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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Expecting the worst, hoping for the best!

~ Kim Sikorski, Michigan

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

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

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

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

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

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

The writer and social essayist Charles Hugh Smith recently posted a great article on his blog about the domino effect leading up to the mortgage meltdown. With Charles’ permission, here is a great graphic depicting how we got to where we find ourselves today:

From Charles’ blog:

Empire of Lies, Kingdom of Magical Thinking

We in the U.S. live in an Empire of Lies. Nowhere is this more painfully visible than in the real estate industry. The real estate/building industry inflated the bubble with an interconnected chain of lies, deceptions and deliberate statistical legerdemaine.

The American public willingly accepted a free pass to the Kingdom of Magical Thinking, where they could indulge their fantasies of gaining great wealth by doing nothing more than owning a house.

Way to go, Charles; I couldn’t have said it better myself!

For more of Charles’ excellent thoughts, read Empire of Lies, Kingdom of Magical Thinking.

As we scramble here in the United States to pick up the pieces from the latest credit crisis and housing market crash, we often overlook the fact that U.S. lenders did not simply sell risky mortgages to homeowners. No, once they were done fleecing homeowners, lenders decided to sell those risky mortgages to overseas investors. After all, why hold onto mortgages that you know homeowners are going to be unable to pay? The U.S. mortgage lending industry essentially pulled off a Ponzi scheme of global proportions, and now the United States stands to pay the price.

Here’s how the scam went down. Back in 2000, the American economy was floundering. Some sort of correction needed to happen, but Alan Greenspan, the Federal Reserve Chairman at the time, decided that we could give the economy a bit of a boost by cutting interest rates.

Mortgage interest rates dropped, more Americans could afford to buy homes, housing prices rose, and suddenly, Americans were rich with equity. Housing values were climbing like there was no tomorrow, and with loans being so cheap, people started cashing out that inflated equity in their homes to finance their enjoyment of the good life.

Unfortunately, housing prices hit a critical tipping point. Fewer and fewer Americans could afford these overpriced abodes. Again, a market correction was in order, but the banks didn’t want that. Instead of letting the housing bubble naturally burst, which would have resulted in more affordable houses, they decided to offer more affordable mortgages–adjustable rate mortgages (ARMs) with low introductory interest rates. This enabled more people to continue buying homes, and home prices to continue to rise.

Everyone was happy. Interest rates were low, so more people could afford to buy houses, lenders and mortgage brokers were processing more loans, Real Estate agents were earning higher commissions, builders were selling more newly constructed homes, and state and local governments were raking in higher property taxes. Life was good.

The only trouble was that the banks failed to account for the fact that eventually the housing market would tank and the teaser rates on the adjustable rate mortgages were scheduled to skyrocket. The banks failed to think ahead… or did they?

Based on what you read in the mainstream press, you might tend to believe that the banks did not know what was going to happen. After all, many mortgage lenders had to fold up shop. Others were brutally punished in the stock market when their share price took a nose dive. The thought the banks were clueless, however, is simply not true. The banks were fully aware of the looming sub-prime mortgage crisis. In fact, they were well prepared to quite literally pass the buck… to foreign investors.

Passing the buck

To get these risky sub-prime mortgages off their books, the banks diversified and then bundled their mortgages, repackaged them, and peddled them to the international community as safe investments. Through financial sleight of hand, the banks tricked investment-rating agencies including Moody’s and Standard & Poor’s to assign these mortgage securities higher ratings and valuations than subprime mortgages would generally receive.

Trusting the U.S. banks and America’s well-known investment-rating agencies, foreign investors bought these securities hook, line, and sinker.

As long as the party was in high gear and housing prices were soaring, foreign investors were completely unaware of what was about to happen on the other side of the ocean (their investments were performing quite nicely, thank you very much). Unseen to them, however, interest rates on many sub-prime mortgages were scheduled to rise, making mortgage payments unaffordable for millions of Americans. When what was fated actually started to happen, foreclosure rates skyrocketed, and foreign investors were left holding the bag.

Now, the U.S. is in quite a financial pickle. Deep in debt and stripped of equity, the U.S. relied on consumer confidence and foreign investment to fuel its economy. Now that both of those assets have been shredded by the mortgage lending industry and rampant real estate fraud, what can we rely on to fuel our economy in years to come?

Massachusetts Attorney General Tom Reilly has obtained emergency orders to stop unfair and deceptive practices by individuals and businesses he claims are involved with mortgage fraud and foreclosure rescue schemes. As part of Massachusetts’ continued effort to tackle predatory conduct in mortgage brokering and lending, temporary restraining orders were issued against five individuals and four businesses engaged in what Rily calls unfair and deceptive practices.

In each of the three lawsuits filed this past Wednesday, judges issued emergency orders to stop the illegal practices, and ordered the defendants not to evict any homeowners or sell any of their homes.

In a complaint filed in Suffolk Superior Court, Reilly alleges that Brockton, MA, attorney Alec G. Sohmer, and his wife Jennifer, participated in a bogus foreclosure rescue scheme targeted at desperate homeowners. The complaint also names Timeless Funding Inc., a Nevada company the Sohmers allegedly used in their fraudulent activities.

According to Reilly’s complaint, Sohmer has preyed on homeowners facing foreclosure since 2004 by promising them they could avoid foreclosure with refinancing through Timeless Funding. Instead, Sohmer deceived the homeowners into conveying their property to himself or to his wife. The complaint alleges that Sohmer concealed his fraud by deceiving the homeowners into signing documents purporting to allow them to stay in their homes by making monthly payments to Sohmer, and then to “repurchase” their homes from Sohmer by obtaining new financing. The complaint alleges that Sohmer knew that, because of the homeowners’ financial distress and the onerous “repurchase” terms, the homeowners would never be able to afford the monthly payments, or obtain the required financing to get their homes back.

After homeowners were unable to make their monthly payments, Sohmer sought to evict them from their homes, and to sell their homes to new buyers. Reilly alleges that, as a result of Sohmer’s scheme, at least three homeowners have already lost, or face losing, their homes and their life savings. The Sohmers also allegedly took for themselves the equity that the homeowners had built up in their homes, as well as additional fees, commissions and other payments directly from the homeowners.

The complaint identifies homeowners in Centerville, Wareham, and Brockton, MA, who have been victimized by Sohmer’s practices. According to AG Reilly’s complaint, Sohmer misled consumers about the nature of the transactions, misrepresented and omitted crucial terms, pressured homeowners into signing documents without reading them, and then refused to give them copies of the signed documents. Sohmer also capitalized on his position as an attorney, and in one case victimized a homeowner who he was representing in bankruptcy.

In another case involving a bogus foreclosure rescue scheme, Reilly filed a complaint Wednesday in Middlesex Superior Court against Walter Ribeck of Newburyport, MA.

According to AG Reilly’s complaint, Ribeck targeted financially distressed homeowners facing foreclosure on their homes. Ribeck, promoting himself as a “loan specialist” with Powderhouse Mortgage Company, promised to arrange replacement financing to allow homeowners to keep their homes and any home equity they may have accumulated. Then, when foreclosure was imminent, Ribeck instead arranged for the homeowners to deed their homes to him, while purportedly maintaining a right to lease the residence and buy it back at a future date. This repurchase terms, however, were at inflated prices that far exceeded the homeowners’ original mortgage obligations. The ultimate result of these transactions, AG Reilly alleges, is that Ribeck evicted the homeowner so he could sell the home on the open market, for far more than he paid to acquire it.

In 1991, Ribeck, then a real estate broker, was convicted of bank fraud and making false statements to a federally insured bank and was incarcerated for two years. Reilly has obtained an emergency court order to prevent Ribeck from evicting homeowners or selling their property, and is also seeking restitution for homeowners harmed by Ribeck’s conduct, civil penalties, and reimbursement of the costs of investigating and litigating this case.

Since he took office, Reilly has made it a priority to protect Massachusetts homeowners and homebuyers from predatory practices by mortgage brokers and lenders, and more recently, from bogus foreclosure rescue scams. From 2003 through mid-2006, the state of Massachusetts has brought lawsuits or obtained settlements against fraudsters that together will return over $25 million to over 20,000 Massachusetts homeowners.

I’m in California today and tomorrow attending the 2006 edition of the Predictive Methods Conference (PMC). In addition to delivering tomorrow’s Keynote address on Recognizing, Avoiding, and Recovering from Mortgage Fraud, I’m visiting with conference attendees via my booth in the exhibit hall, as well as sitting in on number really great workshops. In the meantime, for anyone who may have missed it, earlier this month, Illinois Governor Rod Blagojevich signed legislation into law to protect his state’s homeowners from fraudulent actions by unscrupulous mortgage ‘rescue’ firms.

Senate Bill 2349 now gives Illinois’ homeowners new rights when dealing with companies that offer financial assistance to help them save their homes from foreclosure. It also guarantees that homeowners will receive a substantial portion of their equity in the home from the companies.

As we all know, mortgage rescue fraud is popular among the predatory lending crowd. As Illinois’ Attorney General Lisa Madigan says, “without the protections afforded by the Mortgage Rescue Fraud Prevention Act, homeowners are vulnerable to the greediest of predators who take their money and strip the equity in their homes.”

With the recent rise in foreclosures, Illinois has seen a huge growth in the mortgage rescue services offered to homeowners who are delinquent on their mortgages and at risk of foreclosure. Currently in Illinois, there are two known types of mortgage rescue services: the first are consultants who promise the homeowner they can save the home by negotiating with lenders. These consultants can cost $1,000 to $2,500, and often do little or no work for the homeowner.

The second type of mortgage rescue service are property purchasers who offer to help by letting the homeowner rent the property until they can get back on their feet financially. Homeowners do not always understand that they are signing over ownership of the house to these purchasers. In some cases the rent payments end up being more costly than the mortgage payments, making it financially impossible for them to repurchase the house. Once the property purchaser has taken all of the homeowner’s equity out of the house they will resell the house and evict the homeowner. This type of fraud was documented in a recent Chicago Tribune series.

In the first quarter of 2006 there were over 13,000 foreclosures filed in Illinois, a 32 percent increase from the last quarter of 2005 according to another recent story in the Chicago Tribune.

The legislation:

• Limits the amount a mortgage rescuer can make if the homeowner is successful in buying back the home to 125% of the total debt on the home paid by the rescuer.
• Requires that all mortgage rescue companies provide disclosures and give homeowners the right to cancel contracts, and increases penalties for violations.
• Requires that the mortgage rescuer provide the homeowner with at least 82% of the value of their home if the homeowner is eventually unable to buy back the home from the mortgage rescuer.

Senate Bill 2349 becomes effective January 1, 2007.

Governor Blagojevich also signed two additional bills into law that will provide homeowners with additional protections against property fraud.

Senate Bill 2569 requires that the Cook County Recorder of Deeds send a postcard to notify homeowners when a quitclaim deed has been filed. Quitclaim deeds are often used to transfer property without the legal property owner’s knowledge. The Recorder’s Office, who introduced this bill because of recent problems with mortgage fraud and fraudulent transfers of property, has reported an increase in quitclaim deed filings recently. This legislation becomes effective January 1, 2007.

House Bill 4760, now known as Public Act 94-0821, requires that the signatures on any deed or other document that transfers property must be notarized. This legislation becomes effective January 1, 2007.

St. Louis Post-Dispatch business columnist David Nicklaus has an interesting editorial in this morning’s paper. Commenting on predatory-lending and the federal government’s attempt to further regulate the subprime lending market, Nicklaus writes:

“…given that states are finding ways to crack down on abuses without cutting off the flow of credit, maybe Washington should stay out of this fight.“

When Nicklaus’ suggests that “Washington” stay out of this fight, he’s referring to the numerous attempts by the United States Congress to further regulate predatory lending, which I hope we all recognize accounts for borrowers losing billions and billions of dollars annually due to predatory mortgages, payday loans, and other lending abuses like overdraft loans, excessive credit card debt, and tax refund loans.

Click here for Nicklaus’ entire column. As usual, it’s well written and informative, but this time around he’s only half right, and here’s why:

Personally, I am in favor of laws and regulations that put the interests of homeowners ahead of irresponsible lending that drains home equity from vulnerable citizens. If what Nicklaus really means to say is that Congress should not pass the proposed “Responsible Lending Act” (H.R. 1295), which would allow many abusive practices to continue, then I agree. The truth is that while “The Responsible Lending Act” claims to offer greater protections to vulnerable consumers, in fact, many key provisions of the Act come with loopholes that will continue to permit wealth-stripping and lead to foreclosures.

For example, unscrupulous lenders can drain a family’s wealth by inserting exorbitant fees into mortgage loans. They can repeatedly refinance the same mortgage until the borrower’s equity is gone. They can prevent victims of predatory lending from protecting their homes against foreclosure after the lender has sold their loan. Clearly, “The Responsible Lending Act” is nothing but irresponsible legislation.

On the other hand, “The Prohibit Predatory Lending Act” (H.R. 1182), which was previously introduced in Congress, offers a better option for protecting consumers and homeowners alike. Unlike the so-called “The Responsible Lending Act,” H.R. 1182 is based on anti-predatory lending legislation that is already effective in several states, including North Carolina, the home of many of the nation’s largest banks. Predatory lending has decreased dramatically in North Carolina while subprime lending continues to flourish. One study estimates that North Carolina citizens saved $100 million during the first year alone.

“The Responsible Lending Act” ignores state laws that are working well in areas where the subprime mortgage market continues to flourish. Rather than encouraging responsible lending practices, H.R. 1295 would allow abusive lending to continue while providing no meaningful enforcement and overriding successful state laws.

This is a time when foreclosures are rising in many areas, families are struggling with debt, and abusive lending practices are harming some of our most vulnerable citizens. David Nicklaus is only half-correct when he says Washington should stay out of the fight. Members of Congress should do the right thing by working to protect, not harm, the financial future of our nation’s working families.