florida continues to lead all states in reported mortgage fraud. In fact, according to the report, Florida accounted for 24% of all properties with material misrepresentation for loans originated during the first quarter of 2008, and the Miami MSA alone boasts 49% of all of the reports submitted for properties in the state.

California ranked second in the first quarter of this year (with 52% of the properties with misrepresentation coming from the Los Angeles area), followed by a three-way tie for third place among Illinois, Maryland and Michigan.

Major urban areas also score the highest in Illinois, Maryland and Michigan. Ninety-four percent of investigations in the state of Illinois are for properties in the Chicago MSA, while in Maryland, 25% of reports are in the Baltimore MSA. In addition, the Detroit MSA counts for 56% of all of the misrepresentation reported for Michigan.

For all states, the most common type of fraud was in the “General Application Misrepresentation” category, followed closely by misrepresentations related to income and employment. In addition, multiple types of fraud types–such as identity theft and identity fraud–continue to appear in a significant percentage of loan transactions.

The report–which available for download here–presents a number of interesting and noteworthy trends:

• In general, misrepresentation on the mortgage application trends high in each of the states.
• Income and employment misrepresentation on the mortgage application rank high in Florida,
  California, Illinois and Maryland. Florida and Maryland report higher income than employment misrepresentation, and California and Illinois report slightly higher employment than income misrepresentation.
• Michigan shows a high percentage of asset and debt misrepresentation on the mortgage application.
• Appraisal misrepresentation (including value inflation and incorrect use of comparables) is most prevalent in Michigan.
• Maryland has an abnormally high percentage — 69% — of tax return and financial statement misrepresentation.

In its final analysis, this week’s report concludes the following:

1. The first quarter data reveals that loan application misrepresentation continues to plague the industry. According to the FBI’s 2007 Mortgage Fraud Report, “the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market.” Simply stated, mortgage fraud will not disappear — in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.
2. As the nation’s lenders redraw their credit practices, we see a continued need to highlight and eliminate loans that are not in good order at the point of origination, well before prefunding processors spend any effort to seek added verification or validation of the mortgage application information. If loan applications are not in good order when submitted, the loan data may likely be adjusted to fit the business practice expectation to meet the requirements for funding, which ultimately may result in funded loans that quickly go bad.
3. To save itself from schemes both commonplace and new, the mortgage industry must continue to strengthen its attention to and practice of due diligence to ensure that transactions are in good order at the point of origination. This includes an analysis of the borrower’s identity, as well as the players involved in each of the real estate roles whether they are outsourced or work directly for the lender.
4. As lenders pursue higher-quality loans for the market, the priority should be on identifying poor quality at the earliest possible point in the process — and at the lowest possible cost. In MARI’s view, the origination and prefunding processes offer the largest and least expensive opportunities to assure funding of higher quality loans. How a lender accepts or rejects a loan application at the front door is often all a criminal needs to see how much further he or she may push through the loan process.
5. Pre-funding fraud detection solutions can help prevent the risk of application discrepancies, exposure to compromised identities and establishment of relationships with insiders who leverage someone’s good name to perpetrate fraud. If on the mortgage application general misrepresentation or income, appraiser or employer misrepresentation were checked adequately at origination and pre-funding, in this quarter’s examples, would there still be significant fraud to report…?
6. Mortgage fraud inflicts damage to profits, reputations and consumer confidence. Today, it is wise to ensure you know the customers, employees and vendors involved in every loan transaction — doing this early in the process can result in overall protection from tainted pipelines and hidden threats to loan quality.

We have all heard that if an offer sounds too good to be true, it probably is too good to be true. But what if the offer comes from a high profile member of your own community… say it comes from a professional athlete who spent years helping the local NBA team make it to the playoffs and into championship games. Surely, someone as well known as a National Basketball Association player wouldn’t involve himself as a ringleader in real estate fraud scam, would he?

This is the question I encountered recently when Bruce McClellan and his attorney Mike J. Smith contacted my office for information on where to turn for help in an alleged mortgage fraud scam perpetrated by veteran Detroit Pistons basketball player Lindsey Hunter.

Here is what happened, in Bruce McClellan’s own words (provided as an exclusive to FlippingFrenzy.com):

My name is Bruce McClellan (picture left) and this is my account of what happened between myself and NBA player Lindsey Hunter, and Hunter’s real estate investment firm, L&I Enterprises, LLC, and L&I’s other business personnel—Ivan “Iron” Johnson and Denna P. Tansil. I met Lindsey Hunter through his business associate, Ivan “Iron” Johnson, who I originally met years earlier at the Pontiac School system where I work as a boiler engineer.

In February of 2007, Ivan Johnson approached me to see if I would be interested in investing in real estate. According to Ivan, he had just opened a real estate investment firm with Detroit Pistons’ basketball player Lindsey Hunter, and if Lindsey felt they had a deal that I just had to look at, he wanted to know if I’d be interested.

When I asked him to tell me more about this business he was involved in with Lindsey Hunter, Ivan said they had formed a company called L&I Enterprises, LLC, for the purpose of buying and selling homes for a profit. After he swore to me that his business with Lindsey Hunter was 100% legit, I said yes to learning more about real estate investment opportunities.

A few weeks later, Ivan Johnson told me that he and Lindsay Hunter (picture right) had a real estate opportunity that would make me a lot of money. Ivan asked me to meet with himself and Lindsay at L&I Enterprises’ office for the purpose of checking my credit and running a background check on me to ensure that I’d qualify for a loan. When I arrived at their office, Lindsey he had left already, so Ivan handled the request for my credit report all on his own. Once he saw the results, Ivan said I had a great credit score (it was in the neighborhood of 790), and I was told I’d soon be a millionaire from investing in real estate.

At about the end of February, I heard from Ivan Johnson again. This time he said that he and Lindsey Hunter found the perfect property for me to invest in, and that once the deal was finalized, I’d earn $300,000 for my participation. According to Lindsay Hunter and Ivan Johnson, the deal involved buying a $1.2 Million home and selling it for $2.1 Million to a buyer Lindsey and Ivan had already identified and received a commitment from to buy the house. All I needed to do, Ivan and Lindsey told me, was apply for the home loan for the $1.2 Million purchase, and they’d handle the rest.

When I expressed doubt about my ability to qualify for a $1.2 Million loan, both men told me not to worry, that they would handle everything. Once again, as I did when Ivan first told me about Lindsey Hunter and L&I Enterprises, I expressed my concern for only working on legitimate deals and keeping my good credit in good standing. Again, both men told me I had nothing to be concerned about.

For a man making less than $45,000 a year, what Lindsay Hunter was telling me was quite appealing, as was the star treatment I was receiving from a well-known veteran NBA player.

On March 30, 2007, Ivan Johnson called to tell me that he needed me to meet him at LaSalle Bank in Farmington Hills, MI, where it was necessary for me to add my name to Lindsey and Ivy (wife) Hunter’s bank account. When I asked why my name was being added to Lindsey’s account, Ivan told me that this was necessary so it appeared to the bank that I had more money than I really did, which would help me qualify for the loan. When I asked Ivan why Lindsey wasn’t worried about adding me to his personal account, Ivan told me that Lindsey knew that I was an honest person and that I would never attempt to steal from him (which of course was true—I would never steal money from anyone).

Ivan Johnson and I went to the bank together where Ivan called Lindsay Hunter on his phone. Lindsey spoke to LaSalle Bank employee Shatha Atcho-Salmu, and from what I could hear of the conversation, it was obvious that they knew each other. Anyway, with the assistance of LaSalle Bank’s Shatha Atchoo-Salmu, and without Lindsey Hunter or his wife Ivy Hunter present, I signed my name onto Lindsey and Ivy’s account, which I was told Lindsey had authorized.

On April 30, 2007, Ivan Johnson called to tell me that we got the house (1718 Morningside Way, Bloomfield Hills, MI 48302 — pictured below) and that I needed to meet him to sign all the necessary paperwork. We met at Prudential Cranbrook Real Estate office on Franklin Road in Franklin, MI, to sign the papers. When I arrived I asked if Lindsey would be there and Ivan told me no, Lindsey had a game. I told Ivan that I would be taking his lead because I did not understand the paperwork and Ivan said that was fine. There were about four or five other people there including the sellers of the property.

Luckily, Denna P. Tansil—a realtor from L&I Enterprises, LLC—was there to guide us through the paperwork, which did not include any reference to me receiving $300,000 once the other sale had gone through. When I pointed this out to Denna, she wrote the following into the contract: “Seller will receive no less than $300,000.00 at the sale of the property.” I showed Ivan what Denna wrote, and after he checked over, he said everything was fine and Denna signed the paper and gave me a copy.

After about two months had passed, I asked Ivan Johnson if he could give me a full tour of the house and property. At first, he agreed but on the day we were to meet, Ivan was too busy. So I didn’t try again until much later because I really was not concerned since both Ivan and Lindsey Hunter had told me that they had a buyer for the house and it was basically on its way to being sold.

Later, I told Ivan that I needed to talk to Lindsay Hunter myself because the house had not sold like he said it would and I did not like the way things were going. Ivan called Lindsey while I was there and Lindsey told Ivan to tell me that for sure nothing was wrong. Regardless, I said that I needed to talk to him.

A few days later, Ivan called and told me that Lindsey had invited me to a Detriot Pistons home basketball game for the day of October 24, 2007. After being treated like a VIP in a private suite during the game, Lindsey, Ivan and I went to an upscale restaurant in Bloomfield Hills (MI), where Lindsey proceeded to tell me that everything for the real estate investment deal was in great shape—he reconfirmed that they had a buyer lined up and ready to buy the house from us for $2.1 Million—and that he wasn’t going to do me wrong or get me involved in any illegal activities. Lindsey even went as far as to tell me that he was financially set for the rest of his life, he wanted to make me and Ivan millionaires within the next one to two years, and that he wanted to make me a partner in L&I Enterprises, LLC.

When more time passed by without the house selling, I again became anxious and decided to visit the house myself. When I arrived at the house, I was surprised to find Lindsay Hunter’s truck parked in the driveway. Not knowing why his truck was there, and not seeing a way to gain access to the house, I called Ivan to get a feel for what was going on. It was then that I learned from Ivan that Lindsey and his wife Ivy were going through a rough patch—Ivan said they had separated—and that Lindsey was actually living in the house. Basically, Ivan told me that I shouldn’t go into the house right now because it might be “awkward.”

Understanding that this happens to some people, and keeping in mind Lindsey and Ivan’s previous statements about there already being a buyer for the house—which would yield $300,000 for my part of the investment—I was okay with the situation as explained to me by Ivan, and I went home. From my way of thinking, it was really Lindsey Hunter’s house anyway, and since he already had a buyer lined up and the mortgage was being paid on time—or so I assumed—there really wasn’t anything for me to worry about.

Eventually, in February of 2008, I did end up gaining access to the house, at which time I called Ivan Johnson and told him that I did not think the house was worth $1.2 Million.

In April 2008, I received a phone call from Countrywide inquiring about the mortgage payments. Apparently, the mortgage on the house had not been paid in quite some time, and Countrywide was calling me to demand payment.

Immediately after I got off the phone with Countrywide, I called Ivan Johnson to see just what in the heck was going on. Ivan informed me at that time—and for the first time ever—that Lindsey Hunter had shut down L&I Enterprises, and that in doing so, he had left a lot of people “holdin’ the bag” and that we were on our own. Lindsey, it seems, had gone home to his wife.

I asked Ivan how I was supposed to pay an $8,700 monthly note on my salary, to which he told that what Lindsey Hunter did was wrong and that he would talk with Lindsey to see if Lindsey would make things right for me. Rather than wait for Lindsey to call Ivan, Ivan tried calling Lindsey several times but discovered that Lindsey had changed his phone numbers; he was impossible to reach.

Finally, around the end of May of 2008, Ivan Johnson and Lindsey Hunter called me on a three-way call and asked: “What do you think you deserve to get you out of this house?” I told them that since my credit was ruined from the lack of mortgage payments, I wanted $50,000 and for them to get caught up on all of the outstanding monies owed to Countrywide. At this point, Lindsey became very angry and started cursing at me over and over. I told Lindsey that I was not cursing at him and I did not understand why he was cursing at me. I told Ivan that I didn’t want to talk under these conditions any more and I hung up. Ivan called me back about twenty minutes later and he said that what Lindsey had done was wrong.

About another week passed and Ivan and Lindsey called me again for a three-way conversation. “Bruce, this is Ivan and Lindsey is on the phone,” Ivan said. I said ok and Lindsey said hello and then proceeded to tell me that he was going to do whatever it took to get me out of the deal. He would restore my credit, get me off the house, and give me $25,000.

Since I just wanted my name off the deal, I agreed. The $25,000 was much less than the $300,000 I was originally told I would receive for investing in the house, but like I said, I just wanted to get free of the whole mess.

I never heard from Lindsay Hunter again.

Long story short, Lindsay Hunter never paid the $25,000 he promised me, my credit is ruined, and come to find out that back in April—when I signed all those closing documents Ivan Johnson and Denna Tansil told me to sign—I unknowingly signed for two loans, not just one!

Now I have legal representation and am hoping that because of this story on FlippingFrenzy.com and Lindsey Hunter’s profile, someone with judicial authority will listen and Hunter, Ivan Johnson, and Denna Tansil will be held accountable for what they’ve done.

~ Bruce McClellan

Thank you, Bruce, for sharing your account of what happened between yourself and Lindsey Hunter and Hunter’s business partners, Ivan Johnson and Denna Tansil. This story involves many of the trademark signatures of real estate and mortgage fraud:

• Bruce was a naïve borrower with nearly perfect credit. He had no idea a scam was taking place right under his nose, which ultimately made him the perfect straw buyer.
• This particular case features a long-term relationship—between Bruce and Ivan— making it easy for Bruce to be conned. Ivan knew that Bruce would jump at the chance to make serious money, and he knew that Bruce was a trusting soul with nearly perfect credit.
• What scam wouldn’t be complete without a glamour player (i.e., a ring leader). In this case, it is a professional basketball player claiming to want to take a common man under his wing and make him a millionaire. In other cases it is the smooth talking, good looking, get the deal done, likeable person. In either case, Lindsay Hunter seems to fit the bill.
• This scam involves fabricating income and/or assets, which is one of the oldest tricks in the book. Lindsay Hunter added Bruce McClellan to his million dollar bank account to boost Bruce’s ability to qualify for a loan.
• Bruce was promised easy money and no risk for his involvement in what he was told was a legitimate real estate deal. How many times have we heard that one!

A common thread running through most real estate fraud schemes is an offer that is to good to be true. When prominent public figures like Lindsay Hunter make offers that seem too good to be true, especially in harsh economic times, consumers tend to lose their judgment and make poor decisions

As a result of Bruce coming forward, I was able to put his case in front of serious law enforcement officials who are now attempting to sort through this mess. From Crain’s Detroit Business:

Is Lindsey Hunter, the veteran guard of the Detroit Pistons, a victim of mortgage fraud? Or is he a perpetrator?

That’s what two investigations, one by the Wayne County Register of Deeds’ mortgage-fraud task force, the other by the FBI, want to determine.

So far, Wayne County investigators consider him a victim, with someone else serving as what they describe as “a mastermind.” The FBI, on the other hand, according to sources close to its investigation, has him as its main focus and as a leading participant in at least two possibly fraudulent deals that went awry.

Stay turned to FlippingFrenzy.com for more information and developments on this story. In the meantime, read “Pistons guard: Duplicitous or dupe in mortgage fraud?” for more information.

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

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

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

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

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

According to the Federal Bureau of Investigation (FBI), which earlier today issued yet another Mortgage Fraud Advisory, here are the latest Real Estate Fraud statistics:

• Estimated Annual Losses: $4 billion to $6 billion
• Total Mortgage Fraud Suspicious Activity Reports in Fiscal Year 2007: 46,717, with $813 million in losses
• Total FBI Mortgage Fraud Task Forces/Working Groups (June 2008): 42
• Pending FBI Mortgage Fraud Investigations (May 2008): 1,380
• Cases opened in Fiscal Year 2007: 462 (compared to 295 in Fiscal Year 2003)
• Successes in Fiscal Year 2007: 321 indictments/informations; 260 convictions
• States with Significant Mortgage Fraud problems in 2008:

1. Florida
2. Nevada
3. Michigan
4. California
5. Utah
6. Georgia
7. Virginia
8. Illinois
9. New York
10. Minnesota

Predatory lenders employ many of the same illegal tactics found in other write-ups here on Flipping Frenzy. Loan officers, for example, may obtain inflated appraisals to get the homeowner a higher loan or will falsify income information to qualify the borrower for a mortgage.

Rather than doing those things to help the borrower, predatory lenders are simply out for themselves. Their actions rarely have any tangible benefits for borrowers and often saddle homeowners with loans they cannot afford. Loan officers—as you’re about to read—sometimes simply use borrowers to engage in a type of fraud I like to refer to as fraud for commissions.

Recently, one Flipping Frenzy reader came forward to share her experience with predatory lending and fraud for commission.

My name is Kim Sikorski, and in 2000 I was living in a one-bedroom apartment in New Baltimore, Michigan, when a local builder began construction on the Aspen Glen Condominiums right outside my front door. I remember thinking to myself how nice they looked and wished that someday I could own a home like that. Fast forward three years and I did.

To be honest, I wasn’t sure I could buy anything. I made ok money for a single person but I wasn’t sure it’d be enough to actually buy a home. To get the process started, I went to talk to a man named Dave Piccinini at Lira Financial in Clinton Township., MI (David Piccinini Inc. dba Lira Financial; 16600 18 Mile Rd.; Clinton Township., Michigan 48038). He was a friend of my boss, Ralph Bianchi, so I thought that I would be able to trust him.

I told Mr. Piccinini where I was looking to live and gave him the information he needed to check my credit report and get things started. A few weeks later I received a call from Stephen Tyree, the Lira Financial loan officer assigned to my application. Mr. Tyree called to tell me that my credit was good and I qualified to purchase one of the Aspen Glen condos with a mortgage at 6 ¼% (which for me translated into a monthly of $912.00). Before long, I went ahead and signed the purchase agreement and then started picking out carpet, countertops, tile color, etc. From my perspective, I was in the process of living the American dream of home ownership; I was buying my own home and I couldn’t be happier.

On August 27, 2003, I closed on my condo at the Mt. Clemens MI, office of Greco Title Co. To my surprise, neither Stephen Tyree or Dave Piccinini were present. It was there–at the closing–that I first found out that I was placed into an adjustable rate mortgage (ARM) that was only fixed for two years.

At the time, I only had a few days left to move out of my apartment, so I went ahead and signed all the documents and looked forward to moving into my new home. For me, the closing was a exciting day in my life. My mom and sister were even there by my side, taking pictures along the way.

The next day I talked to Dave Piccinini at Lira Financial and asked about the adjustable rate mortgage without escrow. Mr. Piccinini told me not to worry because in two years we would refinance and be able to set up escrow for my property taxes (which, by the way, were not included the first time). Eventually, I started having trouble keeping up with the taxes, and once again talked to Dave Piccinini about the situation. As he did before, Mr. Piccinini told me not to worry, that the taxing authority couldn’t do anything about it until I was four tax bills behind, and that by then we will have refinanced and paid off the back taxes, and set up escrow before that happens.

Based on Dave Piccinini’s recommendation, I went ahead as planned. About a week or so before I was supposed to close, my mortgage company at the time, Homecomings Financial, paid the back taxes (to protect their interest) and put me into forced placed escrow, which added to my principle and interest payment. My monthly payment went from $912 to $1,280 overnight.

When I called Dave Piccinini at Lira Financial, to tell him what happened, he told me this wasn’t a problem because we would just add it to the new mortgage. Just before closing I went to Mr. Piccinini’s office where I learned for the first time that he had placed me into a interest-only mortgage. I was told that my new mortgage was at 8%, 30-year fixed interest. I immediately told the staff in Mr. Piccinini’s Lira Financial office to stop all paperwork and please have Dave Piccinini call me himself as I was not aware of the interest-only loan (just like I was not aware that I was placed in an adjustable rate mortgage the first time around).

Long story short, I never heard from Dave Piccinini until he called about six months later to tell me that I owed him $350.00 for the appraisal done on my condo. I told him I was not paying him for the appraisal because I did not close with him, and we have not spoken since.

So my interest rate went up and I paid the difference for a year, but with my rate to go up a point or so a year with a ceiling of 12 ½ %, I knew I could not keep it up, so I went to see Stephen Tyree (my original loan officer at Lira Financial) who was now with Keystone Mortgage in Shelby Township, Michigan (45679 Village Blvd, Shelby Township, Michigan 48315). While it’s true that I originally knew Stephen from my association with Dave Piccinini, Stephen had refinanced my girlfriend’s mortgage and she was very happy with the results. I told Stephen the situation I was in—which he was well aware of—and asked for his help. He said he would see what he could do and get back with me. In the meantime, he had me fill out a credit application and give him permission to check my credit report. He also had me sign lots of blank forms saying we had to see what we could do and fill those in later.

When Stephen Tyree called me back he told me it was going to be tough to help me but that he felt he could get it done. He asked me if I had any savings, which I did not, and told me that having a savings account with at least three to six months worth of mortgage payments would show reserves and help me get approved. Stephen Tyree asked me to ask someone with money in their own bank account to add my name to their account to make it look like I had some savings, so I did. I asked my father to do this for me, and despite feeling it was not a very good idea–but wanting to help and not see me lose my home–he did. Stephen also told me that getting my condo to apprise for what we needed was going to be difficult but he thought he knew an appraiser that could get it done. Obviously, looking back, these should have been red flags. I know I should have never signed those papers.

On October 16, 2006, I closed on the refinance with an 80-20 mortgage. The 1st for $112,320 with an interest rate of 7.5% and a payment of $1,047.99 and the 2nd for $28,660 with an interest rate of 9.75% and a payment of $252.44. The total of both is $1,300.43, which I could not afford but I did what I thought I should to save my home.

In about March or April of 2007 I started calling Indy Mac to make them aware of my situation and that I was falling further and further behind on my payments. I talked to several people but no one really had any suggestions for me. They did thank me for calling and making them aware but offered no help other than trying to refinance again with a lower interest rate.

Ultimately, I was told Indy Mac could not lower my interest rate due to the fact that they technically did not own my mortgage any longer. With a payment of $1300.43 plus association dues of $160.00 a month come October 2007, I could no longer afford to pay my mortgage. I had put my condo up for sale by owner in May of 2007 (I thought I would rather sell it then lose it). But nothing. I was advised from Indy Mac that I could sell it in a short sale but the property must be listed with a real estate agent for at least 90 days. I listed the property in October 2007 and did not have even one person look at it. My condominium complex is not completed (the builder has about four more buildings to construct), and prices for new units identical to my own have dropped to $99,000. Why would anyone look at mine for $145,000.00 when they can build a new one for $99,000?

In January 2008 I came home from work to find a letter on my door from Trott & Trott, the law firm representing IndyMac, stating that my property had gone into foreclosure, was going to a Sheriff’s sale at the end of February, and that I had six months from 2/29/08 to redeem my property or be out.

And so there you have it—that’s were I am as of today. Most of my conversations with both Dave Piccinini at Lira Financial and with Stephen Tyree formally at Lira and now with Keystone Mortgage, were based on trust. Like many new homeowners, I did not know anything about mortgages and put all my trust in the people who did. I thought they were working with my best interest at heart.

Expecting the worst, hoping for the best!

~ Kim Sikorski, Michigan

In reviewing Kim’s account of what happened, a number of items jump off the page as being sure signs of predatory lending and fraud for commissions. For example, after contacting Kim and reviewing her situation a little closer, I was able to determine the following:

• Kim’s loan officer had her “sign lots of blank forms” and told her that he had to first “see what we could do and fill those in later.” In real estate fraud forensics, we call this ‘backing into the documents.’ With signed forms (that contain blank fields) in hand, a loan officer is able to manipulate the borrower’s loan documents to fit his commission-related needs.
• Kim’s loan officer artificially inflated her income in order to help her qualify for her loan. This of course is against the law.
• As noted by Kim above, her loan officer worked with an appraiser to secure an inflated appraisal on Kim’s property, thus allowing her to qualify for a higher loan that translated into a higher commission for the loan officer. Here again, the loan officer and appraiser broke the law.
• As Kim already pointed, she was encouraged to borrow her father’s assets, which everyone should know by now is a highly improper way of determining one’s actual worth and ability to repay a loan. Any real estate industry professional that advises someone to borrow or rent assets is more likely than not up to no good.
• Her loan officer promised to refinance Kim into a fixed loan within two years. Legally, no one can make that type of promise to a homeowner.
• As you read in Kim’s account, when she arrived for the very first closing of her life, she learned that she had been placed into an adjustable rate mortgage that was only fixed for two years. When mortgage brokers and loan officers present the borrower with a product, specifying the terms, and then change the terms just prior to closing, that is called “bait and switch” and it makes the loan highly suspect and questionable.

While many federal and state laws are aimed at preventing predatory lending, it’s not always easy to spot it when it occurs. If after reading Kim’s story, you’re left wondering if you are a victim of predatory lending, review the following list of common predatory lending practices:

1. Refinancing a mortgage repeatedly within a short period of time and charging higher than normal loan origination fees each time.
2. Selling a high-cost, high-interest loan to a borrower who would qualify for the lower-cost, lower-interest loan that the same lender offers.
3. Being asked or instructed to sign an application or documents containing blanks that the loan officer says he will fill in later.
4. Convincing loan applicants to borrow more than they can reasonably afford to pay back.
5. Pressuring loan applicants into accepting high-risk loans such as interest-only mortgages and loans with unusually high prepayment penalties.
6. Providing “products” that are nonexistent or offer no benefits.
7. Selling high-interest loans to borrowers based on ethnicity or nationality rather than their credit history or financial situation.

Loan officers (and to be fair, Realtors also) are often paid on commission. The more loans the sell, the more they make. In many cases, loan officers can earn even higher commissions by selling high-cost loans and additional products and services. In other words, the motivation to make money sometimes eclipses a loan officer’s responsibility to follow the rules.

The rules that real estate industry professionals—including loan officers—are supposed to follow stipulate the parameters for approving and underwriting a home loan. Although the stipulations may seem overly restrictive to some, the rules are in place for a reason—to make sure that the homeowner/borrower can afford their monthly payments and continue to live the American Dream of Homeownership.

More Americans are facing foreclosure than at any other time in recent memory. According to the May 2008 U.S. Foreclosure Market Report™ from RealtyTrac, foreclosure filings (i.e., default notices, auction sale notices, and bank repossessions), were reported on 261,255 properties during the month of May, which translates into a 7% increase over April and a 48% increase from May 2007. The report also shows one (1) in every 483 U.S. households received a foreclosure filing during the month of May, the highest monthly foreclosure rate since RealtyTrac began issuing its report in 2005.

Nevada, California, and Arizona post top state foreclosure rates

With one in every 118 households receiving a foreclosure filing in May, Nevada posted the highest state foreclosure rate for the 17th consecutive month. Foreclosure filings were reported on a total of 9,009 Nevada properties, an increase of nearly 24% from the previous month and a 72% increase from May 2007.

California’s foreclosure activity in May increased 11% from the previous month and 81% from May 2007, helping the state continue to register the nation’s second highest state foreclosure rate. One (1) in every 183 California households received a foreclosure filing during the month of May, a rate that was 2.6 times the national average.

Arizona’s May foreclosure rate — 1 in every 201 households received a foreclosure filing during the month — ranked third highest in the U.S. for the second month in a row. Arizona’s foreclosure activity increased nearly 12% from the previous month and almost 119% from May 2007.

One in every 228 Florida households received a foreclosure filing in May, giving it the fourth highest foreclosure rate in the country. Michigan foreclosure activity in May increased nearly 25% from the previous month, helping the state’s foreclosure rate to jump to fifth highest in the country after ranking No. 9 the previous month. One in every 353 Michigan households received a foreclosure filing in May.

Other states with foreclosure rates ranking among the top 10 for the month of May were Georgia, Colorado, Massachusetts, Ohio and New Jersey.

Detailed state-by-state data is available here.

For the second month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report. Seven cities in California were in the top 10, led by Stockton in the top spot. One in every 75 Stockton area households received a foreclosure filing in May– more than six times the national average. Other California cities in the top 10 were Merced at No. 3, Modesto at No. 4, Riverside-San Bernardino at No. 5, Vallejo-Fairfield at No. 7, Bakersfield at No. 8, and Sacramento at No. 9.

The Cape Coral-Fort Myers metro area in Florida registered the second highest metro foreclosure rate in May, with one in every 79 households receiving a foreclosure filing during the month. The other Florida metro area in the top 10 was Port Lucie-Fort Pierce at No. 10.

Las Vegas was the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 96 Las Vegas households received a foreclosure filing in May, more than five times the national average and No. 6 among the metro areas.

Metro areas with foreclosure rates among the top 20 included Phoenix at No. 12, Detroit at No. 14, San Diego at No. 17 and Miami at No. 19.

Next up: Speculation about when the slide will end / have we seen the worst of the worst. Weighing in on the topic is Joe G. Henry of Long & Foster-affiliated W.C & A.N Miller Realtors in Virginia (comment found on ForeclosurePulse):

Defendable recovery will be 2011 due to the highest volume of ARM resets occurring in June 2008 and the typical foreclosure process lasts 12 months from Notice of Default, Notice of Trustee Sale, Foreclosure Auction, then seasoning to a Bank Owned (REO) — plus a 15-18 month housing inventory. Moreover, for every one bank-owned listing in Fairfax County, we have three short sales, which 80 percent of these will actually be foreclosed. There are three crisis response talking points concerning this scenario: (1) added liquidity; (2) mark down distressed assets; and (3) act now.

What’s your take? Do you agree with Joe G. Henry or do you have a theory of your own?

If you are interested in the federal government’s handling of real estate and mortgage fraud prevention and prosecution, read “FBI Halts Some Cases to Investigate Mortgage Frauds,” by Bloomberg’s Robert Schmidt. If you don’t have time to read the entire article, here’s just what you need to know:

• The FBI, confronting a surge in mortgage fraud, has ordered more than two dozen of its field offices to stop probing certain financial crimes so agents can focus on real estate and mortgage fraud.
• Kenneth Kaiser, chief of the bureau’s criminal investigative division, issued this directive late last week on a video conference call with the heads of 26 FBI offices in areas where real estate fraud is out of control.
• An FBI spokesperson said the shift was made after an analysis of how agents are spending their time. Approximately 150 FBI agents were working on more than 1,300 real estate fraud cases before the directive was issued.
• The 26 FBI field offices were told to temporarily suspend opening new cases dealing with price fixing, mass marketing, wire fraud, mail fraud and environmental crimes. Current cases aren’t being dropped, the FBI spokesperson said.
• FBI field offices in Florida, Georgia, California, Nevada, Arizona, Texas, New York, Ohio, Michigan, Illinois, Indiana and Minnesota–all rated as real estate and mortgage fraud hot spots–are participating.
• “Diverting FBI resources to deal with cases of mortgage fraud is exactly what Chairwoman Mikulski wants to avoid,” Melissa Schwartz, a spokeswoman for U.S. Senator Barbara Mikulski, who heads the appropriations subcommittee for the FBI, told Bloomberg late yesterday.
• The Attorney General of the United States, Michael Mukasey said last week that the Justice Department, the FBI’s parent agency, “won’t create a national task force to combat mortgage fraud as the government did with corporate crime after Enron. “This isn’t that kind of phenomenon,” he said.

For more on this developing story, read FBI Halts Some Cases to Investigate Mortgage Frauds.

Two brothers from Michigan were sentenced last Thursday for their role in a real estate and mortgage fraud scam that netted jail time for eight (8) other defendants. Hani Mortada, 29, and Wael Mortada, 28, both from Dearborn, Michigan, were sentenced by U.S. District Judge Patrick Duggan to 20 months in jail and six (6) months in a correction center respectively. Hani Mortada was ordered to pay restitution of $648,750 and to serve five (5) years under the supervision of the court upon his release from jail. His younger brother, Wael Mortada, because he was determined to be a less significant player in the scheme, was sentenced to three (3) years under the supervision of the court (the first six (6) months of which he will serve in a community corrections center), 300 hours of community service, and ordered to pay restitution in the amount of $82,800.

The Mortada brothers were the last of 10 defendants to be sentenced in the case. In October, 2007, Safi Sobh, 35, also of Dearborn, was sentenced to serve 10 years in prison after being convicted by a jury of leading the real estate and mortgage fraud conspiracy that obtained inflated appraisals on residential properties, created false home loan applications, and obtained millions of dollars in bank loans.

The evidence presented during Sobh’s three-week trial showed that between July 2002 and December 2005, the Mortada brothers and others successfully corrupted a system of checks and balances lending institutions rely on to determine how much money they can safely lend on a property, and whether a particular borrower is qualified to repay the loan. Ohio Savings Bank, Commercial Federal Bank, and several other federally insured financial institutions, relied upon false representations to loan millions of dollars, most of which has not been recovered. Working out of his realty office, The Success Group, Sobh hand-picked and taught his co-conspirators how to commit real estate and mortgage fraud crimes. Co-conspirators (including the Mortada brothers) acted as corrupt loan originators, processors, appraisers, and straw buyers.

According to the FBI and multiple public and private sources, Michigan ranks among the top 10 hotspots nationwide for mortgage fraud (#3), with metro-Detroit (which includes the Mortada brothers town of Dearborn) ranked #4 for cities with the highest level of mortgage application misrepresentation.

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

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

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



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

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

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

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.

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

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

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

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

Highlights in the Mortgage Fraud Case Report include:

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

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