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 P at Lira Financial in Clinton Township., MI (Dave P 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. P 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 P 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 P at Lira Financial and asked about the adjustable rate mortgage without escrow. Mr. P 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 P about the situation. As he did before, Mr. P 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 P’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 P 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. Dave P’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. P’s Lira Financial office to stop all paperwork and please have Dave P 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 P 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 P, 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 P 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.

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

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

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

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

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

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

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

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

Great news out of the state of Michigan this morning. The state’s Senate and House of Representatives has approved a series of bills, which if enacted by the Governor, will create a validating registration process for Michigan mortgage loan officers. As reported earlier week by Crain’s Detroit Business, the bills require loan officers to meet specific and measurable educational requirements, register with the Michigan Office of Financial and Insurance Regulation, and undergo a criminal background check. The newly passed legislation also include measures that prohibit loan officers from engaging in fraud, intentionally failing to provide borrowers with required information, or issuing false or misleading ads about mortgage loans or their availability, according to Crain’s.

In a press release issued yesterday afternoon by the Michigan Mortgage Lenders Association (MMLA), Dan Grzywacz, MMLA’s president said that enactment of the legislation “will be very effective in removing the small minority of ‘bad actors’ from the mortgage origination business and will enhance the skills and professionalism of loan officers.”

Under the passed legislation, registered loan officers will be included in a national database in order to track their registration status and compliance record. This national database is expected to help thwart bad loan officers who travel or move across state borders to continue their unscrupulous practices.

Hats off to the Michigan Senate and House of Representatives for passing these important measures!

In related news, Michigan State Police (MSP) investigators report that they are now better prepared to handle cases of mortgage fraud following a two-day mortgage fraud investigation and prosecution training held earlier this week in Livonia, Michigan. The training, which was a cooperative effort between the MSP, Michigan Attorney General’s Office and the mortgage industry, drew more than 40 law enforcement officers and mortgage industry personnel.

“With mortgage fraud becoming more prevalent, it is important that investigators have the tools needed to both identify it and build a case against an offender,” says Detective First Lieutenant Marty Bugbee, commander of the MSP Criminal Investigation Section.

Developed specifically to address mortgage fraud in Michigan, the training consisted of classroom instruction and scenario-based workshops. Officers learned how to identify fraudulent activity, as well as advanced investigative techniques that will lead to a higher likelihood of prosecution.

Here again, hats to to the Michigan State Police (MSP) for conducting this type of training and for engaging in the process of planning future training sessions for additional law enforcement personnel. Great Job!

A Dearborn Heights, Michigan, tax accountant has been sentenced serve five years in prison and ordered to pay more than $11 million for his role in a mortgage fraud scam that defrauded lenders nearly $22 million in loses. Kalil Khalil, 36, according to court documents and information released by the United States Attorney for the Eastern District of Michigan, admitted that during a 2½-year period beginning in January 2001, he participated in the preparation of fraudulent loan applications and related documents that were submitted to mortgage lenders. Each of Khalil’s loan packages was fraudulent in one or more of the following ways:

• The purpose of the loan was not to buy or refinance a residence
• The borrower described on the application was not the true borrower
• The description of the borrower’s employment was false
• Documents purporting to substantiate the borrower’s employment (W-2 Forms, check stubs) were bogus
• The appraisal was inflated and forged
• Title to the property was not free and clear
• The title company purporting to guarantee clear title was merely a name used by Khalil and his codefendant, Tariq Hamad, to carry out the scheme
• Photographs were included that depicted a property other than the property identified in the loan application

Many of Khalil’s fraudulently prepared loan packages were approved and the loan proceeds were wired from the mortgage lenders, which were located outside of the State of Michigan, to bank accounts controlled by Khalil and Hamad that were located in metropolitan Detroit in the names of straw title companies. Khalil used most of the fraud proceeds to buy and sell stocks.

In addition to his prison sentence and order to pay approximately $11.1 million restitution to mortgage lenders and a legitimate appraisal company whose name he used on bogus appraisals, Khalil received a three-year term of supervised release following his exit from prison. He also agreed to forfeit his interest in bank and securities accounts containing about $300,000 that were seized by the government as part of its investigation.

Khalil’s codefendant, Tariq Hamad, 37, of Dearborn, pleaded guilty to one count of wire fraud in December 2006 and was sentenced in September 2007 to 9 years’ imprisonment and ordered to pay restitution in the amount of $11.4 million. The judge in the case, U.S. District Judge David M. Lawson, noted that he would have imposed a similar term of imprisonment on Khalil had it not been for Khalil’s substantial cooperation with the government in unrelated investigations being supervised by the U.S. Attorney’s Office.

25 Indicted in Chicago mortgage fraud scheme: Federal authorities have charged 25 people in what is considered one of the largest mortgage fraud schemes in Chicago area history. Following a four-year investigation, the FBI and U.S. Attorney’s office alleged in three indictments that more than 150 homes were involved in fraudulent mortgage transactions worth $25 million.

Colorado real estate agents get lesson in fraud: Summit County, Colorado, real estate agents got a lesson in identity theft prevention this week at a workshop detailing a nationwide problem quickly seeping into the industry. Janet Elkins, a fraud specialist at Alpine Bank, gave a quick tutorial on how individuals can prevent against identity theft, as well as how business can make smarter choices to prevent thieves from getting their foot in the door.

Ogden, Utah, businessman charged with real-estate fraud: The Utah Attorney General’s Office has filed criminal charges against an Ogden businessman accused of bilking hundreds of investors out of more than $140 million. Val Edmund Southwick, 62, was charged in Salt Lake City’s 3rd District Court today with nine counts of securities fraud, a second-degree felony. Prosecutors accuse him of bilking 817 investors out of millions in a commercial real-estate investment scheme. The federal Securities and Exchange Commission filed a separate civil action against Southwick over his Ogden-based business, VesCor Capital, which it alleges was a “massive Ponzi scheme.”

State cracks down on mortgage brokers: Colorado regulators Friday announced their first actions against mortgage brokers under a new set of state laws aimed at curbing unscrupulous lending practices. In one case, the state’s Division of Real Estate issued a cease-and-desist order against Cade Emerson Lee, who it accused of acting as an unregistered mortgage broker in Colorado despite having been convicted of felony securities fraud.

Mortgage fraud spiraling out of control in London, England: “Endemic” mortgage fraud on new homes has triggered a wave of repossessions and forced a widespread crackdown by regulatory authorities. Initiatives to address lenders’ concerns that residential mortgage fraud is on the rise are either under way or will be launched by the Council of Mortgage Lenders, Financial Services Authority–the City watchdog–the Royal Institution of Chartered Surveyors and police forces around the country.

Michigan tax accountant sentenced in $21 million mortgage fraud case: A Dearborn Heights, Michigan, tax accountant, convicted of stealing $21 million in a mortgage fraud scheme, was sentenced in federal court Thursday to five years in prison. U.S. District Judge David Lawson sentenced tax accountant Kalil Khalil, 36, to 60 months in prison for wire fraud based on a two-and-a-half-year scheme to defraud mortgage lenders.

Kingpin of $30M mortgage fraud scam in Canada jailed: The kingpin of a $30-million mortgage fraud believed to be the largest in Alberta (Canada) history was sentenced Thursday to six years in prison. Gohar (Carmen) Ahmed Pervez, 45, pleaded guilty to 54 counts of fraud that netted him more than $1.8 million in profit in less than five years. He received two-for-one credit for the two years he has served in the remand centre and is now slated to spend two more years behind bars.

Texas couple indicted for $3 million real estate fraud: A Navarro County, Texas, grand jury handed down indictments against three individuals Thursday, in connection with what prosecutors are calling “an organized mortgage fraud scheme.” Lynn Marriott, 54, and Kandace Y. Marriott, 51, both of Gun Barrel City, along with Karen Hayes, 56, of Kemp, were indicted for the first degree felony. Cpl. Mark Nanny of the Corsicana Police Department uncovered the operation, subsequently bringing in the Housing and Urban Development department (HUD) to the investigation. The defendants were doing business as One Way Home & Land, dealing with manufactured housing. Prosecutors allege the company falsified residential loan applications in order to assure the buyers’ loans were approved by mortgage lenders.

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

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

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

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

In particular:

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

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

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

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

• Mortgage Fraud Law Goes into Effect in North Carolina: Among the list of new laws taking effect tomorrow in North Carolina–a law making it easier to prosecute residential mortgage fraud by defining the practice and creating tougher punishments for repeat offenders.
• Mortgage Inquiries Swamping Arizona: Arizona’s mortgage regulator has shut down a handful of firms for fraud and other illegal lending practices this year, but at least 40 other investigations are stalled because there is no money to fund them.
• California Real Estate Firm Investigated for Fraud: Federal investigators are looking into Crisp & Cole Real Estate’s operations for possible mortgage fraud after a federal raid of 13 of the now-defunct California company’s offices.
• New Jersey Lawyer-Judge at Center of Land-Flip Investigation: A NJ lawyer who is also his town’s judge may have played a central role in a scheme to defraud lenders by obtaining mortgages based on inflated appraisals of run-down properties.
• Minnesota Mortgage Firm is the Focus of Fraud Probe: Investigators are probing mortgage fraud complaints involving Universal Mortgage and several of its employees that are said to have used straw buyers to buy property at inflated prices.
• Guilty Plea Entered in Missouri Fraud Case: A 30-year-old man from St. Louis is the fifth person implicated in a mortgage fraud ring involving dozens of homes and millions of dollars in real estate transactions dating back to 2005. Daniel Mann pleaded guilty to conspiracy to commit wire fraud and now faces a maximum penalty of five years in prison. Mann admitted to arranging a number of fraudulent real estate transactions that were part of a larger fraud ring coordinated by another person who pleaded guilty in September to similar charges and will be sentenced in December.
• Canadian Paralegal Convicted in $30 Million Mortgage Fraud Scam: An Edmonton fraudster has been convicted of supporting a criminal organization by helping to swindle unsuspecting real estate investors out of nearly $30 million. Sixty-one-year-old Terry Ellis was found guilty of 12 counts of fraud and one count of forgery in connection with a massive mortgage fraud believed to be the biggest in Alberta history.
• Editorial Questions Michigan Attorney General’s Record on Real Estate Fraud: In the state hardest hit by real estate and mortgage fraud-related foreclosures, its attorney general, Mike Cox–who has won nationwide notoriety for locking up parents behind in their child support payments–has yet to file a single criminal complaint against any mortgage broker or lending entity.
• Two Sentenced in Connection with $15 Million Mortgage Fraud Case in Ohio: Two people have been sentenced to prison in connection with what prosecutors describe as a mortgage fraud scam in upscale Cleveland suburbs. Builder and developer, Edward Emery received a sentence totaling 34 months and a fine of $10,000. Eloise Anderson will spend nearly a year in prison and has been ordered to pay $35,000 in restitution.

Spurred perhaps by yesterday’s U.S. Conference of Mayors meeting and press conference in the Motor City, today’s issue of The Detroit News has fairly solid coverage of the unmistakable connection between Real Estate and Mortgage Fraud and metro-Detroit’s foreclosure crisis.

From “Fraud deepens Michigan housing crisis — Metro Detroit’s foreclosure explosion linked in part to mortgage scams ,” by Ron French and Mike Wilkinson:

Danny Stokes used to sell drugs, before he discovered it was safer and more lucrative to sell mortgages.

Samer Fawaz and Bashar Farraj were students in a mortgage fraud class where they learned to inflate appraisals and bilk lenders. They murdered one of their fellow con men in their Sterling Heights mortgage office when the scheme began to unravel.

Nelson Sumpter served time for fraud in a scam that drew national media attention in 1994. That criminal record didn’t stop him from beginning a new career as a loan officer. He was recently indicted for fraud.
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Michigan ranks among the nation’s leaders in mortgage fraud, costing residents millions of dollars and adding thousands of homes to the region’s record number of foreclosures, a Detroit News investigation found. Here, scam artists found the perfect combination of eager, unsophisticated borrowers and lax regulation.

French and Wilkinson’s article has lots of interesting information, including the fact that mortgage fraud perpetrated against Michigan banks grew 150-fold over the last 10 years, from nine cases in 1997 to over 1,400 reported cases in 2006.

In a separate article penned by Wilkinson, we learn that foreclosures in one particular Shelby Township (Michigan) neighborhood have raised considerable suspicions:

In the Woodlands subdivision in Shelby Township, the homes come in two sizes: big and bigger. Three-car garages, tiled pools and circular driveways are common. The mortgages are supersized, too, and for some, living there requires the down payment of a life’s savings. But for a handful of folks, all it took was high-interest, no-money-down loans from financial institutions scattered across the country.

The Woodlands’ sales caught the attention of township officials, including the assessor. The prices were well above what other homes in the area were going for, averaging nearly 40 percent more per square foot.

The township sent the FBI a list of homes that had been sold at prices so high that the township wouldn’t use them as comparable sales, township Supervisor Ralph “Skip” Maccarone said. All seven of the foreclosed homes in the Woodlands were on that list. The FBI said it cannot confirm whether an investigation is ongoing. Mark Bowling, the FBI’s supervisory senior resident agent for Macomb, St. Clair and Sanilac counties, said his agents are actively working mortgage fraud cases throughout the county.

Click here for an interactive map detailing the foreclosures in The Woodlands of Shelby subdivision.

A leading online marketplace for foreclosure properties, yesterday released its August 2007 U.S. Foreclosure Market Report, which shows that a total of 243,947 foreclosure filings–default notices, auction sale notices and bank repossessions–were reported during the month, up 36 percent from the previous month and up 115 percent from August of last year. This is the highest number of foreclosure filings in a single month that RealtyTrac has reported since it began issuing the monthly report in January 2005.

The national foreclosure rate of one foreclosure filing for every 510 households for the month is also the highest figure ever issued in the report.

The jump in foreclosure filings may just be the beginning of the next wave of increased activity for house flippers, as a large number of subprime adjustable rate loans are now beginning to reset. A significant factor in the increased level of foreclosure activity is that the number of REO filings (bank repossessions) is increasing dramatically, which means that a greater percentage of homes entering foreclosure are going back to the banks.

Nevada, California, Florida post top state foreclosure rates

Nevada continued to register the nation’s highest state foreclosure rate, one foreclosure filing for every 165 households–more than three times the national average. The state reported 6,197 foreclosure filings during the month, a 21 percent increase from the previous month and more than triple the number reported in August 2006.

California’s foreclosure rate jumped to second highest among the states thanks to a 48 percent month-over-month spike in foreclosure activity. The state reported 57,875 foreclosure filings during the month, a foreclosure rate of one foreclosure filing for every 224 households–more than twice the national average.

Florida foreclosure activity jumped 77 percent from the previous month, boosting the state’s foreclosure rate from seventh highest to third highest among the states. The state reported 33,932 foreclosure filings, a foreclosure rate of one foreclosure filing for every 243 households.

Other states with foreclosure rates ranking among the nation’s 10 highest were Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana.

Sun Belt, Rust Belt states dominate top foreclosure totals

Seven of the top 10 states in terms of total foreclosure filings in August were located in the Sun Belt, and three of the top 10 states were in the Rust Belt. After California and Florida, Ohio registered the third highest state total, with 17,793 foreclosure filings during the month. The state documented a foreclosure rate of one foreclosure filing for every 281 households, fifth highest in the nation.

Texas, Michigan and Georgia all reported more than 10,000 foreclosure filings for the month, documenting the fourth, fifth and sixth highest state foreclosure totals respectively, followed by Arizona, Colorado, Illinois and Nevada.

Top Metro foreclosure rates in California, Michigan, Florida, Nevada and Ohio

California cities once again accounted for six of the top 10 metro foreclosure rates in August, with the top three spots all taken by California cities. Modesto documented the nation’s highest metro foreclosure rate, one foreclosure filing for every 79 households, followed by Stockton and Merced. Other California cities in the top 10 included Vallejo-Fairfield at No. 5, Riverside-San Bernardino at No. 6 and Sacramento at No. 7.

Detroit posted a foreclosure rate of one foreclosure filing for every 87 households, the nation’s fourth highest metro foreclosure rate and more than five times the national average. Fort Lauderdale, Las Vegas and Cleveland, ranked Nos. 8, 9 and 10.