A couple of days ago I mentioned that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) reported that mortgage loan fraud in the United States rose 35 percent in the past year. For anyone interested, here are some additional items of note from the FinCEN’s November 2006 report:

• Between 1997 and 2005, Suspicious Activity Reports (SARs) pertaining to mortgage loan fraud increased by 1,411 percent between. This report-filing trend continues apace in 2006, with 7,093 reports filed on suspected mortgage loan fraud during the first quarter, an increase of 35 percent over the SAR filings in the first quarter of 2005. One explanation for the increase in SARs reporting mortgage loan fraud is increased awareness of the potential for fraud in a dynamic real estate market. Many areas in the United States saw double-digit growth in real estate values during 2003 and 2004. At the same time, mortgage loan interest rates were at a historic low. Although growth in the housing industry appears to be slowing in the first quarter of 2006, opportunities for fraud are still present.
• Reports of mortgage loan fraud rose significantly in 2003. The Federal Financial Institutions Examination Council reported an increase in the number of mortgage loans beginning in 2003: “The 2003 data include a total of 42 million reported loans and applications, which is an increase of about 33 percent from 2002, primarily due to a significant increase in refinancing activity (approximately 41 percent).” SARs on mortgage loan fraud increased over 92 percent between 2003 and 2004. The increase in filings may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 – 2005 timeframe and a broader awareness of this fraudulent activity.
• Mortgage loan fraud represents a growing percentage of total depository institution SARs. In 1997, reports of mortgage loan fraud comprised 2.12 percent of total depository institution SAR filings. In 2005, reports of mortgage loan fraud had increased to 4.94 percent of total depository institution filings.
• Identity theft was frequently reported in conjunction with the commission of suspected mortgage loan fraud. Reports of identity theft increased nearly 102 percent between 2004 and 2005.
• The National Association of Mortgage Brokers reports that as many as two-thirds of mortgage loans are now originated by mortgage brokers. Currently there are no national standards for licensing and oversight of mortgage brokers. Some states license mortgage brokerage offices, but not individuals; 24 states have no specific educational or experience requirements for mortgage brokers; and only a few states require criminal background checks on mortgage brokers making it possible for unethical individuals to move from one mortgage brokerage firm to another.
• The top 10 geographical areas for fraud are California, Florida, Illinois, Texas, Georgia, Michigan, New York, Ohio, Washington, and North Carolina.
• High home prices coupled with rising mortgage rates result in a reduction in housing affordability. In response to this trend, the housing industry is expecting a slow down in mortgage loan originations, a decrease in housing sales, and a slowing in housing price gains. The slow down in the growth of housing prices could result in the housing industry becoming less attractive to investors, which in turn could result in a reduction in the reports of fraud for profit. The current housing trend could also lead to an increase in fraud for housing as the increased costs of housing decreases the number of persons who qualify for mortgage loans. The current trend of rising interest rates and slowing housing equity growth could result in an increase in debt elimination fraud schemes, especially for homeowners with adjustable rate mortgages and interest only loans.

There are only a small handful of newspaper reporters who truly understand the intricacies and problems associated with real estate and mortgage fraud. David Jackson of the Chicago Tribune is one, and Geoff Dutton of The Columbus Dispatch is another. From Sunday’s online edition of The Columbus Dispatch:

Big deals send up red flags
Sales of 14 upscale homes at well-above-market prices raise suspicions of flipping

The peculiar but tempting offers sometimes came a year or more after homeowners planted for-sale signs in their front yards.

Interested buyers suddenly appeared, proposing to pay hundreds of thousands of dollars more than the asking price for houses in some of central Ohio’s elite neighborhoods, including Muirfield Village and Tartan Fields.

The catch: the sellers must agree to immediately refund the difference between the asking price and the sale price.

At least 14 such deals worth more than $11 million have closed since spring, and the offers continue. Rather than celebrate, some suspicious real estate brokers, lawyers and title agents advised sellers to reject the offers and walk away from the deals.

Some called the FBI and the Department of Homeland Security, because most of the buyers were Middle Eastern.

“We turned down five of them,” said Bryan Wing, executive vice president of CV Perry Builders. “Believe me, in this day and age, we could have used it.” Others couldn’t resist.

The elusive buyers who could be located by The Dispatch offered little if any explanation. The real estate professionals, two of whom have troubled track records, wouldn’t discuss the sales in detail. Bankers holding the mortgages wouldn’t talk, and neither would FBI or Homeland Security officials.

Geoff Dutton is one of the most thorough and detailed reporters covering real estate fraud today. The above is but just a small part of an amazing article. Trust me, it’s well worth the read.

With fewer houses selling, increases in foreclosures and real estate prices dropping, the housing market is experiencing the “soft landing” that has been long predicted, and the mid-western United States is once again the most vulnerable part of the country when it to real estate fruad. Earlier this week, CoreLogic released the latest edition of the Core Mortgage Risk Monitor, a report that forecasts the geographic regions most likely to experience the economic consequences of increased levels of fraudulent activity over the next 12 to 18 months.

According to the latest report, the risk index rose by 5 percent between the first and second quarters of 2006, after increasing by 6.4 percent between the fourth quarter of 2005 and first quarter this year. This increase indicates that the risk of real estate and mortgage fraud causing economic impact in vulnerable markets continues to rise at an unprecedented rate.

The top five major metropolitan statistical areas most at risk are:

1. Detroit-Livonia-Dearborn, Michigan
2. Memphis, Tennessee
3. Dayton, Ohio
4. Akron, Ohio
5. Gary, Indiana

The top five markets showing the most noticeable increase quarter over quarter are:

1. Gary, Indiana
2. Detroit-Livonia-Dearborn, Michigan
3. Goldsboro, North Carolina
4. Flint, Michigan
5. Florence, South Carolina

The Core Mortgage Risk Monitor measures what we call ‘collateral risk,’ which is the risk associated with the accuracy of a residential property valuation and the sustainability of that valuation over the life of the mortgage due to the unique characteristics of the property, market, and mortgage contract participants.

Columbus, Ohio’s The Daily Reporter is running a three-part series on Real Estate and Mortgage Fraud:

When Franklin County Treasurer Richard Cordray and Prosecutor Ron O’Brien announced last month that they had filed a foreclosure action and a petition for receivership against the county’s “#1 Delinquent Tax Payer,” they once again brought attention to the multitude of problems associated with blighted properties and the state’s high foreclosure rates.

The Daily Reporter launched an investigation into that property owner’s business transactions and those of a company “it appears he had some connection with – Stillwater Asset Fund out of New York.”

In the first of our three-part series, we look at some of the transactions of both parties, the possible links between them and a legacy of foreclosures.

Click here for Part One, which appeared in yesterday’s online edition of The Daily Reporter.

If you cheated lenders out of $2.3 million, you’d think, wouldn’t you, that you’d be fined at least that amount plus interest and penalties? Apparently not! From yesterday’s online edition of Cincinnati’s The Enquirer:

…defendants in the government’s crackdown on mortgage fraud through corrupt home sales were sentenced to prison Wednesday, including a Butler County man who cheated – and tried to cheat – lenders out of $2.3 million over a three-year period. On Wednesday, it was the day of reckoning for what one federal prosecutor called a “prime player” in the mortgage fraud scheme…

…In addition to fooling lenders into making steep loans on homes, most of which ended up in foreclosure, Husvar underreported his income for 2000 and 2001, resulting in the evasion of $26,589 in income taxes due for those years.

[U.S. District Judge Susan] Dlott sent [Timothy] Husvar to prison for two years, starting in September. She fined him $40,000 and ordered him to pay back taxes….

David M. Green, 49, of Franklin, received 26 months in prison, three years’ probation, 600 hours of community service, a $50,000 fine and an order to pay $82,751 in back income taxes.

Lisa Holderman-Powers, 31, of Cincinnati, received 18 months in prison, five years’ probation, 600 hours of community service, a $35,000 fine and an order to repay $1 million to Trust Corp. Mortgage.

Richard Frazier, 46, now of Cape Coral, Fla., received two years in prison, five years’ probation, 600 hours of community service, a $45,000 fine and an order to pay $45,312 in back income taxes.

Another defendant, Jeff Henry, 44, of Cincinnati, was sentenced Monday. He received 12 months in prison, five years’ probation, 600 hours of community service, a $10,000 fine and an order to pay $16,612 in back taxes.

Unless there’s a typo in that story, according to my math, including fines and taxes, the five defendants in this case have been ordered to pay $1,351,264, which is roughly $1 million shy of what they stole. And when you figure in that $171,264 of the total was for back taxes–meaning, taxes already owed–the fine really only amounts to $1.18 million, which is certainly less than the $2.3 million these crooks stole.

Where’s the justice in that? Click here for The Enquirer’s full write-up on the sentencing, which includes a piece about how Husvar has been spending his time since the summer of 2003 when he first admitted to committing bank fraud, conspiracy and income tax evasion. What a joke!

If you spend as much time as I do researching, investigating, and reporting fraudulent real estate and mortgage transactions, you too might be a little nonchalant with respect to the two items I’m about to blog about. If, however, you’re new to the world of real estate and mortgage fraud detection, and you were wondering just how bad the problem has become, these two items should certainly knock your socks off:

BUSINESS SCHOOL PROFESSOR ARRESTED AND CHARGED WITH REAL ESTATE FRAUD: A business school professor at the University of Southern California’s Marshall School of Business was arrested last week for running a real estate fraud scheme that authorities say bilked $1,500,000 from investors, many of whom were the professor’s own students. You heard me correctly… someone entrusted with teaching graduate-level students a course called “Applications of Real Estate Finance to Problems of Development” was actually committing real estate fraud himself. According to the FBI, 36-year-old Barry Landreth was arrested last Friday (March 24th) on charges related to operating a scheme in which investors were defrauded when Landreth lured them with claims of large returns on real estate investments. According to a criminal complaint filed in U.S. District Court in the Central District of California, Landreth operated Webster Realty Investors and fraudulently represented to victims that he was in a position to invest in the development of real estate projects. Specifically, Landreth fraudulently represented that he was developing commercial properties in Las Vegas, Nevada, and Chicago, Illinois. In some instances, Landreth represented that the projects would return 190 percent of their initial investment within 30 to 45 days. The FBI also alleges that neither Landreth nor Webster Realty had any financial interest in the commercial properties represented. The FBI says Landreth obtained millions of dollars in investor funds based on his fraudulent representations, In short, Landreth operated what is commonly referred to as a Ponzi scheme, whereby early investors were paid with the investments of later investors in order to create the illusion of actual development deals and profitability. The complaint alleges that neither Landreth nor Webster Realty generated any profits or returns on the purported real estate development projects.

PRESIDENT OF THE OHIO ASSOCIATION OF MORTGAGE BROKERS EMPLOYS A FELON CONVICTED OF REAL ESTATE FRAUD: According to an article in yesterday’s Columbus Dispatch, Michael L. Matalka, president of the Ohio Association of Mortgage Brokers, is lobbying to change Ohio’s laws regarding the licensing of appraisers and mortgage brokers. While Matalka supports efforts to prohibit the appraisal of real estate for a mortgage loan without state certification or licensure, and also supports a national criminal background check on all applicants for a real estate appraiser certificate or license, a mortgage broker certificate of registration, or a loan officer license, oddly enough, one of Matalka’s own employees–at a company he runs called Manhattin Mortgage Group–is a convicted felon. The Columbus Dispatch’s Geoff Dutton reports that Manhattan Mortgage Group’s controller–Angela R. Robinson–pleaded guilty in 2002 to a federal felony charge of conspiracy to commit bank fraud for her central role in a property-flipping and kickback scheme in Columbus, duping banks out of hundreds of thousands of dollars. Click here for Geoff Dutton’s article.

Back in mid-January of this year, I sent a letter to every states’ Attorney General to warn them about a credit enhancement scheme that’s gaining in popularity among some mortgage and real industry professionals. As Geoff Dutton writes in this morning’s online edition of the Columbus Dispatch, “Companies such as Creditlauncher.com and Seasonedtrades.com have transformed a common white lie in the real-estate industry into a full-fledged business.” Wondering what the common white lie is that Dutton’s referring to? From that letter I sent out in mid-January:

According to their website (http://www.creditlaunchers.com), Credit Launchers can add the name of a consumer applicant on Credit Launchers’ own credit accounts and allow them to reap the benefits of a drastically improved credit rating that they did not earn themselves. Through aggressive Internet-based advertising, this company markets its services in every state in a manner that specifically intends to deceive lenders and consumers alike.

I tip my hat to Geoff Dutton and his editors at The Columbus Dispatch. Every newspaper in the country should be covering this story, as should each and every real estate industry trade publication and website. In fact, if you’re a regular reader of my blog, you’ve probably already noticed that I also wrote about this very same issue as recently as last Tuesday (click here for that post). In the meantime, from this morning’s Columbus Dispatch:

Having trouble qualifying for a mortgage? There are a slew of tricks for padding your credit score, and a horde of companies peddling them. Internet companies are advertising a new tactic, a controversial service that is the latest twist in the murky world of “credit repair.”

It’s an open secret among real-estate professionals that prospective home buyers with marginal credit can improve their credit scores by persuading someone with good credit to add their name as an authorized user on their credit card — even if they have no access to the card. By piggybacking on someone else’s credit history, loan applicants boost their own credit score. Real-estate agents and loan officers sometimes recommend it. Local seminars have promoted the trick. And now, thanks to the Internet companies, you don’t have to rely on a friend or relative.

For a fee of several hundred dollars, the companies offer to add your name to a “seasoned” credit card, one with a history of timely payments. For several thousand dollars, they will add your name to multiple cards for a bigger boost.

Government officials and consumer credit counselors say legitimate methods for improving your credit score are free but take weeks or months. These experts recommend against paying for alleged shortcuts designed to fool the automated credit-scoring process. The blunt assessment of Steve Baker, the Midwest director of the Federal Trade Commission: “We’ve never seen a legitimate credit-repair company.”

In Ohio, a growing number of people are turning to them and feeling ripped off. Complaints to the attorney general about credit-repair companies have been on the rise, records show, including one filed recently against Creditlauncher.com by an industry watchdog.

“It’s very, very wrong,” said Ralph Roberts, a real-estate guru and best-selling author based in Michigan, who filed the complaint in Ohio. “They’re manipulating the system.”

Click here to read the entire Columbus Dispatch article. While the article itself is not as in-depth as I feel it could be, it’s a good start, and it shows once again–as I pointed out in a blog posting a few weeks back–just why the state of Ohio is out in front when it comes to providing across-board coverage of real estate and mortgage fraud-related issues.

I hope more and more newspapers and real estate trade publications start to cover this story as well. In fact, if anyone from the media happens to land on this post, and would like more information about this developing story, please contact me at editorial1 at ralphroberts dot com. I’d be happy to share a press release we’ve developed on the topic of credit enhancement/credit card piggybacking, which is also available on PR Newswire by clicking here.

Wow, what a week, and technically it’s not even over, yet. From talking with nearly a dozen different reporters from national and regional newspapers and magazines about the problems associated with real estate and mortgage fraud, to working on finalizing and submitting chapters to the publisher for my new book, as well as working on workshop proposals for the National Association of REALTORS Annual Conference and going to work every day to help customers and my amazing staff with the daily grind that is the real estate market (phew, that was a mouthful)… it has been one nutty week, to say the least.

Still though, the coverage of real estate fraud indictments, convictions, and related legislative efforts keep coming, and the state of Ohio seems to be leading the charge. From this morning’s online edition of The Cincinnati Post:

Mortgage Broker Pleads Guilty in Real Estate Flipping Scheme

By Jon Newberry, Post Staff Reporter

Another Cincinnati area mortgage broker has agreed to plead guilty to criminal charges arising from a real estate “flipping” scheme, this one allegedly defrauding mortgage lenders of more than $872,000, according to U.S. Attorney Gregory Lockhart’s office.

Clarence D. Harris of Cincinnati was charged with conspiracy to commit bank, mail and wire fraud and filing a false tax return earlier this month. He has agreed to cooperate with the ongoing investigation. He’s scheduled to appear before U.S. District Court Judge Herman Weber on Feb. 28, according to Internal Revenue Service spokesman Craig Casserly.

Harris’s approach was similar to other flipping schemes that have been uncovered by law enforcement officials, including the IRS, the FBI and the U.S. Postal Inspection Service. Prosecutors said the schemes involved people purchasing real estate at a low value and then recruiting a buyer for the property, usually someone who otherwise couldn’t afford it or who was interested in buying it as an investment.

False documents would be created, including pay stubs, W-2 forms, bank statements and employment verifications, and a falsely inflated property appraisal would be obtained.

My colleague Rachel Dollar at MortgageFraudBlog.com got a hold of Harris’ plea agreement and provides a deeper look into what the former mortgage broker did (click here to read Rachel’s overview).

Also this week, more great news out of Ohio… this time though it’s on the legislative side of the coin… news about a Bill in the Ohio Senate that would hold mortgage brokers more accountable for their actions. From Wednesday’s online edition of the Cincinnati Enquirer:

Bill To Aid Homeowners

Lawmakers rebuffed efforts Wednesday to protect mortgage brokers and lenders from lawsuits, instead inserting more borrower-friendly provisions in a bill aimed at lowering Ohio’s foreclosure rate. The [sic: Ohio] Senate voted 29-4 to send the bill [sic: Sub. S. B. No. 185] clamping down on predatory lending practices to the House. Sen. Tom Niehaus, R-New Richmond, was one of the four who voted no.

Ohio’s foreclosure rate is the worst in the nation. Despite federal investigations of mortgage fraud in Greater Cincinnati and Dayton, and questions about the rising foreclosure rate across the state, the General Assembly has studied the issue for a couple of years but enacted no laws.

House Speaker Jon Husted called the bill a good foundation. The suburban Dayton Republican said he hadn’t studied all the specifics but wants to ensure the bill stays focused on stopping fraudulent practices without hampering business. The bill adds mortgage brokers and lenders that aren’t otherwise covered by federal banking regulations to Ohio’s consumer protection act, requires more licensing for those in the industry and increases enforcement authority of local prosecutors and the state attorney general.

The Ohio Chamber of Commerce learned late of a provision that requires brokers and lenders to act in the best financial interests of their customers – similar to requirements for stock brokers and insurance agents. But instead of removing the requirement as the chamber suggested, a Senate committee Wednesday strengthened it, prohibiting brokers and lenders from asking customers to sign papers saying the lenders don’t have to act in the borrowers’ best interest.

From this week’s news, it looks like Ohio’s moving in the right direction. Click here for the full text version of Ohio Senate Bill 185… it’s a long read, but it’s also well worth it!

Here’s a classic and timely example of a fraudster caught in a “flipping” scheme. Ohio authorities announced charges yesterday against the former Cincinnati man who they say bilked nearly $5 Million from financial institutions by buying low and then selling high using inflated appraisals. From this morning’s online edition of The Cincinnati Enquirer:

The former operator of a Cincinnati real estate company could face up to 30 years in prison and $1 million in fines after agreeing to plead guilty to three charges in the federal probe of mortgage fraud in Greater Cincinnati. David Lockwood, who operated Lockwood Real Estate Holding Co. and now lives in Florida, will plead guilty to federal charges of bank fraud, conspiracy and money laundering, according to documents filed Tuesday in U.S. District Court. He is to appear in court Feb. 22.

Lockwood, who waived a federal grand jury indictment, was among a group of investors who conspired to defraud mortgage lenders by submitting false information on loan documents, authorities said. Investigators said the scheme focused on “flipping” low-value homes.

Flipping, a real estate practice of buying low-priced properties and trying to sell them for a quick profit, is legal. Illegalities can occur though, for example, if loan documents are falsified or if appraisals are rigged or inflated.

Separately, Paula Asher, a former apprentice appraiser, is scheduled to appear in U.S. District Court this morning to enter a guilty plea to one count of conspiracy to commit bank fraud. Federal investigators said she completed at least 17 inflated appraisals from September 2001 through June 2002 to support fraudulent loan applications. Investigators said her actions resulted in actual or intended losses of more than $719,000 for lenders.

Officials said Asher is the first appraiser to admit charges in the mortgage fraud investigation. More than two dozen individuals have admitted charges or agreed to plead guilty in the investigation into fraud involving more than $50 million in real estate purchases in and around Greater Cincinnati. To date 14 have been sentenced to prison terms ranging up to four years.

Investigators told the Enquirer that Lockwood acted as a seller of numerous ‘flipped’ properties, and in one sale in particular, purchased a house and property for $37,000 and sold it three (3) months later for $80,000, knowing the entire time that the property wasn’t worth anywhere near the higher amount.

As I pointed out in a recent article for Realty Times, flipping, when done properly, is a perfectly legitimate strategy for making money in real estate. Someone buys a property below market value, fixes it up (or not), and sells it–based on legitimate appraisals, not inflated ones–for more than they invested in it. Do it well, and you can earn a handsome profit. Make a serious blunder, and you suffer a loss. The fix-it-and-flip-it approach has a positive effect on the real estate market. It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way–capitalism at work.

Conduct a flip based on inflated appraisals, and you too could be facing a million dollar fine and 30 years in prison!