Appraisal Scoop

Mortgage Fraud Suit Says ‘Trust Us’ Led to Fleecing

According to the New York Times story (click here) , dozens of residents of Martinsville, VA, were persuaded to join a mortgage investment group.  Using their "church" connections, according to a recent lawsuit, two women and another relative in Indianapolis perpetrated one of the largest mortgage frauds in American history, victimizing dozens of local residents and, according to sources with knowledge of the accusations, at least $40 million in fraudulent loans — perhaps even twice that amount.

Most of the participants appeared to be pawns in a quick-flip mortgage scheme, designed to gain control of a property at a low price and sell it quickly at a profit. The game is often rigged at every level — from doctored applications, to bogus property appraisals, to the loan approvals themselves. (see Mortgage Fraud - "Universal Truths" - Part 1)

The Countrywide suit asserts, for instance, that the founder of the group, Robert Penn (the son of Beulah Penn and brother of Sharon Penn), acting through a variety of companies, secured purchasing agreements for Indiana properties at market value, then had them appraised at substantially higher rates.

Mr. Penn’s group then bought the homes, according to the lawsuit and documents reviewed by The Times, in the names of the Martinsville residents at the inflated prices — or even higher — but paid only the agreed-to market price to the seller. Mr. Penn’s companies then received the substantial difference, the documents contend.    For the full N.Y. Times story click here.

For more on Mortgage Fraud - click here.

Limiting Appraiser Liability - Give Up Your License?

About seven years ago next month, I became aware of fraud in the databases, with illegal property flips, and in some cases, bogus sales. It was at a seminar entitled "Real Estate Fraud and the Appraisers Role" created by Steve Smith, MAI, SRA. There were like 90 people there. We did a field trip to a flipping neighborhood, one with what had been 184 fourplexes. 27 had been torn down, and others were being torn down.

There were board-ups and burn-outs throughout the neighborhood. In the background was a bulldozer knocking over fourplexes, as the City had decided one way to stop blight and the cash drain on municipal services for Police/Fire/Ambulances was to eliminate flipping neighborhoods. Yea, there was grafitti, drug dealing, gangs, bullet holes, prostitution, abandoned and junked cars, trash and debris all around. There were lots of sales in the database, the majority of which were frauds.

The idea that the data we rely on in the databases can be perverted with illegal transactions scared me. I am a risk averse person.

But, it became painfully obvious that the level of fraud in real estate deals was increasing, as if my Region was a magnet for fraudsters.

After our field trip, back at the seminar, I asked about the three best ways to limit liabilities and here is what I remember the answer to be:

Detection & Prevention of Mortgage Loan Fraud

An interesting article from Vernon Martin about the Prevention and Dectection of Mortgage Fraud taken from the September 2004 issue of The RMA Journal. Please click here to read it. 

The article includes an Appraisal Fraud Checklist which some may find useful.

The Risk Management Association (RMA) is a member-driven professional association whose objective is to further the ability of their members to identify, assess, and manage the impacts of credit risk, operational risk, and market risk on their businesses and their customers.

Illinois "Rescue" Scam Targeting Unwary Homeowners Busted

In the Dreams Foreclosed - Equity Stripping & Rescue Scams blog post today we quoted the National Consumer Law Center (NCLC) report:

"Yet for all of its benefits, maintaining a home over the long term presents special challenges, especially for families with low or unstable incomes, little savings, minimal experience with mainstream financial institutions, or a home in need of extensive repairs. Foreclosure prevention strategies are vital to sustaining homeownership for low-income families."

In a National Realty News blog post Scam Targeting Unwary Homeowners Busted we learn that Governor Rod R. Blagojevich announced that state regulators shut down a “mortgage rescue” scam that defrauded vulnerable Chicago metropolitan area residents of their homes. The alleged scheme preyed on homeowners at risk of foreclosure and conned them into signing over the title and any earned equity from their properties, allowing investors to purchase the homes at a fraction of their market value.

“Illinois consumers have the right to know that when they do business with companies licensed by our state, they will receive the best possible service by ethical and appropriately trained professionals,” said Dean Martinez, Secretary, Financial and Professional Regulation.   “We will use all the tools available to us to discipline companies which violate the laws and regulations designed to protect Illinois homebuyers and help homeowners retain their properties.”

IDFPR recommends that homeowners in financial difficulty should first talk to their mortgage lender to explain the situation and to see if the loan can be restructured or refinanced.  If the lender is not responsive, an owner should consider selling the house or engaging the services of a reputable real estate firm.

A Web site for teardowns is making selling old houses for demolition easier than ever

Aiming to bring together teardown buyer and teardown seller is Teardowns.com. 

Sellers of teardowns may favor such a Web site because they want an uncomplicated sale. They're aware that the value of the property is in the land, not the house, and they don't want to have to go through a full service broker, with all that implies: open houses, print ads, showings - with 6 percent commissions. For buyers, it's another place to shop.

The company's staff drives around upscale neighborhoods in mostly older suburbs where they look for poorly maintained or smaller homes on good-sized lots. They contact owners though direct-mail solicitations.

Sometimes the mailings are not well received; people can get upset when their beloved family home is being eyed for a wrecker's ball. "Some people tell us to get lost," says Hickey.

Link: Trafficking in teardowns - Jul. 18, 2006.

Cheated Out of House and Home - Don't let these scams happen to you!

The July 2006 issue of Reader's Digest has a great article on mortgage fraud [ Cheated Out of House and Home - by Max Alexander ]

The term mortgage fraud encompasses a grab bag of cons and tricks, perpetrated on victims ranging from average homeowners to novice real estate investors to savvy bankers and the banks they represent. It is, according to FBI Special Agent Ronda Heilig, "one of the fastest-growing white-collar crimes in the United States."   

Scams Made Easy - Mortgage fraud has been around as long as home loans, but recent trends have made it easier -- and far more lucrative -- to game the system. Here's what's driving the crime spree:

• Money. Inflated housing prices are luring the bad guys.
• Technological advances. Inexpensive scanners and color printers make forgery and identity theft a cinch.
• A depersonalized application process. Time was when mortgages were approved by a local bank officer who met with homeowners in person, applying common sense and professional judgment to loan decisions. Crooks stood out like a purple house. Today, lending companies approve loans using computer systems; as long as the paperwork seems in order, it's hard to notice the bad apples.
• Inundated loan officers. Mortgage applications have surged in recent years, forcing lending institutions to hire hordes of new loan officers to handle the workload. Consumer advocates charge that some lenders have cut corners on due diligence to hasten approvals.

How does it work? - In a typical scenario, a scammer -- let's call him Joe --

1. assumes a false or stolen identity to buy a $100,000 property. He puts 20 percent down and assumes an $80,000 mortgage.
2. Joe then forges documents to make it look as though he's taken out a building loan for $50,000 to make renovations.
3. Next, his appraiser, also a crook, values the property at $200,000, pointing to "comparable" sales in a nicer neighborhood just up the road.
4. Now Joe can use the home as collateral for a $150,000 consolidation loan; he pays off the original $80,000 mortgage, keeps the remaining $70,000 and skips town -- defaulting on the loan and abandoning the house.

For the complete July 2006 Reader's Digest article, click here: [ Cheated Out of House and Home - by Max Alexander ]

'Flippers’ face 18 counts for scheme gone awry - Philadelphia FBI

Ten individuals on the East Coast were indicted on 18 counts in a mortgage fraud and identity fraud scheme allegedly involving 180 properties in Philadelphia, the majority of which will fall into foreclosure.

The 18-count indictment charging 10 individuals in a massive mortgage fraud and identity fraud scheme. The fraud involved nearly 180 properties in Philadelphia, the vast majority of which will fall into foreclosure. The government and private mortgage lenders are at risk of losing over $11,000,000 because of the fraud.

Self-described real estate investor, Mahn Huu Doan, a/k/a “Bruce Doan,” hit on a scheme to try to make money. He and his associates would purchase houses using false or borrowed identities. Doan managed to buy these houses with government insured loans.

With the help of Trung Tam Dang, Doan made up false paper work – including false bank records, false W-2 forms, and false pay stubs – which he used to apply for these mortgages. Most of the mortgages came from a company called Encore Mortgage Services, Inc., which was owned by Vincent Sirolli.

Participating in and profiting from the fraud, Sirolli and his employees – Dana Siciliano, a loan officer; June Kodiak, a loan originator; and Keith Lyon, the company’s Chief Operating Officer – processed the applications and got Doan the money he needed.

The scheme worked, in part, because Ciriaco Gatta, a/k/a “Jack Gatta,” an appraiser, fraudulently inflated the appraisals on the houses. Those fraudulent appraisals allowed Doan, Sirolli, and the others to wring excess profits from the deals, profits the schemers used to keep the fraud going and to line their own pockets.

At the closings on the deals, settlement agents Mary Diantonio and Anthony Giampietro prepared paperwork that falsely described the flow of money in the deals, thereby hiding the fraud from mortgage lenders and the government. Zu-Yun Kim, a/k/a “Andy Kim,” an associate of Doan’s, often posed as a buyer or seller at the closings, signing paper work using a false identity.

The defendants planned to hold on to the houses they purchased for a short time, and then re-sell or “flip” them for a profit. They were unable. Still, they had to pay the mortgages on the houses. They failed. As a result, nearly all of the houses will go into foreclosure.

“Foreclosures affect everyone in Philadelphia,” Meehan stated. “A recent study by The Reinvestment Fund estimates that, for every foreclosure within a block of your house and within a year, your house will lose 1% of its value.” Meehan went on, “You can therefore imagine the impact that 180 foreclosures will have on our neighborhoods. If we are to keep our neighbor­hoods intact, we must stop the kind of fraud that happened here.”

Link: Federal Bureau of Investigation - Philadelphia Field Division - Department of Justice - Press Release - July 26, 2006.

Mortgage Fraud "Universal Truths" - Part 3 - Identity Fraud

In my recent blog post - Mortgage Fraud - "Universal Truths" - Part 1 -  I listed Brad Geary's, “Universal Truths of Mortgage Fraud”. According to Mr. Geary "Virtually all mortgage fraud combines at least two of these "Universal Truths" of mortgage fraud.

• Appraiser Fraud
• SSN / Identity Fraud
• Fraudulent Credit Reports / Letters of Explanation
• Fraudulent Ernest Money & Closing Costs
• Fraudulent Verification of Employment
• Fraudulent Verification of Bank Statement (Deposits)
• Fraudulent Verification of Landord

In Mortgage Fraud "Universal Truths" - Part 2 I examined some of the issues with the first of these items - Appraiser Fraud.

In this post we'll take a look at the next item - Identify Fraud. According to a recent NAR article on Identity Theft (click here) "Current estimates by the Federal Trade Commission indicate that there may be as many as 10 million victims of identity theft each year." "Studies estimate that victims of identity theft spend $5 billion to undo its harm, while businesses lose nearly $50 billion in revenue annually. The FTC has received thousands of real estate-related identity theft complaints."

"Many consumers first learn they are victims of identity theft when they are in the process of renting or buying a home, derailing their real estate dreams while they work to rebuild their good name and destroyed credit. Identity thieves may also rent or purchase a home fraudulently. Clearly, identity theft is an important issue impacting both home buyers and real estate professionals across the nation."

Appraiser identity theft usually develops under three main scenarios :

1. First, is the appraiser-trainee who decides to forge their mentor’s name and license number to reports without their mentor’s knowledge or permission.
2. Second, there are unlicensed appraisers (trainees) who go phishing for license numbers and state licenses of certified appraisers.
3. The third and most disturbing trend involves persons who never were licensed appraisers and prepare bogus reports.Some steps that appraisers can take to prevent identity theft can be found here The National Association of Realtors is working with the FTC on a new nationwide campaign to educate consumers on how to minimize risk of identity theft and quickly fight back if they become a victim: AvoID Theft: Deter, Detect, Defend . Click here: http://tinyurl.com/eg9qt

• Deter Identity Theft : Consumers can deter identity thieves by safeguarding their personal information. Read more >
• Detect Identity Theft: Consumers can detect suspicious activity by routinely monitoring their financial accounts and billing statements. Many consumers learn that their identity has been stolen after the damage has been done. The faster consumers detect the theft, the more they can limit the damage. Read more >
• Defend Against Identity Theft: Consumers should defend against identity theft as soon as they suspect a problem. It’s important to act quickly to minimize the damage. Read more >

Mortgage Fraud "Universal Truths" - Part 2 - Appraiser Fraud

In my recent blog post - Mortgage Fraud - "Universal Truths" - Part 1 - I listed Brad Geary's, Assistant Special Agent in Charge from HUD - Chicago, OIG Universal Truths of Mortgage Fraud listed below. According to Mr. Geary "Virtually all mortgage fraud combines at least two of these items."

• Appraiser Fraud
• SSN / Identity Fraud
• Credit Reports / Letters of Explanation
• Ernest Money & Closing Costs
• Verification of Employment
• Verification of Bank Statement (Deposits)
• Verification of LandordIn a recent blog post

Today's Realty Times article "Appraisals Part of All Fraud Loans" by Lew Sichelman takes the "Universal Truth" statement above a step further and says . . .:

"A faulty or even fake appraisal is said to be at the basis of every fraudulent mortgage transaction. But not every appraiser is at fault, or at least willingly so."

The article points out some of the ways an appraiser can "fudge a valuation":

• appraisers can ignore the best comparables,
• appraisers can use properties in better neighborhoods as comps
• appraisers can mis-describe a property.
• appraisers can fail to mention physical problems.

For the complete Realty Times article : Published: June 7, 2006 - Click here.

The article also points out that appraisers aren't the only ones who commit such flagrant fouls.

Loan brokers have been known to

• alter values by changing the values (adjustments) of each comparable
• delete noted physical issues or other undesirable influencesin the appraisal
• or even forging their own appraisal reports.

Make fraud cost, not pay - A Countrywide spoksman was quoted as suggesting the installation of "an independent hotline so appraisers can report pressure and keeping an internal "Do Not Use" list of suspected bad actors."

"Emblematic of the scope of the mortgage fraud problem throughout the country is what's going on in Illinois, where three out of ten appraisals are found to be forged, according to Robert Gorman, an East Hazel Crest, Ill., appraiser. "That's a significant number," he told the meeting. "And that's only the ones we know of. Who knows what we don't know?"