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The FBI Investigates Mortgage Fraud!

Recent posts


October 13, 2010

FBI investigates and tips to help prevent you from being victimized

Redemption / Strawman / Bond Fraud

Proponents of this scheme claim that the U.S. government or the Treasury Department control bank accounts—often referred to as “U.S. Treasury Direct Accounts”—for all U.S. citizens that can be accessed by submitting paperwork with state and federal authorities. Individuals promoting this scam frequently cite various discredited legal theories and may refer to the scheme as “Redemption,” “Strawman,” or “Acceptance for Value.” Trainers and websites will often charge large fees for “kits” that teach individuals how to perpetrate this scheme. They will often imply that others have had great success in discharging debt and purchasing merchandise such as cars and homes. Failures to implement the scheme successfully are attributed to individuals not following instructions in a specific order or not filing paperwork at correct times.

This scheme predominately uses fraudulent financial documents that appear to be legitimate. These documents are frequently referred to as “bills of exchange,” “promissory bonds,” “indemnity bonds,” “offset bonds,” “sight drafts,” or “comptrollers warrants.” In addition, other official documents are used outside of their intended purpose, like IRS forms 1099, 1099-OID, and 8300. This scheme frequently intermingles legal and pseudo legal terminology in order to appear lawful. Notaries may be used in an attempt to make the fraud appear legitimate. Often, victims of the scheme are instructed to address their paperwork to the U.S. Secretary of the Treasury.

Tips for Avoiding Redemption/Strawman/Bond Fraud:

* Be wary of individuals or groups selling kits that they claim will inform you on to access secret bank accounts.
* Be wary of individuals or groups proclaiming that paying federal and/or state income tax is not necessary.
* Do not believe that the U.S. Treasury controls bank accounts for all citizens.
* Be skeptical of individuals advocating that speeding tickets, summons, bills, tax notifications, or similar documents can be resolved by writing “acceptance for value” on them.
* If you know of anyone advocating the use of property liens to coerce acceptance of this scheme, contact your local FBI office.

Advance Fee Schemes

An advance fee scheme occurs when the victim pays money to someone in anticipation of receiving something of greater value—such as a loan, contract, investment, or gift—and then receives little or nothing in return.

The variety of advance fee schemes is limited only by the imagination of the con artists who offer them. They may involve the sale of products or services, the offering of investments, lottery winnings, “found money,” or many other “opportunities.” Clever con artists will offer to find financing arrangements for their clients who pay a “finder’s fee” in advance. They require their clients to sign contracts in which they agree to pay the fee when they are introduced to the financing source. Victims often learn that they are ineligible for financing only after they have paid the “finder” according to the contract. Such agreements may be legal unless it can be shown that the “finder” never had the intention or the ability to provide financing for the victims.

Tips for Avoiding Advanced Fee Schemes:

If the offer of an “opportunity” appears too good to be true, it probably is. Follow common business practice. For example, legitimate business is rarely conducted in cash on a street corner.

* Know who you are dealing with. If you have not heard of a person or company that you intend to do business with, learn more about them. Depending on the amount of money that you plan on spending, you may want to visit the business location, check with the Better Business Bureau, or consult with your bank, an attorney, or the police.
* Make sure you fully understand any business agreement that you enter into. If the terms are complex, have them reviewed by a competent attorney.
* Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address. Also be suspicious when dealing with persons who do not have a direct telephone line and who are never in when you call, but always return your call later.
* Be wary of business deals that require you to sign nondisclosure or non-circumvention agreements that are designed to prevent you from independently verifying the bona fides of the people with whom you intend to do business. Con artists often use non-circumvention agreements to threaten their victims with civil suit if they report their losses to law enforcement.

For more information:
– Work-at-Home Advance Fee Scheme
– Cancer Research Advance Fee Scheme

Identity Theft

Identity theft occurs when someone assumes your identity to perform a fraud or other criminal act. Criminals can get the information they need to assume your identity from a variety of sources, including by stealing your wallet, rifling through your trash, or by compromising your credit or bank information. They may approach you in person, by telephone, or on the Internet and ask you for the information.

The sources of information about you are so numerous that you cannot prevent the theft of your identity. But you can minimize your risk of loss by following a few simple hints.

Tips for Avoiding Identity Theft:

* Never throw away ATM receipts, credit statements, credit cards, or bank statements in a usable form.
* Never give your credit card number over the telephone unless you make the call.
* Reconcile your bank account monthly, and notify your bank of discrepancies immediately.
* Keep a list of telephone numbers to call to report the loss or theft of your wallet, credit cards, etc.
* Report unauthorized financial transactions to your bank, credit card company, and the police as soon as you detect them.
* Review a copy of your credit report at least once each year. Notify the credit bureau in writing of any questionable entries and follow through until they are explained or removed.
* If your identity has been assumed, ask the credit bureau to print a statement to that effect in your credit report.
* If you know of anyone who receives mail from credit card companies or banks in the names of others, report it to local or federal law enforcement authorities.

Investment-Related Scams

Letter of Credit Fraud

Legitimate letters of credit are never sold or offered as investments. They are issued by banks to ensure payment for goods shipped in connection with international trade. Payment on a letter of credit generally requires that the paying bank receive documentation certifying that the goods ordered have been shipped and are en route to their intended destination. Letters of credit frauds are often attempted against banks by providing false documentation to show that goods were shipped when, in fact, no goods or inferior goods were shipped.

Other letter of credit frauds occur when con artists offer a “letter of credit” or “bank guarantee” as an investment wherein the investor is promised huge interest rates on the order of 100 to 300 percent annually. Such investment “opportunities” simply do not exist. (See Prime Bank Notes for additional information.)

Tips for Avoiding Letter of Credit Fraud:

* If an “opportunity” appears too good to be true, it probably is.
* Do not invest in anything unless you understand the deal. Con artists rely on complex transactions and faulty logic to “explain” fraudulent investment schemes.
* Do not invest or attempt to “purchase” a “letter of credit.” Such investments simply do not exist.
* Be wary of any investment that offers the promise of extremely high yields.
* Independently verify the terms of any investment that you intend to make, including the parties involved and the nature of the investment.

Prime Bank Note Fraud

International fraud artists have invented an investment scheme that supposedly offers extremely high yields in a relatively short period of time. In this scheme, they claim to have access to “bank guarantees” that they can buy at a discount and sell at a premium. By reselling the “bank guarantees” several times, they claim to be able to produce exceptional returns on investment. For example, if $10 million worth of “bank guarantees” can be sold at a two percent profit on 10 separate occasions—or “traunches”—the seller would receive a 20 percent profit. Such a scheme is often referred to as a “roll program.”

To make their schemes more enticing, con artists often refer to the “guarantees” as being issued by the world’s “prime banks,” hence the term “prime bank guarantees.” Other official sounding terms are also used, such as “prime bank notes” and “prime bank debentures.” Legal documents associated with such schemes often require the victim to enter into non-disclosure and non-circumvention agreements, offer returns on investment in “a year and a day”, and claim to use forms required by the International Chamber of Commerce (ICC). In fact, the ICC has issued a warning to all potential investors that no such investments exist.

The purpose of these frauds is generally to encourage the victim to send money to a foreign bank, where it is eventually transferred to an off-shore account in the control of the con artist. From there, the victim’s money is used for the perpetrator’s personal expenses or is laundered in an effort to make it disappear.

While foreign banks use instruments called “bank guarantees” in the same manner that U.S. banks use letters of credit to insure payment for goods in international trade, such bank guarantees are never traded or sold on any kind of market.

Tips for Avoiding Prime Bank Note Fraud:

* Think before you invest in anything. Be wary of an investment in any scheme, referred to as a “roll program,” that offers unusually high yields by buying and selling anything issued by “prime banks.”
* As with any investment, perform due diligence. Independently verify the identity of the people involved, the veracity of the deal, and the existence of the security in which you plan to invest.
* Be wary of business deals that require non-disclosure or non-circumvention agreements that are designed to prevent you from independently verifying information about the investment.

“Ponzi’ Schemes

“Ponzi” schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of “dividends.”

This type of fraud is named after its creator—Charles Ponzi of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors.

Tips for Avoiding Ponzi Schemes:

* Be careful of any investment opportunity that makes exaggerated earnings claims.
* Exercise due diligence in selecting investments and the people with whom you invest—in other words, do your homework.
* Consult an unbiased third party—like an unconnected broker or licensed financial advisor—before investing.

For more information:
– Bernie Madoff Case
– Stanford Case
– Wholesale Grocery Distribution Ponzi Scheme
– ATM Ponzi Scheme
– Victims Turn Tables with Ponzi Scheme

Pyramid Schemes

As in Ponzi schemes, the money collected from newer victims of the fraud is paid to earlier victims to provide a veneer of legitimacy. In pyramid schemes, however, the victims themselves are induced to recruit further victims through the payment of recruitment commissions.

More specifically, pyramid schemes—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.

Tips for Avoiding Pyramid Schemes:

* Be wary of “opportunities” to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.
* Independently verify the legitimacy of any franchise or investment before you invest.

Market Manipulation or “Pump and Dump” Fraud

This scheme—commonly referred to as a “pump and dump”—creates artificial buying pressure for a targeted security, generally a low-trading volume issuer in the over-the-counter securities market largely controlled by the fraud perpetrators. This artificially increased trading volume has the effect of artificially increasing the price of the targeted security (i.e., the “pump”), which is rapidly sold off into the inflated market for the security by the fraud perpetrators (i.e., the “dump”); resulting in illicit gains to the perpetrators and losses to innocent third party investors. Typically, the increased trading volume is generated by inducing unwitting investors to purchase shares of the targeted security through false or deceptive sales practices and/or public information releases.

A modern variation on this scheme involves largely foreign-based computer criminals gaining unauthorized access to the online brokerage accounts of unsuspecting victims in the United States. These victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect the pump portion of a manipulation, while the fraud perpetrators sell their pre-existing holdings in the targeted security into the inflated market to complete the dump.

Tips for Avoiding Market Manipulation Fraud:

* Don’t believe the hype.
* Find out where the stock trades.
* Independently verify claims.
* Research the opportunity.
* Beware of high-pressure pitches.
* Always be skeptical.

For more information:
– Operation Shore Shells investigation

Telemarketing Fraud

When you send money to people you do not know personally or give personal or financial information to unknown callers, you increase your chances of becoming a victim of telemarketing fraud.

Here are some warning signs of telemarketing fraud—what a caller may tell you:

* “You must act ‘now’ or the offer won’t be good.”
* “You’ve won a ‘free’ gift, vacation, or prize.” But you have to pay for “postage and handling” or other charges.
* “You must send money, give a credit card or bank account number, or have a check picked up by courier.” You may hear this before you have had a chance to consider the offer carefully.
* “You don’t need to check out the company with anyone.” The callers say you do not need to speak to anyone including your family, lawyer, accountant, local Better Business Bureau, or consumer protection agency.
* “You don’t need any written information about their company or their references.”
* “You can’t afford to miss this ‘high-profit, no-risk’ offer.”

If you hear these or similar “lines” from a telephone salesperson, just say “no thank you” and hang up the telephone.

Tips for Avoiding Telemarketing Fraud:

It’s very difficult to get your money back if you’ve been cheated over the telephone. Before you buy anything by telephone, remember:

* Don’t buy from an unfamiliar company. Legitimate businesses understand that you want more information about their company and are happy to comply.
* Always ask for and wait until you receive written material about any offer or charity. If you get brochures about costly investments, ask someone whose financial advice you trust to review them. But, unfortunately, beware—not everything written down is true.
* Always check out unfamiliar companies with your local consumer protection agency, Better Business Bureau, state attorney general, the National Fraud Information Center, or other watchdog groups. Unfortunately, not all bad businesses can be identified through these organizations.
* Obtain a salesperson’s name, business identity, telephone number, street address, mailing address, and business license number before you transact business. Some con artists give out false names, telephone numbers, addresses, and business license numbers. Verify the accuracy of these items.
* Before you give money to a charity or make an investment, find out what percentage of the money is paid in commissions and what percentage actually goes to the charity or investment.
* Before you send money, ask yourself a simple question. “What guarantee do I really have that this solicitor will use my money in the manner we agreed upon?”
* Don’t pay in advance for services. Pay services only after they are delivered.
* Be wary of companies that want to send a messenger to your home to pick up money, claiming it is part of their service to you. In reality, they are taking your money without leaving any trace of who they are or where they can be reached.
* Always take your time making a decision. Legitimate companies won’t pressure you to make a snap decision.
* Don’t pay for a “free prize.” If a caller tells you the payment is for taxes, he or she is violating federal law.
* Before you receive your next sales pitch, decide what your limits are—the kinds of financial information you will and won’t give out on the telephone.
* Be sure to talk over big investments offered by telephone salespeople with a trusted friend, family member, or financial advisor. It’s never rude to wait and think about an offer.
* Never respond to an offer you don’t understand thoroughly.
* Never send money or give out personal information such as credit card numbers and expiration dates, bank account numbers, dates of birth, or social security numbers to unfamiliar companies or unknown persons.
* Be aware that your personal information is often brokered to telemarketers through third parties.
* If you have been victimized once, be wary of persons who call offering to help you recover your losses for a fee paid in advance.
* If you have information about a fraud, report it to state, local, or federal law enforcement agencies.

For More information:
– Telemarketing Fraud Targeting Seniors

Nigerian Letter or “419” Fraud

Nigerian letter frauds combine the threat of impersonation fraud with a variation of an advance fee scheme in which a letter mailed from Nigeria offers the recipient the “opportunity” to share in a percentage of millions of dollars that the author—a self-proclaimed government official—is trying to transfer illegally out of Nigeria. The recipient is encouraged to send information to the author, such as blank letterhead stationery, bank name and account numbers, and other identifying information using a fax number provided in the letter. Some of these letters have also been received via e-mail through the Internet. The scheme relies on convincing a willing victim, who has demonstrated a “propensity for larceny” by responding to the invitation, to send money to the author of the letter in Nigeria in several installments of increasing amounts for a variety of reasons.

Payment of taxes, bribes to government officials, and legal fees are often described in great detail with the promise that all expenses will be reimbursed as soon as the funds are spirited out of Nigeria. In actuality, the millions of dollars do not exist, and the victim eventually ends up with nothing but loss. Once the victim stops sending money, the perpetrators have been known to use the personal information and checks that they received to impersonate the victim, draining bank accounts and credit card balances. While such an invitation impresses most law-abiding citizens as a laughable hoax, millions of dollars in losses are caused by these schemes annually. Some victims have been lured to Nigeria, where they have been imprisoned against their will along with losing large sums of money. The Nigerian government is not sympathetic to victims of these schemes, since the victim actually conspires to remove funds from Nigeria in a manner that is contrary to Nigerian law. The schemes themselves violate section 419 of the Nigerian criminal code, hence the label “419 fraud.”

Tips for Avoiding Nigerian Letter or “419” Fraud:

* If you receive a letter from Nigeria asking you to send personal or banking information, do not reply in any manner. Send the letter to the U.S. Secret Service, your local FBI office, or the U.S. Postal Inspection Service. You can also register a complaint with the Federal Trade Commission’s Complaint Assistant.
* If you know someone who is corresponding in one of these schemes, encourage that person to contact the FBI or the U.S. Secret Service as soon as possible.
* Be skeptical of individuals representing themselves as Nigerian or foreign government officials asking for your help in placing large sums of money in overseas bank accounts.
* Do not believe the promise of large sums of money for your cooperation.
* Guard your account information carefully.

For More information:
– Related Online Rental Ads Scheme
– Related Spanish Lottery Scam

Health Care Fraud or Health Insurance Fraud

Medical Equipment Fraud:

Equipment manufacturers offer “free” products to individuals. Insurers are then charged for products that were not needed and/or may not have been delivered.

“Rolling Lab” Schemes:

Unnecessary and sometimes fake tests are given to individuals at health clubs, retirement homes, or shopping malls and billed to insurance companies or Medicare.

Services Not Performed:

Customers or providers bill insurers for services never rendered by changing bills or submitting fake ones.

Medicare Fraud:

Medicare fraud can take the form of any of the health insurance frauds described above. Senior citizens are frequent targets of Medicare schemes, especially by medical equipment manufacturers who offer seniors free medical products in exchange for their Medicare numbers. Because a physician has to sign a form certifying that equipment or testing is needed before Medicare pays for it, con artists fake signatures or bribe corrupt doctors to sign the forms. Once a signature is in place, the manufacturers bill Medicare for merchandise or service that was not needed or was not ordered.

Tips for Avoiding Health Care Fraud or Health Insurance Fraud:

* Never sign blank insurance claim forms.
* Never give blanket authorization to a medical provider to bill for services rendered.
* Ask your medical providers what they will charge and what you will be expected to pay out-of-pocket.
* Carefully review your insurer’s explanation of the benefits statement. Call your insurer and provider if you have questions.
* Do not do business with door-to-door or telephone salespeople who tell you that services of medical equipment are free.
* Give your insurance/Medicare identification only to those who have provided you with medical services.
* Keep accurate records of all health care appointments.
* Know if your physician ordered equipment for you.

For more information:
– Heath Care Fraud webpage

October 9, 2010

Who Are the Winners and Losers in the Foreclosure Fraud Crisis?

The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

* Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

* Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
* The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
* The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

* Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
* The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

By Annie Lowrey

October 3, 2010

Financial Fraud Enforcement Task Force Holds Mortgage Fraud Summit in Los Angeles

LOS ANGELES ( —Representatives of the Financial Fraud Enforcement Task Force met in Los Angeles today for the latest in a series of Mortgage Fraud Summits. The task force—established by President Barack Obama in November 2009 to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes—is comprised of representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement agencies.

According to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the Los Angeles metropolitan area now ranks first in the nation for the number of subjects named in Mortgage Fraud Suspicious Activity Reports filed since 2008 by financial institutions.

Today, the task force members met with community members, legal services providers, real estate industry representatives and law enforcement officials to discuss the problem of mortgage fraud from a national, state and local perspective. In the morning, attendees participated in panels on mortgage fraud trends and the community impact of mortgage fraud in the Los Angeles area. In the afternoon, task force representatives will meet privately with law enforcement officials involved in the investigation of mortgage fraud.

“This Administration has made protecting America’s working families from financial fraud a top priority,” said Assistant Attorney General for the Civil Division Tony West. “The President’s Financial Fraud Enforcement Task Force has brought together the government’s civil and criminal capabilities to uncover mortgage fraud schemes and hold those who commit fraud accountable to the fullest extent of the law.”

“White collar financial crimes strike at the economic heart of the American system. To the extent that we can uncover and prosecute these activities, it’s to everyone’s benefit,” said Deputy Inspector General at the Department of Housing and Urban Development (HUD) Michael P. Stephens. “Accordingly, I am happy to lend the HUD Office of Inspector General’s nationwide expertise to this exceptional group of law enforcement agencies.”

“Today’s Mortgage Fraud Summit in Los Angeles is particularly timely because our region is now a national epicenter of mortgage fraud,” said United States Attorney André Birotte Jr. “In the last month alone, my office has indicted two dozen defendants for their involvement in mortgage and real estate fraud, and has pursued civil remedies in other mortgage fraud cases.”

Steven Martinez, Assistant Director of the FBI‘s Los Angeles Field Office, said: “As we’ve increased our efforts in addressing mortgage fraud, new challenges arise as the nature of the fraud evolves with the economic situation of homeowners. Our multi-agency partnership has successfully targeted many of these complex schemes but we hope to further educate our seasoned investigators and prosecutors through efforts such as today’s summit. Southern California is dedicated to curbing the abysmal mortgage fraud problem that has victimized tens of thousands of homeowners, a large number of whom reside in and around Los Angeles.”

Summit participants also include Executive Director of the Financial Fraud Enforcement Task Force Robb Adkins and representatives from the Federal Trade Commission, the Treasury Department’s Financial Crimes Enforcement Network, the United States Postal Inspection Service, the U.S. Secret Service, the California Department of Justice and local police agencies.

Mortgage fraud is a key focus of the Financial Fraud Enforcement Task Force’s efforts. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

For more information, visit
By Moe Bedard on October 1, 2010
Unless otherwise noted, you can republish our articles and graphics for free.

November 30, 2009

33% of Home Loans Under Water

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.

Posted By: Ralph Roberts @ 6:22 pm | | Comments (2) | Trackback |
Filed under: Arizona,California,Florida,Michigan,Mortgage Meltdown,Uncategorized

April 2, 2009

FBI’s Latest Information on Mortgage Fraud

Official PhotoImage via Wikipedia

When I first read about John Pistole’s Congressional testimony before the House Committee on the Judiciary, I figured I’d take an hour or so to read through his testimony myself and summarize it for readers here on Flipping Frenzy. Little did I know that Pistole, who currently serves as the FBI’s Deputy Director, would have so much to say.

Rather than attempt to summarize Pistole’s remarks about real estate and mortgage fraud’s role in our current economic tsunami, here is the Deputy Director’s comments in full (emphasis/bold is of my own doing):

John S. Pistole

Deputy Director
Federal Bureau of Investigation

Statement Before the House Committee on the Judiciary

April 1, 2009

Good morning Mr. Chairman, Ranking Member, and Members of the Committee. I want to thank you for the opportunity to testify before you today about the Federal Bureau of Investigation’s (FBI) efforts to combat mortgage fraud and other financial frauds. Much the same as the Savings and Loan (S&L) Crisis of the 1980s crippled our economy, so too has the current financial crisis. Many of the lessons learned and best practices from our work during the past decade, such as the Enron investigation, will clearly help us navigate the expansive crime problem currently taxing law enforcement and regulatory authorities.

In the late 1980s and early 1990s, the United States experienced a similar financial crisis with the collapse of the savings and loans. The Department of Justice (DOJ), and more specifically the FBI, were provided a number of tools through the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and Crime Control Act of 1990 (CCA) to combat the aforementioned crisis. As stated in Senate Bill 331 dated January 27, 2009, “in the wake of the Savings and Loan crisis of the 1980s, a series of strike forces based in 27 cities was staffed with 1000 FBI agents and forensic experts and dozens of federal prosecutors. That effort yielded more than 600 convictions and $130,000,000 in ordered restitution.”

However, today’s financial crisis dwarves the S&L crisis as financial institutions have reduced their assets by more than $1.2 trillion related to the current global financial crisis compared to the estimated $160 million lost during the S&L crisis. Mortgage and related corporate fraud were not the sole sources of the current financial crisis; however, it would be irresponsible to neglect mortgage fraud’s impact on the U.S. housing and financial markets.

As the FBI’s Assistant Director for the Criminal Division testified in 2004 before the House Financial Services Sub-Committee:

“If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans.”

He also noted that the FBI supported new approaches to address mortgage fraud and its effects on the U.S. financial system, to include:

  • a mechanism to require the mortgage industry to report fraudulent activity, and
  • the creation of “Safe Harbor” provisions to protect the mortgage industry under a mandatory reporting mechanism.

What has occurred has been far worse than predicted. Mortgage fraud and related financial industry corporate fraud have shaken the world’s confidence in the U.S. financial system. The fraud schemes have adapted with the changing economy and now individuals are preyed upon even as they are about to lose their homes. But what is mortgage fraud?

Although there is no specific statute that defines mortgage fraud, each mortgage fraud scheme contains some type of material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.

The FBI delineates mortgage fraud in two distinct areas: 1) Fraud for Profit; and 2) Fraud for Housing. Fraud for Profit uses a scheme to remove equity, falsely inflate the value of the property or issue loans relating to fictitious property(ies). Many of the Fraud for Profit schemes rely on “industry insiders”, who override lender controls. The FBI defines industry insiders as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, settlement/title company employees, mortgage brokers, loan originators, and other mortgage professionals engaged in the mortgage industry.

Fraud for Housing represents illegal actions perpetrated by a borrower, typically with the assistance of real estate professionals. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding the borrower’s income or employment history to qualify for a loan.

The FBI compiles data on mortgage fraud through Suspicious Activity Reports (SARs) filed by financial institutions and through the Department of Housing and Urban Development (HUD) Office of Inspector General (OIG) reports. The FBI also receives complaints from the industry at large.

While a significant portion of the mortgage industry is void of any mandatory fraud reporting and there is presently no central repository to collect all mortgage fraud complaints, SARs from financial institutions have indicated a significant increase in mortgage fraud reporting. For example, during Fiscal Year (FY) 2008, mortgage fraud SARs increased more than 36 percent to 63,173. The total dollar loss attributed to mortgage fraud is unknown. However, 7 percent of SARs filed during FY 2008 indicated a specific dollar loss, which totaled more than $1.5 billion. Only 7 percent of SARs report dollar loss because of the time lag between identifying a suspicious loan and liquidating the property through foreclosure and then calculating the loss amount. As of February 28, 2009, there were 28,873 mortgage fraud SARs filed in fiscal year 2009.

Fraud Trends

The current financial crisis has produced one unexpected consequence: it has exposed prevalent fraud schemes that have been thriving in the global financial system. These fraud schemes are not new but they are coming to light as a result of market deterioration. For example, current market conditions have helped reveal numerous mortgage fraud, Ponzi schemes and investment frauds, such as the Bernard Madoff scam. These schemes highlight the need for law enforcement and regulatory agencies to be ever vigilant of White Collar Crime both in boom and bust years.

The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations. The number of open FBI mortgage fraud investigations has risen from 881 in FY 2006 to more than 2,000. In addition, the FBI has 566 open corporate fraud investigations, including matters directly related to the current financial crisis. These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading. The increasing mortgage, corporate fraud, and financial institution failure case inventory is straining the FBI’s limited White Collar Crime resources.

Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders who are part of organized enterprises engaged in Mortgage Fraud for Profit. Industry insiders are of priority concern as they are, in many instances, the facilitators that permit the fraud to occur. The FBI utilizes SAR data to help identify fraud schemes perpetrated by insiders. However, SAR data does not capture suspicious activity identified by the entire mortgage industry. Requiring the entire industry to report suspicious activity would give us a more complete data set to exploit. The FBI is engaged with the mortgage industry in identifying fraud trends and educating the public. Some of the current rising mortgage fraud trends include: equity skimming, property flipping, mortgage identity related theft, and foreclosure rescue scams.

Equity skimming is a tried and true method of committing mortgage fraud and criminals continue to devise new schemes. Today’s common equity skimming schemes involve the use of corporate shell companies, corporate identity theft and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors.

Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers and shell companies, along with industry insiders to conceal their methods and override lender controls.

Identity theft in its many forms is a growing problem and is manifested in many ways, including mortgage documents. The mortgage industry has indicated that personal, corporate, and professional identity theft in the mortgage industry is on the rise. Computer technology advances and the use of online sources have also assisted the criminal in committing mortgage fraud. However, the FBI is working with its law enforcement and industry partners to identify trends and develop techniques to thwart illegal activities in this arena.

Foreclosure rescue scams are particularly egregious in that fraudsters take advantage and illegally profit from other individuals’ misfortunes. As foreclosures continue to rise across the country, so too have the number of foreclosure rescue scams that target unsuspecting victims. These scams include victims losing their home equity or paying thousands of dollars in fees, and then receiving little or no services, and ultimately losing their home to foreclosure. The FBI is again working with our law enforcement and regulatory partners along with industry partners to target, disrupt and dismantle the individuals and/or companies engaging in these fraud schemes.

Proactive Approach to Financial Frauds

The FBI has implemented new and innovative methods to detect and combat mortgage fraud. One of these proactive approaches was the development of a property flipping analytical computer application, first developed by the Washington Field Office, to effectively identify property flipping in the Baltimore and Washington areas. The original concept has evolved into a national FBI initiative which employs statistical correlations and other advanced computer technology to search for companies and persons with patterns of property flipping. As potential targets are analyzed and flagged, the information is provided to the respective FBI field office for further investigation. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then sold at a higher price to an associate of the “flipper” at a substantially inflated price. Often flipped properties go into foreclosure and are ultimately repurchased for a fraction of their original value.

Other methods employed by the FBI include sophisticated investigative techniques, such as undercover operations and wiretaps. These investigative measures not only result in the collection of valuable evidence, they also provide an opportunity to apprehend criminals in the commission of their crimes, thus reducing loss to individuals and financial institutions. By pursuing these proactive methods in conjunction with historical investigations, the FBI is able to realize operational efficiencies in large scale investigations.

In December 2008, the FBI dedicated resources to create the National Mortgage Fraud Team at FBI headquarters in Washington, D.C. The Team has the specific responsibility for all management of the mortgage fraud program at both the origination and corporate level. This Team will be assisting the field offices in addressing the mortgage fraud problem at all levels. The current financial crisis, however, has required the FBI to move resources from other white collar crime and criminal programs in order to appropriately address the crime problem. Since January 2007, the FBI has increased its agent and analyst manpower working mortgage fraud investigations. The Team provides tools to identify the most egregious mortgage fraud perpetrators, prioritize pending investigations, and provide information to evaluate where additional manpower is needed.


One of the best tools the FBI has in its arsenal for combating mortgage fraud is its long-standing partnerships with other federal, state and local law enforcement. This is not a new tool employed by the FBI. Collaboration, communication, and information-sharing have long been a proven solution to the nation’s most difficult crimes. In response to a growing gang problem, for example, the FBI stood up Safe Streets Task Forces across the country. In response to crimes in Indian Country, the FBI developed the Safe Trails Task Force Program. In response to this new threat, the FBI stood up Mortgage Fraud Task Forces across the country.

Presently, there are 18 mortgage fraud task forces and 47 working groups in the country. With representatives of federal, state, and local law enforcement, these task forces are strategically placed in areas identified as high threat areas for mortgage fraud. Partners are varied but typically include representatives of HUD-OIG, the U.S. Postal Inspection Service, the Internal Revenue Service, FinCEN, the Federal Deposit Insurance Corporation, as well as State and local law enforcement officers across the country.

While the FBI has increased the number of agents around the country who investigate mortgage fraud cases from 120 Special Agents in FY 2007 to currently over 250 Special Agents as of February 28, 2009, this multi-agency model serves as a force-multiplier, providing an array of resources to adequately identify the source of the fraud, as well as finding the most effective way to prosecute each case, particularly in active markets where fraud is widespread. We are pleased to report that the model is working.

Last June, for example, we worked closely with our partners on “Operation Malicious Mortgage” – a massive multiagency takedown of mortgage fraud schemes involving more than 400 defendants nationwide. That operation focused primarily on three types of mortgage fraud: lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes. Among the 400-plus subjects of “Operation Malicious Mortgage”, there have been 164 convictions and 81 sentencings so far for crimes that have accounted for more than $1 billion in estimated losses. Forty-six of our 56 field offices around the country took part in the operation, which has resulted in the forfeiture and/or seizure of more than $60 million in assets.

In addition to the effort placed in standing up mortgage fraud task forces, the FBI is one of the DOJ participants in the national Mortgage Fraud Working Group (MFWG), which DOJ chairs. The MFWG represents the collaborative effort of multiple Federal agencies and facilitates the information sharing process across the aforementioned agencies, as well as private organizations. Together, we are building on existing FBI intelligence databases to identify large industry insiders and criminal enterprises conducting systemic mortgage fraud.

The FBI is also a member of the President’s Corporate Fraud Task Force which is comprised of investigators from the Securities and Exchange Commission, the Internal Revenue Service, the U.S. Postal Inspection Service, the Commodity Futures Trading Commission, and the FinCEN. The purpose of the Corporate Fraud Task Force is to maximize intelligence sharing between membership agencies and to ensure the violations related to corporate fraud are appropriately addressed. The FBI also participates in the Securities and Commodities Fraud Working Group, a national interagency coordinating body established by DOJ to provide a forum for exchanging information and discussing violation trends, law enforcement issues and techniques. In addition, since April 2007, FBI headquarters personnel have met with representatives from the Securities and Exchange Commission once a month to coordinate the respective Corporate Fraud inventories focused on the current financial crisis and to share intelligence.

Industry Liaison

In addition to its partners in law enforcement and regulatory areas, the FBI also continues to foster relationships with representatives of the mortgage industry to promote mortgage fraud awareness. The FBI has spoken at and participated in various mortgage industry conferences and seminars, including those sponsored by the Mortgage Bankers Association (MBA).

To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided contact information for all FBI Mortgage Fraud Supervisors to relevant groups including the MBA, Mortgage Asset Research Institute, Fannie Mae, Freddie Mac and others. Additionally, the FBI is collaborating with industry to develop a more efficient mortgage fraud reporting mechanism for those not mandated to report such activity. The FBI supports providing a “safe harbor” for lending institutions, appraisers, brokers and other mortgage professionals similar to the provisions afforded to financial institutions providing SAR information. The “ Safe Harbor” provision would provide necessary protections to the mortgage industry under a mandatory reporting mechanism. This will also better enable the FBI to provide reliable mortgage fraud information based on a more representative population in the mortgage industry.

Lenders are painfully aware that fraud is affecting their bottom line. Through routine interaction with FBI personnel, industry representatives are aware of our commitment to address this crime problem. The FBI frequently participates in industry sponsored fraud deterrence seminars, conferences and meetings which include topics such as quality control and industry best practices to detect, deter, and prevent mortgage fraud. These meetings play a significant role in training and educating industry professionals. Companies share current and common fraud trends, loan underwriting weaknesses and best practices for fraud avoidance. These meetings also increase the interaction between industry and FBI personnel.

Additionally, the FBI continues to train its personnel and conduct joint training with HUD-OIG and industry on mortgage fraud. As a training model, the FBI seeks industry experts to assist in its internal training programs. For example, industry has assisted training FBI personnel on mortgage industry practices, documentation, laws and regulations. Industry partners have offered to assist the FBI in developing advanced mortgage fraud investigative training material and fraud detection tools.


Mr. Chairman, the FBI remains committed to its responsibility to aggressively investigate significant financial crimes which include mortgage fraud. We will continue to work with the Office of Management and Budget, and the Congress to ensure that adequate resources are available to address these threats. To maximize our current resources, we are relying on intelligence collection and analysis to identify emerging trends to target the greatest threats. We also will continue to rely heavily on the strong relationships we have with both our law enforcement and regulatory agency partners.

The FBI looks forward to working with you and other members of this committee on solving this serious threat to our nation’s economy. Thank you for allowing me the opportunity to testify before you today. I look forward to taking your questions.

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Posted By: Ralph Roberts @ 10:46 pm | | Comments (15) | Trackback |
Filed under: FBI,Mortgage Fraud,Mortgage Meltdown,Real Estate Fraud,Uncategorized

February 19, 2009

Is Obama’s Foreclosure Plan Ripe for Mortgage Fraud?

Robert L.Image via Wikipedia

If you believe some lawmakers, President Obama’s $75 billion foreclosure rescue plan is an open invitation for people to commit real estate and mortgage fraud. From CBS News:

House Republican leadership and Senator Charles Grassley (R-IA), ranking member of the Senate Finance Committee sent letters to administration officials asking for assurances that anti-fraud measures will be put in place to guarantee that taxpayer dollars are not used to re-do mortgages that were originally based on fraudulent documentation. Grassley notes that experts in mortgage lending say that anywhere from 30-70% of all mortgages inked in the last few years were based on fraudulent claims of assets or income.

The Treasury Department is considering a new computer program developed by Smithfield and Wainwright, a real estate business out of Florida known as “Mo-Mod.” A company spokesperson says the product can modify up to a million loans per month.

Some in the mortgage industry doubt that an automated program could catch fake documentation.

“You’ve got to get a human into there and look at it to underwrite it so that you can properly assess the risk,” Jon Daurio of Kondaur Capital Corporation in Southern California told CBS News. “I do a full documentation. I am verifying that income, getting tax forms, bank statements, etc. and I want to verify that that gross income is accurate,” he said.

But the “Mo-Mod” automated system under consideration by the Treasury Department will not re-examine the original W-2s or paystubs.

Hogan Copeland who goes by the name “Big Hogan” developed “Mo-mod” through his company Smithfield and Wainwright. Copeland told CBS News if his company is involved they will only be conducting appraisals not determining the homeowner’s true income or credit history. “We are not forensic accountants, that’s the bank’s determination, that’s not Big Hogan’s determination,” he said. “We will be evaluating the house, that’s the piece in question, that’s the hottest button right now.”

Copeland says if the government uses “Mo-Mod”, his team of 23,000 “independent and unbiased” appraisers nationwide would immediately begin to appraise foreclosed homes or those on the edge of foreclosure. Copeland notes that his network of appraisers would use a nationwide set of standards based on at least 20 data points to get at the new value of each home, “It’s just coming back to reality,” he said.

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Filed under: Legislation,Mortgage Fraud,Mortgage Meltdown

December 15, 2008

60 Minutes on More and Looming Mortgage Defaults

Here’s last night’s 60 Minutes report by Scott Pelley on the mortgage meltdown that’s far from over, with a second wave of expected defaults on the way that will likely deepen the bottom of our current recession (notice though that the word “fraud” never appears once in the report):

A Second Mortgage Disaster On The Horizon?
Dec. 14, 2008

(CBS) When it comes to bailouts of American business, Barney Frank and the Congress may be just getting started. Nearly two trillion tax dollars have been shoveled into the hole that Wall Street dug and people wonder where the bottom is.

As correspondent Scott Pelley reports, it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy. In the executive suites of Wall Street and Washington, you’re beginning to hear alarm about a new wave of mortgages with strange names that are about to become all too familiar. If you thought sub-primes were insanely reckless wait until you hear what’s coming.

One of the best guides to the danger ahead is Whitney Tilson. He’s an investment fund manager who has made such a name for himself recently that investors, who manage about $10 billion, gathered to hear him last week. Tilson saw, a year ago, that sub-prime mortgages were just the start.

“We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we’re probably about halfway through the unwinding and bursting of the bubble,” Tilson explains. “It may seem like all the carnage out there, we must be almost finished. But there’s still a lot of pain to come in terms of write-downs and losses that have yet to be recognized.”

In 2007, Tilson teamed up with Amherst Securities, an investment firm that specializes in mortgages. Amherst had done some financial detective work, analyzing the millions of mortgages that were bundled into those mortgage-backed securities that Wall Street was peddling. It found that the sub-primes, loans to the least credit-worthy borrowers, were defaulting. But Amherst also ran the numbers on what were supposed to be higher quality mortgages.

“It was data we’d never seen before and that’s what made us realize, ‘Holy cow, things are gonna be much worse than anyone anticipates,'” Tilson says.

The trouble now is that the insanity didn’t end with sub-primes. There were two other kinds of exotic mortgages that became popular, called “Alt-A” and “option ARM.” The option ARMs, in particular, lured borrowers in with low initial interest rates – so-called teaser rates – sometimes as low as one percent. But after two, three or five years those rates “reset.” They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

“The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall,” Tilson explains.

“What you seem to be saying is that there is a very predictable time bomb effect here?” Pelley asks.

“Exactly. I mean, you can look back at what was written in ’05 and ’07. You can look at the reset dates. You can look at the current default rates, and it’s really very clear and predictable what’s gonna happen here,” Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn’t hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We’re at the beginning of a second wave.

“How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?” Pelley asks.

“Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That’s probably another $500 billion to $600 billion on top of that,” Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, “Well north of 50 percent. My gut would be 70 percent of these option ARMs will default.”

“How do you know that?” Pelley asks.

“Well we know it based on current default rates. And this is before the reset. So people are defaulting even on the little three percent teaser interest-only rates they’re being asked to pay today,” Tilson says.

That second wave is coming ashore at a place you might call the “Repo Riviera” – Miami Dade County. Oscar Munoz used to sell real estate; now his company clears out foreclosed homes.

“Business is just going through the roof for us. Fortunately for us, unfortunately for the poor families who are going through this,” Munoz explains.

“I wonder do you ever come to houses where the people are still here?” Pelley asks.

“Absolutely,” Munoz says. “That’s really a sad situation. I’d rather not meet the people.”

Asked why not, Munoz says, “It’s not easy to come in and move a family out. It’s just our job to do it for the bank. It’s just the nature of what’s going in the market right now.”

Munoz says his company alone gets about 20 to 30 assignments per day. “And we’re one of the few companies right now who are hiring. We have to hire people because the demand is so high,” he tells Pelley.

People who’ve been evicted tend to leave stuff behind. The next house is usually much smaller. Banks hire Munoz to move the possessions out where, by law, they remain for 24 hours. Often the neighbors pick through the remains.

Once the homes are empty the hard part starts – trying to find buyers in a free-fall market.

Miami real estate broker Peter Zalewski talks like a man with a lot of real estate to move. “We have 110,000 properties for sale in South Florida today, 55,000 foreclosures, 19,000 bank owned properties. Sixty-eight percent of the available inventory is in some form of distress. They need someone to clean it up.”

Asked what the name of his company is, Zalewski says, “It’s called Condo Vultures Realty.”

What does that mean?

“That in times of distress, and in times of downturn, there’s opportunity. And you know, vultures clean up the mess. A lot of people seem to think they kill, but they don’t actually kill, they clean,” he says.

The killing, in Miami, was done by the developers back when it seemed that the party would never end. They sold hyper-inflated condos at what amounted to real estate orgies-sales parties for invited guests who were armed with option ARM and Alt-A loans. “There were red ropes outside. They had hired cameramen, and they had hired photographers to almost set the scene of a paparazzi,” Zalewski remembers.

“They were hiring fake paparazzi? To make the customers feel like they were special?” Pelley asks.

“You were selling a lifestyle,” Zalewski says.

Asked what roles these exotic mortgages played, Zalewski says, “They were essential. They were necessary. Without the Alt A or option ARM mortgage, this boom never would’ve occurred.”

It never would have occurred because without the Alt As and the option ARMs, many buyers never would have qualified for a loan. The banks and brokers were getting their money up front in fees, so the more they wrote, the more they made.

“They stopped checking whether the income was even real. They turned to low and no-doc loans, so-called ‘liar’s loans’ and jokingly referred to as ‘ninja loans.’ No income, no job, no assets. And they were still willing to lend,” Tilson says.

“But help me out here. How does that make sense for the lender? It would seem to be reckless, in the extreme,” Pelley remarks.

“It was,” Tilson agrees. “But the key assumption underlying, the willingness to do this was that home prices would keep going up forever. And in fact, home prices nationwide had never declined since the Great Depression.”

On the way up, everyone wanted in. No one expected to feel any pain. People like acupuncturist Rula Giosmas became real estate speculators.

Giosmas says she bought about six properties in this last five-year period as investments. She says she put 20 percent down on each. Now they’re all financed with option ARM loans.

Asked what she understood about the loans, Giosmas says, “Well, unfortunately, I didn’t ask too many questions. I mean in the old days, I would shop around. But because of the frenzy, and I was so busy looking to buy other properties, I didn’t really focus on shopping around for mortgage brokers.”

“But if you’re investing in real estate, you’re buying multiple properties, you should be asking a lot of questions,” Pelley remarks. “Why didn’t you ask?”

“I was busy. I was really busy looking at property all the time, all day long,” she replies.

She also acknowledges that she didn’t read the paperwork. Now she’s losing money on every property.

“You know that there are people watching this interview who are saying, ‘You know, she was just foolish. She was greedy and foolish. She was buying small apartment buildings and wasn’t paying enough attention to how they were financed,'” Pelley points out.

“My full-time job is I’m an acupuncturist. So, this was just a side thing,” she says.

Giosmas says she was misled and she hopes to renegotiate her loans. But many other buyers have simply walked away from their properties. One Miami luxury building was a sellout, but when 60 Minutes visited, a quarter of the condos were in foreclosure.

Zalewski says one of those condos was originally purchased in October 2006 for $2.4 million. Now he says the asking price from the lender is $939,000.

And there are tough years to come because, just like the sub-primes, the Alt-A and option ARM mortgages were bundled into Wall Street securities and sold to investors.

Sean Egan, who runs a credit rating firm that analyzes corporate debt, says he expects 2009 to be miserable and 2010 also miserable and even worse.

Fortune Magazine cited Egan as one of six Wall Street pros who predicted the fall of the financial giants.

“This next wave of defaults, which everyone agrees is inevitably going to happen, how central is that to what happens to the rest of the economy?” Pelley asks.

“It’s core. It’s core, because housing is such an important part. We’re not going to get the housing industry back on track until we clear out this garbage that’s in there,” Egan explains.

“That hasn’t cleared out yet. We haven’t seen the bottom,” Pelley remarks.

“It’s getting worse,” Egan says. “There are some statistics from the National Association of Realtors, and they track the supply of housing units on the market. And that’s grown from 2.2 million units about three years ago, up to 4.5 million units earlier this year. So you have the massive supply out there of units that need to be sold.”

“What with the housing supply increasing that much, what does it mean?” Pelley asks.

“It means that this problem, the economic difficulties, are not going to be resolved in a short period of time. It’s not gonna take six months, it’s not gonna 12 months, we’re looking at probably about three, four, five years, before this overhang, this supply overhang is worked through,” Egan says.

In the next four years, eight million American families are expected to lose their homes. But even after the residential meltdown, Whitney Tilson says blows to the financial system will keep coming.

“The same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that’s taking a little longer to show. But there are gonna be big losses there. Credit cars, auto loans. You name it. So, we’re still, you know, we’re maybe halfway through the mortgage bubble. But we may only be in the third inning of the overall bursting of this asset bubble,” Tilson says.

“Does that mean that the stock market is gonna continue plunging as we’ve seen the last several months?” Pelley asks.

“Actually we’re the most bullish we’ve been in 10 years of managing money. And the reason is because the stock market, for the first time I can say this, in years, has finally figured out how bad things are going to be. And the stock market is forward looking. And with U.S. stocks down nearly 50 percent from their highs, we’re actually finding bargains galore. We think corporate America’s on sale,” Tilson says.

The stock market will still have a lot of figuring to do with more troubling news on the horizon. The mortgage bankers association says one out of 10 Americans is now behind on their mortgage. That’s the most since they started keeping records in 1979.

Produced by David Gelber and Joel Bach

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Filed under: Mortgage Meltdown,Mortgage Payment Reset

September 23, 2008

Mortgage Fraud and the Housing Bailout

PaulsonFreddieFannieImage by robertodevido via FlickrAs everyone knows by now, late last week the U.S. government announced it would ask Congress for the authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets, including residential and mortgage-related assets, which include mortgage-backed securities. The move–as defended today by Treasury Secretary Henry M. Paulson, Jr. before the U.S. Senate Banking Committee–purports to stabilize the U.S. economy, which I have long maintained is being rocked to its very core by real estate and mortgage fraud.

The news about the government’s proposal has been fast and furious, with objections popping up on an hour-by-hour basis since last Friday (which partly explains my silence over the last four days… literally, it has been difficult to tell what the latest proposal actually calls for or means to distressed homeowners and taxpayers alike).

While members of Congress have generally balked at rubber-stamping the Treasury’s plan to remove illiquid assets from the banking system, illiquid assets may be the result of the problem but they are not the problem itself. The problem is (and will continue to be, until something drastic is done to fix it) the fraudulent lending practices and sloppy underwriting oversight that placed disadvantaged borrowers and billions of dollars of bad loans into the stream of commerce via the secondary market. Banks, lenders, and investors are now all suffering from their own bad judgment and poor oversight, while the rest of us–the taxpayers–are going to foot the bill that eases their suffering.

The house of cards we’re all surrounded by was always going to fall (for evidence of this, look no further than to the fact that real estate and mortgage fraud has been classified as the “fastest-growing white collar crime in America” by the FBI for last four years). And if you can’t see a direct correlation between real estate and mortgage fraud and the housing crisis, the failure of AIG, and this $700 Billion bailout, then you’re either completely naive or you’re just not looking hard enough.

Take AIG for example. A lot of people may be wondering how a major insurance corporation’s failure can be tied to real estate and mortgage fraud. Well, as Lehman Brothers suffered a significant decline in its own share price last week, analysts began comparing the types of securities held by AIG and Lehman, and guess what? They found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman. Hello, can you say “panic!”

And this just in: The FBI has now opened an investigation into possible fraud involving AIG, Fannie Mae, Freddie Mac, and Lehman Brothers. Meanwhile, Congress just passed by a vote of 350-23, HR 6853 EH, otherwise known as the “Nationwide Mortgage Fraud Coordinator Act of 2008,” which provides the FBI with additional and dedicated resources for fighting real estate and mortgage fraud.

Stay tuned… there’s lots more to report and comment on!

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Filed under: Mortgage Fraud,Mortgage Meltdown

September 8, 2008

Fannie Mae, Freddie Mac, and the F-word

While a lot will be written about the U.S. government’s takeover of Freddie Mac and Fannie Mae, very little is likely to be said about the role real estate and mortgage fraud played in the run-up to the takeovers themselves.

With real estate fraud still labeled by the FBI as the “fastest-growing white collar crime,” and with a high percentage of mortgage loans containing overwhelming evidence of fraudulent claims, one would think that now would be the time that interviews with Treasury Secretary Henry M. Paulson Jr. would touch upon the F-word. Sadly though, it’s business as usual at all of the national media outlets covering this story. It’s as if they don’t even know to ask about real estate fraud, which of course is utterly insane:

At the very beginning of the current mortgage meltdown and resulting foreclosure epidemic, a small group of people–myself included–pointed out the true main cause of this mess–fraud. Most people I talked with either didn’t understand or disagreed, including a lot real estate professionals and–not surprising–members the national media. Most still think today’s mess had more to do with irresponsible lending on the part of consumers, the popularity of poorly conceived mortgage loan products, and a long overdue market correction in property values.

The truth then as it is now, is that fraud is at the very root of the problems we’re experiencing.

Unfortunately, getting the national media or the real estate and mortgage industry to admit to this fact is nearly impossible. For the national media, it appears to be too easy for them to just tell the story as it is being fed to them by the government (in other words, they’re either lazy or don’t have the resources to dig just a little deeper). And for the real estate and mortgage industry, well, they just have too much to lose by admitting the truth. If fraud is a proven contributing factor to a borrower’s defaulting on a loan, the mortgage lender is required to buy the bad loan back from Fannie Mae, Freddie Mac, or the Wall Street Firms who sold the loan to investors.

Fraud has been and continues to be so rampant that acknowledging its role in this mess would lead to the mortgage banks having to buy back billions of dollars in bad loans, which they simply cannot afford to do.

The current state of denial about fraud is only making the problem worse. Until the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and the real estate and mortgage loan industry all wake up and admit to the problem, the fraudsters will be free to continue in their ways with no thought of the future mess they’re causing.

Posted By: Ralph Roberts @ 7:34 pm | | Comments (3) | Trackback |
Filed under: Fannie Mae,Freddie Mac,Mortgage Fraud,Mortgage Meltdown,Real Estate Fraud

September 5, 2008

United States Government Set to Take over Fannie Mae and Freddie Mac

Senior White House officials, along with top brass from the Federal Reserve, met earlier this evening with executives from Freddie Mac and Fannie Mae and reportedly told them that the U.S. government is preparing to place the two government sponsored enterprises (GSEs) under federal control. The plan, as outlined by The New York Times, would place both companies into a conservatorship, which means that their boards of directors and top executives would be replaced and shareholders would almost entirely be wiped out, but that the GSEs would continue operations with the federal government standing behind their debt.

Fannie Mae and Freddie Mac are privately owned but publicly chartered, and are considered critical to the stability of the U.S. housing and mortgage markets. Their current troubles have threatened to worsen the bursting of the housing bubble, which along with significant levels of fraud, has led to a surge in foreclosures.

The U.S. Treasury Department and the Federal Reserve recently took steps to increase confidence in both organizations, including granting them access to low-interest loans and removing the prohibition on the Treasury to purchase the GSEs’ stock. Despite these efforts, in the last year alone, publicly held shares of Fannie Mae and Freddie Mac have fallen more than 75%.

Just last week, Fannie Mae announced that the company’s chief financial officer, Stephen Swad, was being replaced by David C. Hisey, and that former Executive Vice President of Capital Markets, Peter Niculescu, would take on an expanded role as the new Chief Business Officer to replace Robert J. Levin, who is retiring as Executive Vice President and Chief Business Officer. The company also announced Michael Shaw would be appointed as the new chief risk officer and Daniel Mudd, the company’s embattled president and chief executive officer, would remain in place after a vote of confidence from the Board of Directors.

Tonight’s news of a government takeover comes just hours after the Mortgage Bankers Association released its latest National Delinquency Survey, which shows that the rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter. Among mortgages for one- to four-family homes, nearly 10% are currently at least one month overdue or in foreclosure.

From The New York Times:

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

Posted By: Ralph Roberts @ 10:52 pm | | Comments (4) | Trackback |
Filed under: Fannie Mae,Freddie Mac,Mortgage Bankers Association,Mortgage Meltdown

July 24, 2008

Guest Commentary: The Truth about Wall Street

Editor’s Note: The following Guest Commentary was written exclusively for by Larry Rubinoff, branch manager of a Clearwater Beach, Florida office of Mortgage Lending Direct, a dba of MLD Mortgage, Inc. Larry’s commentary is his and his alone and may not necessarily reflect the views or opinions of the management of

When he speaks in public, President Bush usually talks in a very measured tone. Yet late last week, at a private fundraising event in Houston, Texas, the President was more candid than ever before about the state of the U.S. economy:

There’s no question about it,” President Bush said. “Wall Street got drunk (that’s one of the reasons I asked you to turn off the TV cameras) it got drunk and now it’s got a hangover,” Bush said last Friday, according to a video obtained by Houston’s ABC network affiliate, KTRK. “The question is how long will it [sic: take to] sober up?

It is with those comments in mind that Guest Blogger Larry Rubinoff weighs in with the following:

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The Truth about Wall Street
By Larry Rubinoff

President Bush is right. Wall Street was drunk (with greed), and it opened the floodgates for the levees to burst, creating what can only be described as economic disaster of unprecedented proportions.

While drunk, Wall Street provided the vehicles for fraud, encouraged it and worse–closed a blind eye to it all the while profiting to the tune of hundreds of billions of dollars.

Not only are they complicit in the fraud we are learning about and fighting here through, but Wall Street was instrumental in committing fraud against investors on a global scale… investors who bought the securities almost every mortgage was put into. Fannie and Freddie did the same. The rating agencies committed fraud by rubber-stamping each security issue “AAA,” never really looking at the integrity of the pools. Wall Street sold these securities knowing full well what the true worth and values of the pools were.

The government had full knowledge of what they were doing, and in fact, may have encouraged them to do so to keep our economy flourishing. This was, in fact, the case during the Great Depression.

President Bush admitted what many of us already knew, and that’s why he wanted the cameras turned off.

~ Larry Rubinoff

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Editor’s Note: You can read more of Larry Rubinoff’s thoughts and opinions on
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Posted By: 4wordsystems @ 6:14 pm | | Comments (8) | Trackback |
Filed under: Larry Rubinoff,Mortgage Fraud,Mortgage Meltdown,Real Estate Fraud

July 23, 2008

President Bush Set to Sign American Housing Rescue & Foreclosure Prevention Act

Speaking to reporters by phone during this morning’s White House Press Briefing, White House spokeswoman Dana Perino said President Bush is now prepared to sign the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, which is expected to receive full Congressional approval by this time tomorrow. According the legislation, H.R. 3221 will help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

To shore up the housing market and ensure the availability of affordable home loans, H.R. 3221 would put a new, independent regulator in charge of housing Government Sponsored Enterprises (i.e., GSEs — Fannie Mae, Freddie Mac, and the Federal Home Loan banks), which is said to be vital to both the financial markets and homeowners. The new regulator is expected to be far better prepared than the current system is to quickly and effectively respond to issues affecting the safe and sound operation of Fannie Mae, Freddie Mac, and Federal Home Loan banks.

The centerpiece of the bill provides assistance to a large number of homeowners now in danger of losing their homes. Lower-cost government-insured mortgages–which Congressional leaders say come at no cost to the American taxpayer–will be offered if President Bush signs the Bill into law, but according to the Congressional Budget Office estimates, the plan could cost taxpayers around $25 billion.

Specifically, the American Housing Rescue & Foreclosure Prevention Act, H.R. 3221, includes the following provisions:

FHA Housing Stabilization and Homeownership Retention Act

  1. Provides mortgage refinancing assistance to keep at least 400,000 families from losing their homes, to protect neighboring home values, and to help stabilize the housing market at no cost to American taxpayers.
  2. Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government-insured mortgages they can afford to repay.
  3. Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout, legislators say; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal.
  4. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
  5. Contains critical protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
  6. Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
  7. Provides $180 million for financial counseling and legal assistance to help families stay in their homes.

Strengthening Regulations of the GSEs

  1. Puts an independent regulator in place with what are said to be significant responsibilities and powers so that Fannie Mae and Freddie Mac can safely and soundly work to provide families with affordable housing.
  2. The new regulator will have enhanced authority to raise capital standards, set strict prudential standards, including internal controls, audits, and to enforce these new standards and promptly take corrective action.
  3. The new regulator will oversee, and can directly restrict, executive compensation at Fannie Mae and Freddie Mac.
  4. Raises the GSE loan limits for single family homes to create more affordable mortgage loans for moderately priced homes by allowing GSE loans up to 115% of the local area median home price, and to make GSE loans effective in high cost areas by raising the permanent loan limit from $417,000 to $625,500.
  5. Creates a new permanent affordable housing trust fund–financed by the GSEs and not by taxpayers–to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas.

Backstopping Fannie Mae and Freddie Mac To Shore Up the Housing Market

  1. Gives the Secretary of the Treasury the authority to increase the already existing line of credit to Freddie and Fannie for the next 18 months, as well as giving the Treasury Department standby authority to buy stock in those companies to provide confidence in the GSEs and stabilize housing finance markets.
  2. Includes taxpayer protections directing the Treasury Department to take the following into account, when using these authorities: A) Taxpayers should be first in line for being paid back, before other shareholders; and, B) There should be restrictions on dividends for shareholders and on compensation for the executives of the GSE’s until taxpayers are fully reimbursed.
  3. Strengthens oversight by requiring the Federal Reserve and Treasury to consult with the new regulator on issues concerning the safety and soundness of the GSEs and use of the standby authority.

Stabilizing Neighborhoods Hurt by the Foreclosure Crisis

  1. Provides $4 billion in emergency assistance (CDBG Funds) to communities hardest hit by the foreclosure and subprime crisis to purchase foreclosed homes, at a discount, and rehabilitate or redevelop the homes to stabilize neighborhoods and stem the significant losses in home values of neighboring homes.
  2. Foreclosed and rehabilitated homes would be sold or rented to moderate-income individuals and families–those whose incomes do not exceed 120% of the area median income. At least 25% of the funds would be targeted to house low-income and very low-income persons and families–those whose incomes do not exceed 50% of area median income.
  3. Any profit from the sale, rental, rehabilitation or redevelopment of these properties must be reinvested in affordable housing and neighborhood stabilization.
  4. Provides $180 million for pre-foreclosure counseling, to be distributed in grants by the Neighborhood Reinvestment Cooperation (NeighborWorks), with 15% targeted for low-income and minority homeowners and neighborhoods, and $30 million in grants for legal counseling to assist homeowners in foreclosure.

Preventing Future Abuses and Crises

  1. Establishes a nationwide loan originator licensing and registration system that will set minimum standards for loan originator licensing substantially improving the oversight of mortgage brokers and bank loan officers.
  2. Establishes improved mortgage disclosure requirements that will help ensure that mortgage borrowers understand their mortgage loan terms.

FHA Modernization

  1. Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
  2. Raises FHA loan limits to create affordable mortgage loans for moderately priced homes by allowing FHA loans up to 115% of the local area median home price, and to make GSE loans more available in high cost areas by raising the permanent loan limit from $362,790 to $625,500.
  3. Expands opportunities for seniors to tap into equity in their home through FHA reverse mortgage loans, by increasing the loan limit for the program, reducing and capping lender fees for such loans, and strengthening consumer protections limiting the sale of other financial products in conjunction with FHA reverse mortgage loans.
  4. Prevents HUD from raising single family loan fees on lower and middle-income borrowers, and from raising loan fees on FHA rental housing loans.

Preserving the American Dream for Our Nation’s Veterans

  1. Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.
  2. Helps returning soldiers avoid foreclosure and stay in their home by lengthening the time a lender must wait before starting foreclosure, from three months to nine months after a soldier returns from service and providing returning soldiers with one-year relief from increases in mortgage interest rates.
  3. Requires the Department of Defense to establish a counseling program for veterans and active service members facing financial difficulties and provides a moving benefit to servicemen and women who are forced to move out because their rental housing was foreclosed on.
  4. Increases benefits paid to veterans with disabilities, such as blindness, to adapt their housing and allows the Veterans Administration to provide for improvements to homes of veterans with service-connected disabilities.

Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720)

  1. Provides $15 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $11 billion in mortgage revenue bonds for states, and improves access to low-income housing.
  2. Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return).
  3. Provides taxpayers that claim the standard deduction with up to an additional $500 ($1,000 for a joint return) standard deduction for property taxes in 2008.
  4. Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $11 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
  5. Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

The Wall Street Journal reports this morning that President Bush’s support of the measure is a “dramatic split” for both Bush and congressional Republicans, many of whom the Journal says are “angrily opposed to the housing legislation, which they call a handout for irresponsible homeowners and unscrupulous lenders.” President Bush had voiced earlier objections to a provision that would give grants for local governments to purchase and refurbish foreclosed properties–a provision the White House feels amounts to nothing more than a bailout. But White House spokeswoman Perino said today that President Bush doesn’t feel this is the right time for a “…prolonged veto fight, but we are confident the President would prevail in one.”

July 14, 2008

Federal Reserve Issues New Rules for Home Mortgage Loans

The Federal Reserve Board today approved a “final rule” for home mortgage loans it says will better protect consumers and facilitate responsible lending, but not until October of 2009. The new final rule prohibits unfair, abusive or deceptive home mortgage lending practices and restricts certain other mortgage practices. The final rule also establishes advertising standards and requires certain mortgage disclosures to be given to consumers earlier in the transaction.

The final rule, which amends Regulation Z (Truth in Lending) and was adopted under the Home Ownership and Equity Protection Act (HOEPA), largely follows a proposal released by the Federal Reserve Board in December of 2007, with enhancements that address ensuing public comments, consumer testing, and further analysis.

Fed Board Logo.jpg

Essentially, the new final rule adds four protections for a newly defined category of “higher-priced mortgage loans” secured by a consumer’s principal dwelling. For loans in this category, the Fed says these protections will:

  • Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value. A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a “pattern or practice.”
  • Require creditors to verify the income and assets they rely upon to determine repayment ability.
  • Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.
  • Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

In addition to the rules governing higher-priced loans, the rules adopt the following protections for loans secured by a consumer’s principal dwelling, regardless of whether the loan is higher-priced:

  • Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home’s value.
  • Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees. In addition, servicers are required to credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
  • Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer’s principal dwelling, such as a home improvement loan or a loan to refinance an existing loan. Currently, early cost estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.

For all mortgages, the rule also sets additional advertising standards. Advertising rules now require additional information about rates, monthly payments, and other loan features. The final rule bans seven deceptive or misleading advertising practices, including representing that a rate or payment is “fixed” when it can change.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market. To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac. A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index, or 3.5 percentage points if it is a subordinate-lien mortgage. This definition overcomes certain technical problems with the original proposal, but the expected market coverage is similar.

One element of the original proposal has been withdrawn. The Federal Reserve Board had proposed for public comment certain requirements pertaining to so-called “yield-spread premiums.” During the intervening period, the Board engaged in consumer testing that cast significant doubt on the effectiveness of the proposed rule. As part of its ongoing review of closed-end loan rules under Regulation Z, however, the Board will consider alternative approaches.

In finalizing the rule, the Board carefully considered information obtained from testimony, public hearings, consumer testing, and over 4,500 comment letters submitted during the comment period. “Listening carefully to the commenters, collecting and analyzing data, and undertaking consumer testing, has led to more effective and improved final rules,” Governor Kroszner said.

The new rules take effect on October 1, 2009. The single exception is the escrow requirement, which will be phased in during 2010 to allow lenders to establish new systems as needed.

In a related move, the Fed will be publishing for public comment a proposal to revise the definition of “higher-priced mortgage loan” under Regulation C (Home Mortgage Disclosure), which requires lenders to report price information for such loans, to conform to the definition the Board is adopting under Regulation Z.

Posted By: Ralph Roberts @ 11:49 am | | Comments (3) | Trackback |
Filed under: Federal Reserve,Mortgage Meltdown,Uncategorized

July 13, 2008

U.S. Government Moves to Save Freddie Mac

Less than 48 hours after federal regulators seized IndyMac Bank, the Board of Governors of the United States’ Federal Reserve System announced today that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is, according to the Fed, intended to supplement the Treasury Department’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

For the uninitiated, Freddie Mac is a stockholder-owned corporation established by the United States Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for homeowners across U.S. Over the years, it has been estimated that Freddie Mac has made homeownership possible for one in six homebuyers.

For his part, Freddie Mac chairman and CEO Richard Syron, had this to say about today’s development:

We are heartened by today’s announcement and the steps outlined by the U.S. Department of the Treasury and the Federal Reserve Board. This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters. I applaud Secretary Paulson and Chairman Bernanke for their leadership and encourage Congress to act quickly to pass the new legislative proposals.

Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) say the company is adequately capitalized, has a large liquidity portfolio and access to the world’s debt markets. The company is in the process of finalizing its June 30, 2008 financial results and says they will show that Freddie Mac has a substantial capital cushion above the 20% mandatory target surplus established by federal regulations.

Speaking on behalf of the United States government, the Secretary of the U.S. Department of the Treasury, Henry Paulson, said:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Below, when Paulson refers to “GSEs” he’s talking about government sponsored enterprises, which are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Posted By: Ralph Roberts @ 10:42 pm | | Comments (3) | Trackback |
Filed under: Freddie Mac,Henry Paulson,IndyMac,Mortgage Meltdown

July 11, 2008

Breaking News: IndyMac Closed By Federal Regulators

Updated: 7:57 p.m. ET — 7/11/08

Federal regulators from the Office of Thrift Supervision have seized and shut down IndyMac Bank, transferring its operations to the Federal Deposit Insurance Corporation (FDIC). Today’s move, which just happened moments ago, came on the heels of renewed concerns of a looming government bailout for the lending giant.

Indymac Bancorp, Inc. is the holding company for Indymac Bank, F.S.B., the largest savings and loan in the Los Angeles area and the 7th largest mortgage originator in the nation. Indymac Bank, operating as a hybrid thrift/mortgage banker, provides financing for the acquisition, development, and improvement of single-family homes. Indymac Bank also provides financing secured by single-family homes and other banking products to facilitate consumers’ personal financial goals.

Just this past Monday, IndyMac announced it had stopped making new loans and would cut up to 3,800 jobs. The bank reported a sharp increase in the number of depositor withdrawals following those announcements and remarks made by Senator Charles Schumer (D-NY) on the bank’s ability to survive the current mortgage and foreclosure crisis.

IndyMac is the second largest financial institution to close in U.S. history, and as one may suspect, today’s action may create further insecurity on Wall Street about mortgage backed securities (fraudulent and illegal loans and sloppy underwriting practices tend to make this sort of thing happen).

As the battle intensifies about IndyMac financial stability, a new report from the Center for Responsible Lending (CRL) provides evidence that the lending giant put itself in a hole by engaging in unsound and abusive lending during the nation’s mortgage boom. The report, “‘IndyMac: What Went Wrong?,” finds substantial evidence that IndyMac routinely made loans with little regard for their customers’ ability to repay the loans.

CRL’s interviews with former IndyMac employees and a review of lawsuits in 10 states indicate that IndyMac:

  • Pushed through loans based on inflated appraisals and income data that exaggerated borrowers’ finances
  • Worked hand-in-hand with mortgage brokers who misled borrowers about their rates and other loan terms and stuck them with unwarranted fees
  • Treated many elderly and minority consumers unfairly

In CRL interviews and court documents, 19 former IndyMac employees describe an atmosphere where the drive to close loans ruled even when IndyMac’s own risk experts recommended against approvals. Most of the ex-employees who provided information for the CRL report were mortgage underwriters who were supposed to be making sure borrowers could afford the deals.

According to the FDIC, insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday, July 14. Loan customers should continue making loan payments as usual.

Beginning on Monday, July 14, IndyMac Federal Bank, FSB’s 33 branches will observe normal operating hours and will continue to offer full banking services, including on-line banking..

At the time of closing, IndyMac Bank, F.S.B. had about $1 billion of potentially uninsured deposits held by approximately 10,000 depositors. The FDIC will begin contacting customers with uninsured deposits to arrange an appointment with an FDIC claims agent by Monday. Customers can contact the FDIC for an appointment using the toll-free number above. The FDIC will pay uninsured depositors an advance dividend equal to 50 percent of the uninsured amount.

Stay tuned to Flipping Frenzy for more news and analysis on this breaking development. In the meantime, for additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m.

Posted By: Ralph Roberts @ 7:29 pm | | Comments Off on Breaking News: IndyMac Closed By Federal Regulators | Trackback |
Filed under: Mortgage Meltdown

June 19, 2008

Real Estate Fraud for Wall Street Nets Bear Stearns Arrests

My apologies for the length of this post but there was an interesting joint announcement today from the U.S. Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) that bears (no pun intended) commenting on. According to a press release titled “More Than 400 Defendants Charged for Roles in Mortgage Fraud Schemes as Part of Operation “Malicious Mortgage”,” from March 1st of this year until yesterday (June 18), a coordinated effort between the two agencies resulted in 144 mortgage fraud cases being cracked and 406 defendants being charged with related crimes.

On the surface, this looks like very big news, and as one would suspect, almost every media outlet in the country is covering the story. But when you really stop to think about it, sadly, the numbers touted in today’s announcement amount to very little. Certainly, every real estate and mortgage fraud-related arrest helps, but when you consider that there were 110 days between March 1st and yesterday, Operation Malicious Mortgage netted less than two real estate and mortgage fraud scams per day (or to be more precise, 1.30909091 scams per day for each day of the 110-day effort). I don’t know about anyone else, but less than two real estate and mortgage fraud-related scams being shut down per day–when by one estimate, more than 75% of all home loans closed leading up to the current mortgage meltdown contained some level of fraud–isn’t really that big of a deal.

But Ralph, you’ll say, 406 people who were committing these horrible crimes are no longer in the business of intentionally destroying the American dream of homeownership (which is like 3.69 arrests per day); doesn’t count for something?

Of course it does… it does count for something… it counts for what’s already happening across the country in terms of arrest volume for real estate and mortgage fraud-related crimes, and it’s still not enough to make much of a difference. By my own estimate, if I were to only report real estate and mortgage fraud-related arrests or indictments here on (which I don’t because this site is about more than just indictments and arrests), and we were to go back and count the number of scams that were shut down (or the number of people arrested or indicted), I could come up with a pretty sexy number to rival that which the DOJ and FBI came out with today. In the grand scheme of things, today’s announcement is actually a little bit disappointing.

Of more interest to me than the 144 mortgage fraud cases being cracked and the 406 defendants being charged with related crimes, was this (from the same press release and summarized by Kate Kelly of The Wall Street Journal):

RC_Arrest.jpg M_Tannin.jpg A federal grand jury in Brooklyn, N.Y., indicted two former Bear Stearns Cos. hedge-fund managers, alleging they misled investors when their fund was in peril, lied about their financial interest in the portfolios and destroyed evidence in the investigation. The high-profile criminal case, along with a parallel civil securities-fraud action by the Securities and Exchange Commission, marks the first criminal securities-fraud charges stemming from the mortgage-market crisis. The 27-page indictment paints a picture of the scramble by the managers, Ralph Cioffi and Matthew Tannin, to keep their hedge funds alive…

Everyone, including the FBI, likes to talk about how there are two types of real estate and mortgage fraud… Fraud for Housing and Fraud for Profit. Well, what about Fraud for Wall Street?

Read the following (from the Associated Press’ Tom Hays), and tell me if you too can spot the Fraud for Wall Street:

2 charged on Wall Street in mortgage meltdown

NEW YORK (AP) — Two former Bear Stearns hedge fund managers were hauled into jail Thursday and charged with lying to investors about the collapse of the subprime mortgage market, perhaps signaling the start of a wave of prosecutions arising from the housing meltdown.

Ralph Cioffi and Matthew Tannin were accused of encouraging investors to stay in their hedge funds, heavily exposed to subprime mortgages, even as they knew the credit market was in serious trouble.

They were indicted on conspiracy and fraud counts, the first criminal charges to hit Wall Street in the housing market meltdown.

The eventual implosion of their two hedge funds cost investors $1.8 billion and started the domino effect that led the demise of Bear Stearns itself, which barely avoided bankruptcy in a rescue buyout by JP Morgan Chase & Co.

This is not about mismanagement of a hedge fund,” Mark Mershon, head of the New York FBI office, told reporters. “It is about premeditated lies to investors and lenders.

The arrests came as the Justice Department in Washington announced the indictments of more than 400 players in the real-estate industry since March in a crackdown on mortgage fraud. Sixty were arrested on Wednesday alone.

That alleged fraud includes misstatement of income or assets, forged documents, inflated appraisals and misrepresentation of a buyer’s intent to occupy a property as a primary residence.
The Bear Stearns case against Cioffi and Tannin appears to be based heavily on a series of e-mails that reveal panic and disorder behind the scenes at the hedge fund as its investments began to slide.

The subprime market looks pretty damn ugly,” Tannin wrote to Cioffi in April 2007. If Bear’s internal reports were accurate, Tannin suggested, “I think we should close the funds now,” and “the entire subprime market is toast.

The situation became so dire that Cioffi pulled $2 million of his own cash from the fund, but the pair still told investors that they should stay in and that the outlook was good, prosecutors said.

Cioffi, 52, was arrested by FBI agents at his home on the Upper West Side of Manhattan on Thursday morning, and Tannin, 46, was taken into custody outside his New Jersey home.

Both men pleaded not guilty at an afternoon arraignment and were released on bond. Each faces up to 20 years in prison. They left court with their wives and without speaking to reporters.

The mortgage market crisis “took the whole financial world by surprise,” said Cioffi’s attorney, Edward Little. “So our question is, why is Ralph Cioffi being charged in this case?” Tannin’s lawyer, Susan Brune, said he was “being made a scapegoat for a widespread market crisis. He looks forward to his acquittal.

Legal experts said more Wall Street figures would probably be charged in the credit crisis, the latest front for white-collar prosecutors who brought — and in most cases won — high-profile cases earlier this decade after the fall of Enron.

There is no doubt the government is always looking to go as high as they can,” said Bill Leone, a former U.S. Attorney in Colorado. “Any time you get losses into the billions, the likelihood that higher-level executives participated in decisions increases.

Subprime mortgages were sold to people with less-than-ideal credit. Many of them began defaulting on their loans when the housing market fell and their introductory “teaser” interest rates shot up, making their payments unaffordable.

Because many of those mortgages were sliced and repackaged as securities that could be bought and sold, the mass defaults caused widespread pain among large U.S. banks.

The collapse of the two Bear Stearns funds is just a small part of the subprime crisis, which is still rippling through the economy.

Amid the fallout for banks, prominent CEOs have lost their jobs, including Citigroup Inc.’s Charles Prince, Merrill Lynch & Co.’s Stanley O’Neal and Bear Stearns Cos.’ own James Cayne, who was stripped of his CEO title.

Hedge funds cater to large investors and the very wealthy and use complex, speculative investing methods in hopes of winning enormous gains. They operate with little government supervision and have lately come under fire from regulators.

In the Bear case, the internal e-mails provide a window into the trouble that began to engulf the hedge funds in 2007.

The indictment describes a meeting of Cioffi, Tannin and two unnamed colleagues in which Cioffi confided the hedge funds had narrowly “averted disaster” in February 2007 — news that “led to a vodka toast to celebrate surviving the month.”

The complaint says Tannin expressed doubt about Cioffi’s management in an one e-mail last March to a third fund manager with only question marks in the subject line. The e-mail said, “Is Ralph doing what he should be doing right now?

Around the same time, Cioffi wrote to a Bear Stearns economist: “I’m fearful of these markets. … As we discussed it may not be a meltdown for the general economy but in our world it will be. Wall Street will be hammered with lawsuits.

Tannin and Cioffi were repeatedly telling investors and Bear Stearns brokers responsible for selling funds that the outlook was good.

In once instance, prosecutors said, Tannin encouraged an investor to add money to the fund and said he would do the same, but never did.

At the same time, prosecutors say, Cioffi pulled $2 million of his own money out of the fund, about a third of his stake, and put it into a separate fund without telling investors. He was charged with insider trading in addition to fraud.

The Bear Stearns hedge funds had more than $20 billion in assets before collapsing in June 2007. Just before the collapse, Cioffi fretted in an e-mail that “I’ve effectively washed a 30-year career down the drain” if he couldn’t turn things around, the indictment said.

The case demonstrates yet again how e-mail can trip up Wall Street executives.

Prosecutors used e-mail exchanges against former Credit Suisse Group banker Frank Quattrone and famed stock analysts Jack Grubman and Henry Blodget. But prosecutors struggled to win and maintain convictions in all of those cases.

Cioffi and Tannin have already been named in lawsuits brought last year by hedge fund investors who allege they were purposely misled.

The fortunes of Bear Stearns began to crumble around the same time that the fund collapsed, getting so bad that the Federal Reserve and JPMorgan had to intervene to save the once-mighty institution from bankruptcy earlier this year.

AP Business Writer Joe Bel Bruno contributed to this report.

As I told many of the reporters who called about today’s developments (including The Detroit News), what the popular media is finally getting around to reporting isn’t even the tip of the iceberg that sank the Titanic. While it’s true that today’s announcements are a step in the right direction, its also true that this nation’s real estate and mortgage fraud-related woes go much deeper than what Operation Malicious Mortgage has uncovered. Sadly, as I recently reported, our own Attorney General, Michael Mukasey, said just 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,’’ Attorney General Mukasey says.

Hey, Mr. Attorney General… to paraphrase James Whitcomb Riley: If it walks like a duck, quacks like a duck, and looks just like a duck, I would call it a duck.

Posted By: Ralph Roberts @ 11:23 pm | | Comments (8) | Trackback |
Filed under: Arrest,FBI,Mortgage Fraud,Mortgage Meltdown,Real Estate Fraud

June 6, 2008

Real Estate Fraud and Celebrities in Foreclosure

As of today, the list of celebrities facing foreclosure isn’t long but you wouldn’t think that by reading newspaper and blog headlines or tuning in to national news reports from the likes of CNN, CNBC, ABC World News Tonight, and others (oh, and don’t forget Larry King Live… he featured one celebs’ story during last night’s show). In fact, the only celebrities we are able to identify as facing foreclosure in 2008 are:

  • Marion Jones (athlete – track and field)
  • Jose Canseco (athlete – baseball)
  • Michael Jackson (entertainer – music)
  • Latrell Sprewell (athlete – basketball)
  • Aretha Franklin (entertainer – music)
  • Ed McMahon (entertainer – talk show)
  • Evander Holyfield (athlete – boxing)

Still, while the numbers are low and are sure to grow, the mere fact that some of the wealthiest and well-known people on the planet are now facing foreclosure is very telling, and, may in fact signal a new discovery in real estate and mortgage fraud forensics.

For example, is it possible that Ed McMahon, Aretha Franklin, Evander Holyfield and other celebrities never really qualified to own their palatial homes in the first place? Of course it’s possible… in fact, it’s more likely the case than not! How can I state such a thing, especially in light of the money these people reportedly earn? that’s easy…

What do most people do when they encounter a celebrity? Stare, point, stumble all over themselves, try to act cool like it’s no big deal, ask for an autograph, take pictures, offer to buy them a drink, yada, yada, yada. The simple fact is this… we tend to place celebrities on pedastools, and I’d bet you dollars to donuts that Realtors, financial advisors, bankers, mortgage brokers and loan officers do the same. They see a celebrity walking down their hall and they think one of two things… how wonderful would it be to say “I’m Ed McMahon’s Realtor” or loan officer, and, “I wonder if I can get an autograph or get Mr. McMahon to endorse my services to his wealthy friends and business associates.”

Holyfield Home.jpg In those moments–when the Mr. Holyfield’s of this world are asking for a real estate industry insider’s help in acquiring a home (in this case, a 235-acre estate–click on image to left to see for yourself–that surrounds a 109-room, 54,000 square-foot house complete with 17 bathrooms, three kitchens, and a bowling alley)–don’t you think the Realtor, mortgage broker, loan officer or banker is going to do anything possible to make Mr. Holyfield happy, even if it means fudging numbers to make sure a loan is approved? If for one second you don’t think this is entirely possible, then I say it’s time to wake up and smell the order coming from the floorboards.

Our society places way too much stock into the welfare of celebrities and those like them. I bet you that if we were to audit Ed McMahon’s, Aretha Franklin’s, or Evander Holyfield’s real estate-related files, we would find that their finances were manipulated at some point in time by financial advisors and others to make it appear as if they qualified for their home loans. Just because they’re rich and famous doesn’t mean that they automatically qualify for large loans; and as I said, I wouldn’t put it past an aggressive autograph seeking/commission generating financial advisor, Realtor or loan officer to do anything they could to earn that business, including, knowingly engage in real estate and mortgage fraud.

Posted By: Ralph Roberts @ 10:25 pm | | Comments (8) | Trackback |
Filed under: Celebrities in Foreclosure,Foreclosure,Mortgage Meltdown,Real Estate Fraud

June 3, 2008

Credit Expansion and Borrowed Time

Borrowed Time.jpg According to the Joint Economic Committee of the U.S. Congress, the most important cause of our current housing bubble was a massive credit expansion. An overly accommodative U.S. monetary policy from the second quarter of 2002 through the third quarter of 2006–when compared with the Taylor Rule–encouraged financial institutions to expand credit aggressively by reducing their short-term funding costs.

At the same time, according to the Joint Committee’s latest report– The U.S. Housing Bubble and the Global Financial Crisis: Housing and Housing-Related Finance [warning: pdf file]–stable inflationary expectations and the exchange rate policies in the People’s Republic of China and other Asian economies restrained long-term U.S. interest rates. Our housing prices soared as low long-term interest rates further encouraged the already strong demand among consumers for housing, while financial institutions enthusiastically supplied the necessary residential mortgage credit.

In plain English, a combination of government policy blunders and private sector miscalculations and mistakes underlie the inflation and deflation of the housing bubble. Fair enough, but I still say real estate fraud played a significant role in our current housing crisis, and for evidence of this one needs to look no further than to the financially lethal cocktail of risky high-rate mortgages and naive borrowers in many neighborhoods across central Ohio.

A wave of residential housing foreclosures during recent years has pushed property values down for the first time in decades, a new Columbus Dispatch analysis has found. The newspaper, which does an outstanding job of reporting on real estate and mortgage fraud, analyzed three years’ worth of HMDA (Home Mortgage Disclosure Act) data for more than 1.3 million mortgages executed across Ohio between 2004 and 2006. The Dispatch’s new series examines the toll of high-cost refinancings as well as the disproportionate impact on minorities, including African Americans.

Borrowed Time in Ohio.jpg

From Bill Bush, Rob Messinger, Doug Haddix, Mike Wagner, Jill Riepenhoff, and Geoff Dutton of the Columbus Dispatch:

Mortgage meltdown: Think you’re unaffected? Think again

Sunday, June 1, 2008 3:26 AM

Virtually everyone is suffering from a mortgage hangover.

Even homeowners who never have missed a payment.

Even people who already have paid off their mortgages.

Even renters.

The financially lethal cocktail of risky high-rate mortgages and naive borrowers has taken a toll in many neighborhoods across central Ohio. A wave of foreclosures during recent years has pushed property values downward for the first time in decades, a Dispatch analysis found.

Thousands of families have lost their dream homes. Their neighbors, surrounded by orange foreclosure stickers and for-sale signs, have seen their homes lose value as abandoned houses blight their communities. And many renters have been pushed out of their homes because of their landlords’ problems.

Franklin County Home Values.jpg

The worst might still lie ahead.

Interest rates are scheduled to jump this year and next on another round of high-rate mortgages, known as subprime loans — typically adding hundreds of dollars to monthly mortgage payments.

“Subprime is going to destroy neighborhoods,” said Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio. “It’s hurt more people than it ever helped. It encouraged a culture of recklessness by everyone.”

To measure the damage and the looming challenges, The Dispatch has investigated the effects of the mortgage meltdown.

The three-day series kicks off today.

Read the Columbus Dispatch series by clicking on any of the links below (or simply start by clicking here):

Posted By: Ralph Roberts @ 1:45 pm | | Comments (1) | Trackback |
Filed under: Geoff Dutton,Mortgage Fraud,Mortgage Meltdown,Ohio,Real Estate Fraud

May 20, 2008

Overview: Federal Housing Finance Regulatory Reform Act of 2008

The U.S. Senate Committee on Banking, Housing, and Urban Affairs, yesterday announced they reached an agreement on legislation entitled “The Federal Housing Finance Regulatory Reform Act of 2008,” which includes efforts to:

  1. Help prevent the rising number of foreclosures
  2. Create more affordable housing for consumers
  3. Reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system

According to, provisions of the proposed legislation include:

  • Allowing the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers’ homes.
  • Stricter oversight of Fannie Mae and Freddie Mack. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market.

The new FHA program could benefit an estimated 500,000 people, reports It could cost as much as $500 million, which would be paid for by Fannie and Freddie. If it turns out the costs fall below that level–that is, should few if any borrowers default on their new FHA loans–the funds from Fannie and Freddie would be redirected back to the affordable housing trust fund.

The Senate Banking Committee is scheduled to debate and vote on the bill later today. The measure is certain to pass at both the committee and full Senate levels in time to go to President Bush before the July 4 congressional recess, reports It remains an open question whether President Bush would support the bill. He did, after all, threaten to veto a similar bill sponsored by Congressman Barney Frank and passed by the House of Representatives several weeks ago. But Senator Dodd said that while the Bush White House hasn’t endorsed his bill yet, “there’s been some positive reaction out of the White House.”

Posted By: Ralph Roberts @ 6:07 am | | Comments (4) | Trackback |
Filed under: Foreclosure,Legislation,Mortgage Meltdown

May 9, 2008

President Bush Vows to Veto Comprehensive Housing Package

Defying veto threats from the Bush administration, the U.S. House of Representatives yesterday passed a comprehensive measure in response to the mortgage crisis. The American Housing Rescue and Foreclosure Prevention Act (H.R. 3221) appears to respond directly to the current crisis facing middle class Americans while providing many of the tools necessary to prevent a repeat of these problems. President Bush has threatened to veto the roughly $300 billion package, arguing it would “reward speculators and lenders.”

The legislation combines a number of bipartisan bills including measures to modernize the FHA and reform the GSEs, which will provide crucial liquidity to our mortgage markets now, and also strengthen regulation and oversight for the future. In addition, the package could help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

Summary of H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act

Amendment 1: FHA Housing Stabilization and Homeownership Retention Act (H.R. 5830)

  • Provides mortgage refinancing assistance to keep families from losing their homes, protect neighboring home values, and help stabilize the housing market.
  • Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government -insured mortgages they can afford to repay. This legislation will help troubled borrowers avoid foreclosure while minimizing taxpayer exposure.
  • Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
  • Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
  • Contains important protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
  • Provides $230 million for financial counseling to help families stay in their homes.

FHA Modernization (H.R. 1852)

  • Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
  • This measure passed the House in September. (Expanding American Homeownership Act of 2007, H.R.1852)

GSE Reform (H.R. 1427)

  • Strengthens regulation of Fannie Mae and Freddie Mac, and the Federal Home Loan Bank system.
  • Raises the GSE loan limits for single family homes in high cost areas, so that these entities can purchase more loans in higher cost areas (thereby lowering interest rates for new homes and refinancings in those areas).
  • Expands liquidity in the mortgage markets by buying loans already made, freeing up money for new mortgages and refinances.
  • Creates a new Fund to boost the nation’s stock of affordable rental housing.

Encouraging Mortgage Modifications/Castle Bill (H.R. 5579)

  • Mortgage servicers are concerned about the threat of investor lawsuits if they help families in danger of losing their homes with loan modifications that reduce monthly mortgage payments through lower interest rates, reduced principal amounts or other changes in loan terms.
  • To speed loan modifications and keep more families in their homes, this package includes HR 5579 to provide mortgage servicers with clarity and certainty for their actions, and protection from such lawsuits for specified loan modifications.

Preserving the American Dream for Our Nation’s Veterans

  • Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.

Amendment 2– Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720): This amendment provides $11 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $10 billion in mortgage revenue bonds for states, and improves access to low-income housing.

  • Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $70,000 ($140,000 in the case of a joint return).
  • Provides taxpayers that claim the standard deduction with up to an additional $350 ($700for a joint return) standard deduction for property taxes in 2008.
  • Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $10 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
  • Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.
  • Helps returning soldiers avoid foreclosure by lengthening the time a lender must wait before starting foreclosure, from three months to one year after a soldier returns from service.
  • Would not add to the national debt. The cost of this bill is offset with a tax compliance provision included in the President’s Budget and by delaying the effective date of a tax benefit for multinational companies that has not yet taken effect.

Amendment 3–Miller/LaTourette

  • This amendment protects the right of states and cities to regulate the foreclosure process and the treatment of foreclosed property — by clarifying that this act, the National Bank Act, and the Home Owner’s Loan Act do not preempt State foreclosure laws for national banks or federally chartered thrifts.
  • Exempting national banks and thrifts from foreclosure law would deprive the states and cities of the right to require that foreclosures must follow certain procedures, including notice to the people foreclosed, and that foreclosed property be safely maintained.
  • Many in the industry and in the Bush administration argue that national banks should be exempted from these rules. There is no reason that national banks and federal thrifts should be treated differently from all other mortgage holders when it comes to how to foreclose and how to maintain foreclosed property.
Posted By: Ralph Roberts @ 12:26 pm | | Comments (1) | Trackback |
Filed under: Legislation,Mortgage Meltdown
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