Equity skimming, illegal property flipping, foreclosure rescue scams.
And now, say hello to the newcomer on the fraud block, the home loan modification scam.

“There’s no evidence that the same companies or the same people are involved,” said Deborah Bortner, director of consumer services for the Washington State Department of Financial Institutions. “But the intent is about the same: They are looking to take people’s money.”

State agencies like DFI were established to regulate and examine a variety of state-chartered financial services. The agencies also provide education and outreach to protect consumers from financial fraud. Given the peaks and valleys of real estate and mortgage banking, the agency has had its hands full.

“We proposed a new loan servicer bill because we received so many complaints from homeowners who lost their dreams – their homes – to questionable third-party loan servicing practices,” Bortner said. “Throughout the foreclosure crisis, homeowners desperately hoping to avoid losing their homes have fallen victim to companies offering to help, for a substantial fee. In many cases, the homeowner pays several thousand dollars, receives no loan modification and loses their home to foreclosure anyway.”

All servicers now must explain all fees, credit all payments within one business day of receipt, make reasonable attempts to comply with requests for information from the borrower, and promptly correct errors and refund invalid fees.

A typical loan modification is a permanent change in one or more of the terms of a borrower’s loan. It allows the loan to be reinstated and results in a payment the borrower can afford. This can mean a lower interest rate or an adjustment in loan term or monthly payment.

While there are legitimate loan modification companies, there are many more which charge fees for services never rendered.

New loan servicing/modification laws require licensure of loan servicers and create prohibited practices. They also compel all servicers to comply with many of the laws applicable to loan originators and demand them to maintain a surety bond.

Other guidelines address escrow shortcomings and require an escrow agent’s bond to cover the owner, a director or an officer in addition to all employees.

Investigators and regulators see all kinds of deceptive pitches. In every case, the program offers a desperate consumer hope of escaping a deep, dark hole. Three years ago, the big play was “foreclosure rescue,” where scammers peruse county records to find properties that face foreclosure for nonpayment of mortgages or taxes. And, like loan modification programs, these companies would charge questionable upfront fees and then not do any work.

Consumers who think they are being scammed should not sign anything until they have a neutral party look over the documents. They should contact the consumer protection division of their state attorney general’s office to get information about who would be an appropriate neutral party to review the documents.

Tom Kelly is a former real estate editor for the Seattle Times.

Bothell’s Robert Ernest Brandt, 42, a former Kirkland attorney and escrow officer, was convicted in U.S. District Court in Seattle April 1 of conspiracy and four counts of wire fraud.

The jury deliberated approximately one day following an eight-day trial. When sentenced by U.S. District Judge Richard A. Jones on June 25, Brandt faces up to 20 years in prison and a $250,000 fine.

The Washington State Bar Association disbarred Brandt in 2006 after concluding he had allowed the improper use of his client trust account in the mortgage fraud scheme, and had improperly engaged in transactions in which he had a conflict of interest.

The federal case was indicted in June of 2008, as part of “Operation Malicious Mortgage,” and the overall investigation was conducted jointly with the Washington State Department of Financial Institutions, the King County Prosecuting Attorney’s Office and the Kirkland Police Department.

According to records in the case and testimony at trial, more than a dozen people, including Brandt, were linked to an extensive mortgage fraud scheme operating in 2004 and 2005. Those who have already pleaded guilty in the scheme include a former bank employee, mortgage brokers, as well as the owner of shell companies involved in “flipping” dozens of properties as part of the fraud.

Ten members of the scheme were charged, six in federal and four in state court. All of the charged defendants pleaded guilty, except for Brandt. A number of the charged co-conspirators testified at trial.

The conspirators would identify houses and would use shell companies or third parties to purchase the homes, again according to records and testimony. At the same time, they recruited “straw buyers” who would enter into a purchase agreement to buy the same home from the conspirators at an inflated price (a “flip”). The conspirators assisted the straw buyers with phony paperwork for the home loans, making it appear that they were qualified for the mortgage loans and planned to occupy the houses.

Members of the conspiracy allegedly falsified numerous documents including appraisals, verifications of deposits, employment verification and closing documents. The conspirators split the proceeds from the fraudulent mortgages, and the straw buyers defaulted on the loans after pocketing as much as $20,000 for their fee. The homes were foreclosed and financial institutions and mortgage lenders suffered substantial losses, estimated to exceed $7 million dollars.

For his part, according to records and testimony, Brandt ran a company called “Escrow Authority,” which closed all of the sales of the flipped properties. He permitted other members of the scheme to use money out of his lawyer’s trust account to acquire properties. The same properties were then quickly resold to straw buyers for significantly higher prices, and fraudulent loans were obtained to finance the fictitious resales.

Brandt also helped create shell companies used as part of the scheme, and signed off on fraudulent settlement statements (HUD forms) provided to lenders that failed to disclose the fraudulent nature of the transactions.

A former loan originator and licensed notary was convicted Wednesday in federal court on 30 felony counts of conspiracy, bank fraud, wire, fraud and money laundering offenses, following an investigation by U.S. Immigration and Customs Enforcement (ICE).

William S. Poff, 37, of Marshall, Mich., was living in Washington state when he and four other individuals were involved in a mortgage fraud scheme that cheated banks and property sellers in the Puget Sound region out of millions of dollars. ICE agents arrested Poff and four others in June 2009.

Court documents reveal that starting in 2005 through 2008, the co-conspirators fraudulently obtained financing from banks to purchase homes. They secured the loans by providing a series of false statement on employment, income, citizenship status, assets and liabilities.

They submitted bogus appraisals and hired fictitious home repair companies to do repair work on the properties. Proceeds from the home sales would go to the fake companies that had, in fact, done no work.

At the same time, they convinced innocent home sellers to extend private loans to the buyer of the home to cover a portion of the purchase price. The private loans, which were not disclosed to the banks, allowed the conspirators to obtain loan proceeds far beyond the value of the assets securing those loans.

The sellers did not know that the conspirators had already obtained financing from commercial lenders to cover the full cost of the home. When payments were not made, the properties fell into foreclosure. The homes were then sold for less than the total of all loans secured for the property. The sellers who had extended private loans to the buyers were ultimately left with nothing.

During Poff’s trial, prosecutors focused on the purchase of eight different properties using various deceptive methods including straw buyers, forged settlement documents, lies on loan applications, inflated sales prices, and undisclosed seller financing. Most of the properties are pending foreclosure.

ICE investigators learned that Poff and his co-conspirators pocketed $1.7 million. Evidence presented at trial showed that Poff used some of it for his living expenses, trips, and child support payments.

“This case illustrates how the desire to turn a quick profit can lead to financial crimes that defraud innocent citizens,” said Leigh Winchell, special agent in charge of ICE’s Office of Investigations in Seattle. “ICE will continue to use its unique investigative authority to expose other illegal financial transactions in an effort to deter this type of activity.”

The fraudulent mortgage transactions occurred in communities throughout Western Washington, including in Des Moines, Tacoma, Seattle, Puyallup, Spanaway, SeaTac, Auburn, Bellevue, Renton, Lakewood, Fircrest, Kent, Pacific and Issaquah. The other four defendants in the case have pleaded guilty.

Poff faces up to 30 years in prison. He is scheduled to be sentenced on June 14.

Approximately 200 Washington homeowners who paid for a service they thought would help save their homes from foreclosure will receive partial refunds under a settlement announced yesterday by the Washington Attorney General’s Office. The homeowners each paid between $1,200.00 and $1,500.oo to Foreclosure Assistance Solutions LLC, of Clearwater, Florida. More than 70% of homeowners who signed up with Foreclosure Assistance Solutions ended up losing their homes anyway. The company went out of business in fall 2007.

From Washington State’s Attorney General, Rob McKenna:

“We believe Foreclosure Assistance Solutions used coercive tactics to pressure consumers into paying for a service they really couldn’t afford and then doing little or nothing to actually help those consumers save their homes,” Attorney General Rob McKenna said. “Today’s settlement puts some money back into the pockets of those who bought into the company’s false promise of hope.”

The Attorney General’s Office accused Foreclosure Assistance Solutions of violating the state’s Consumer Protection Act, Credit Services Organization Act, and Commercial Telephone Solicitation Act. According to the state’s complaint filed with the settlement yesterday, Foreclosure Assistance Solutions sent letters and postcards to consumers whose homes were in foreclosure. Some of the solicitations mimicked official government notices. The messages instructed the consumers to call the company for help.

More from the Attorney General’s Office:

“Foreclosure Assistance Solutions employees delivered a deceptive sales pitch to frighten consumers into believing they needed to act quickly. Homeowners who paid for the service were then presented with a contract that prohibited them from contacting the mortgage lender that initiated the foreclosure for any reason. And for consumers who paid Foreclosure Assistance Solutions with a credit card, the contract prohibited them from trying to dispute the charges by contacting their credit card provider before Foreclosure Assistance Solutions. Consumers who did would not receive a refund.”

Foreclosure Assistance Solutions did not admit to any wrongdoing in the settlement but agreed to pay $78,125 in restitution to Washington consumers, as well as $20,000 in attorneys’ fees. The settlement also includes injunctive provisions limiting how the company does business, should it offer services again in the future, as well as an additional $100,000 in civil penalties for failure to comply with the agreement.

Foreclosure Assistance Solutions will be providing the Attorney General’s Office with contact information for Washington consumers who purchased its services. The state will mail checks to eligible recipients within the next three months. The total restitution will be divided among all eligible recipients; individuals will likely receive $300-$500 each. Anyone who has questions about the settlement can contact the State of Washington Attorney General’s Consumer Resource Center at 1-800-551-4636 between 10 a.m. and 3 p.m. weekdays (Pacific Time).

In related news, the Texas Attorney General’s Office reached a settlement with Foreclosure Assistance Solutions and its operators earlier this month. A court agreed in September 2007 to freeze the defendants’ assets on conjunction with Texas’ investigation, and the company subsequently went out of business.

The Washington Attorney General’s Office introduced legislation this past legislative session to help protect homeowners from foreclosure rescue scams where the “rescuer” agrees to purchase a distressed property then sell or lease it back to the original homeowner. Washington House Bill (HB) 2791 takes effect June 12, 2008. The new law will require that the purchaser prove the homeowner is able to make the payments and provide a written contract with clearly disclosed terms. The new law also gives the homeowner the right to cancel the contract within five (5) business days, and also requires that the original homeowner receive at least 82% of the difference between the property’s fair market value and the underlying mortgage should the home be sold to a third party.

With one out of every 1,370 homeowners in her state facing foreclosure, Washington’s Governor, Chris Gregoire, yesterday announced the formation of a task force to evaluate instability in the national subprime mortgage market and ensure that the impact is minimized in Washington.

While the economy in Washington is relatively strong and the state is not yet seeing foreclosures and defaults at the same rate as other states, Governor Gregoire is concerned for Washingtonians who may be at risk of losing their homes due to the unstable lending market. Governor Gregoire has directed the group, called the Task Force for Homeowner Security, to provide evaluation and recommendations for action to her on:

• The extent of the problem and impact in Washington for current and new home buyers
• Ways to facilitate sensible refinancing options from responsible lenders for homeowners in default or at risk of default
• Consumer education to those in foreclosure or at risk of foreclosure
• Consumer education to potential new home buyers
• Reforms to Washington lending practices

The task force is scheduled to deliver recommendations to Governor Gregoire no later than December 31, 2007.

In mid-June, Reuters reported that “U.S. home foreclosures in May jumped 90% from a year earlier, reflecting a poor spring housing market and foreshadowing even higher levels later in 2007.” And this was only one of dozens of articles I read in June declaring the current foreclosure crisis and warning that the worst is yet to come.

Well, June came and went, after which I was contacted by Julie Tripp of The Oregonian, who told me that foreclosure rates in the Pacific Northwest were lower than national average. According to Julie and the Mortgage Bankers Association, Pacific Northwest homeowners are less likely than those nationwide to be behind in their mortgage payments, but the percentage of Oregon and Washington loans in foreclosure is creeping upward. Julie says that with the smell of blood in the water, foreclosure sharks are beginning to close ranks, attracting the wounded with promises of rescues that never come.

From yesterday’s online edition of The Oregonian:

To make matters worse — and yes, it gets worse — con artists are targeting homeowners in foreclosure with pitches about saving their homes. But what they’re really doing is setting the vulnerable homeowner up for a scam that skims all of the equity from a property and leaves the borrower nothing.

Oregon’s mortgage regulation chief, Berri Leslie, has seen a handful of equity-skimming schemes in the past six months and has tried to help unwind the disasters. But because the scammers are not mortgage brokers or bankers, they don’t come under the purview of her office. The Department of Justice investigates so-called mortgage-rescue schemes through the state’s Unlawful Trade Practices Act and has received 56 complaints or inquiries about them since 2003.

Here’s how they work, according to Ralph R. Roberts, a Detroit real estate executive and author of “Protect Yourself from Real Estate and Mortgage Fraud“:

The classic foreclosure-rescue scheme starts when the con artist gets foreclosure information from county public records or by reading legal notices. In Portland, such a detailed “trustee’s notice of sale” can be found in the pages of the Daily Journal of Commerce, including names and addresses of property owners in default, amounts owed and the date of proposed sale on the courthouse steps.

The scammer then calls on owners, sometimes within days of scheduled foreclosure sales. He says he can save their homes if they sign lease-option contracts to sell their properties to the scammer, who says he’ll rebuild their credit rating during the lease so that they can qualify for a loan when the lease expires, then buy back the property.

Depending on the scheme, the scammer either takes control of the property, taps its equity using a refinanced loan, or pockets the homeowners’ payments.
Some investment seminars teach similar techniques as an “investment strategy,” Roberts says.

“It is one of the most often taught ways of buying property with ‘no money down,’ Roberts says. But the purpose is to get the property and strip its equity, not to teach investors how to earn a reasonable rate of return.

“Foreclosure-rescue scams always increase when the housing market begins to decline,” Roberts says. “As foreclosure rates continue to rise, we see an inordinate increase in the incidence and frequency of such schemes.”

The U.S. Department of Justice has issued a consumer alert about mortgage-foreclosure scams, including the following warning signs. Watch out if an individual or company:

• Calls itself a “mortgage consultant,” “foreclosure service,” or similar name.
• Contacts or advertises to people whose homes are listed for foreclosure.
• Collects a fee before it provides services.
• Directs you to make your home mortgage payments to the individual or company.
• Tells you to transfer your property deed or title to the individual or company.

As Julie points out at the end of her excellent article, if you cannot pay your mortgage, call your lender to find out what help is available. Also, consider calling the U.S. Department of Housing and Urban Development to find a legitimate counselor at 800-569-4287.

A Washington state loan officer convicted of stealing nearly $50,000.00 from homeowners as part of a scheme to pay off their mortgages, last week received a five-and-a-half year sentence, $70,600 in restitution and a $10,000 fine. The Financial Crimes Unit of the Washington state Attorney General’s Office brought charges against J. Anthony Hansen, 42, of Tacoma, WA, in August 2005 at the request of the Washington State Department of Financial Institutions.

Hansen was convicted in February of this year of one count of theft in the first degree, 67 counts of theft in the second degree, and one count of money laundering. A jury returned a special verdict designating the case “a major economic offense.”

The State reviewed more than 16,000 total pages of materials, and presented 230 trial exhibits and 17 witnesses from all over the state, plus two witnesses from outside of Washington.

According to court documents, Hansen was an independent contractor with Country Home Finance for a little over two years, during which time he charged 68 customers, on average, $600 for a Mortgage Payment Acceleration Program (MPAP). Hansen used advertising materials obtained from Equity Corp., of Florida, and claimed he would enroll customers in the MPAP. In fact, none of the customers was enrolled.

One of the interesting things about this case is that was investigated and prosecuted thanks to a special pool of funds earmarked for mortgage fraud. Washington’s Mortgage Lending Fraud Prosecution Account was created by the Legislature in 2003 to aid prosecutors in bringing mortgage lending fraud cases. Funding is generated through a $1 fee for each recording of a deed of trust.

A former Spokane, Washington, Realtor who claimed she was just following widely accepted practices in the real estate industry has been sentenced to serve two-and-a-half years in federal prison and pay $264,406.00 in restitution for her role in a $1.4 million mortgage fraud scheme. Sixty-three-old Sally Gibson was originally convicted in August 2004 of conspiracy and 11 counts of wire fraud associated with a home-selling scheme carried out by Century Mortgage and its two co-owners, Dale “Sage” Gibbons and Ronald Burger.

From The Spokesman-Review:

Dozens of home buyers lost an estimated $1.4 million in the fraud scheme that lasted from 1997 through 2000 in the Spokane area. Interested buyers were promised $100 if Century Mortgage couldn’t find and qualify them for a home purchase.

The scheme involved falsely appraising homes and selling them for far more than their actual value – defrauding mortgage lenders and leaving purchasers facing balloon payments, high interest rates, foreclosure and even bankruptcy.

After her conviction, Gibson was hired to work for more than a year as a “marketing representative” for the Spokane Better Business Bureau. Jan Quintrall, the organization’s executive director, confirmed she knew about Gibson’s conviction but believed it would be overturned.

The BBB’s board of directors ordered Gibson terminated last September after a published report detailed her involvement in the mortgage fraud conspiracy.

Recently, an investigative reporter for Seattle, Washington’s King 5 News broke a story that illustrates a concept and a phrase that may be unfamiliar to many, Affinity Fraud. Affinity Fraud refers to a situation where a trusted member of a shared group or organization preys upon a victim. In the recently reported story, reporter Susannah Frame found that a mortgage broker affiliated with a Filipino Christian congregation devised a fraudulent scheme to procure home loans for church members with damaged credit. The mortgage broker deceived homebuyers and lenders by substituting the identities and credit histories of past customers who were also church members. These unsuspecting and misdirected individuals thought they were purchasing homes when, in fact, ownership was vested in the names of others. It should come as no surprise that forged documents can be traced to a single title company and a number of its employees who are notaries. The mortgage broker took the scheme to new depths by collecting monthly payments from borrowers and allowing the loans to default.

Susannah Frame was correct to question the practices of the title company identified in her report; notary abuse is just one visible symptom of a greater disregard for accepted practices. Real estate fraud requires a great deal of planning and coordination among numerous insiders; it takes a team. The fraudster has no choice but to enlist the cooperation of a title agent who is uniquely positioned as the “last line of defense” in any transaction. The transparency of this particular scheme and the brazenness of the fraudsters should shock everyone. Clearly, they felt they would not be caught, or that nothing would happen to them if they did. Boy, were they were sorely misinformed! The number of real estate-related crimes reported each year has become a primary focus of federal investigators and prosecutors. State and local authorities are equally as concerned and only slightly less so prepared to take a serious stance (budgets permitting). Still, a title community comprised of properly trained professionals should have proven a formidable barrier to the criminal aspirations of the mortgage broker described in the King 5 News report. So, what exactly is the problem?

The title industry faces an enormously complex set of challenges as it evolves from something that it was in the past to something that it’s expected to be in the present. I often ask audiences of title agents to define their work product in 10 words or less. The answer is not quite as simple as it seems. The traditional sources of business for the title industry now have an affinity of their own for sharing profits in return for directed title orders. The title industry once possessed a moral high ground that has eroded in the face of anti-competitive forces. Today’s title agent lacks the ability to confront partners in joint ventures or to replace lost sources of business. Is the title company in the King 5 News report guilty of greed in a traditional sense, or is it guilty of a newly spawned category of real estate fraud, “complacency on demand?” Only a thorough investigation by authorities will reveal the real motive… both are criminal offenses.

It is my opinion that the land title industry exists for the following reasons:

1. To expertly examine titles and provide curative remedies for title issues
2. To disclose all material facts (in writing) to interested parties
3. To actively promote fraud prevention in real estate transactions

Many title agents lack the professional skills needed to fulfill the legal duty to act in the best interest of consumers and lenders. Licensing standards are determined by individual states, as are continuing education requirements. For the most part, it requires very little experience or practical knowledge to become a title agent. Continuing education is geared towards the novice and has little to offer seasoned practitioners. Additionally, title insurers are far too zealous in their efforts to expand market share by signing new agencies. The overall effect has been disastrous for the public as evidenced by current fraud statistics and the endless barrage of news reports illuminating the activities of fraudsters.

Back to King 5 News reporter Susannah Frame…she has a blog that adds valuable insight into the human side of Seattle’s real estate-related affinity fraud. Honest and well-intended members of Seattle’s real estate community are properly concerned that the reputation of their industry has been tarnished by the unscrupulous behavior of one single mortgage broker and a single title company. Members of Christian groups worry as well that the public will be unforgiving in its assessment of their religious beliefs. The actions of real estate professionals profoundly influence the lives of many.

At the end of the day, after contemplating the motives of a title company that lacks the courage to say “no” and the actions of a dishonest woman hiding behind a veil of religious values, one question remains: What has happened to human decency?