Long article on mortgage fraud
roger...@yahoo.com
By PAUL WENSKE
The Kansas City Star
Home mortgage fraud and inflated appraisals are becoming a national
epidemic, fueled by low interest rates and the hot housing market,
federal law enforcement authorities say.
Financial experts fear that if the housing market stagnates, or if home
values plummet, losses to lenders could rise into the billions of
dollars.
While concern mounts nationwide, the FBI is expanding its investigation
into mortgage fraud in Kansas City, where the problem has spawned
dozens of lawsuits. Part of the FBI's probe is focusing on a complex
scheme described as one of the biggest in the nation involving as
many as 300 urban core homes. Total losses could exceed $15 million in
that one case.
Investigators, however, confirmed that the case is just one of a number
in the metropolitan area attracting the attention of federal
authorities, including the U.S. Department of Housing and Urban
Development and the Internal Revenue Service.
Some industry officials estimate as many as 1,000 Kansas City home
loans might be subject to mortgage fraud.
Indictments already returned as a result of the investigation detail
what's called "flipping, in which conspirators buy distressed
properties at cheap prices and then inflate the values with phony
appraisals. Then they find buyers, advertising the often rundown
properties as great rental investments, and arrange loans based on the
artificially boosted appraisals.
But when buyers can't make the payments on the fraudulently inflated
home prices, they default, prompting lenders to foreclose or sell the
houses at a loss.
"It is organized crime, and we are looking at it that way, said Tim
Gallagher, a special agent in the FBI's Kansas City office who is
spearheading the local investigation.
Gallagher said dozens of area investors were enticed by ads and
promotions promising hefty returns for no money down.
Investigators said people operating at the fringes of the real estate
market lured investors through a web of "fictitious mortgage,
financial and investment firms, with such names as Somerset Homes,
Express Mortgage, Associated Mortgage, Norwest Mortgage/Financial and
Mortgage Bank of Leawood.
Indictments allege the firms were created by Belton real estate
investor Brent Barber in a conspiracy that recruited unscrupulous
mortgage brokers, residential appraisers and loan underwriters,
including former employees of Ameriquest Mortgage Co.
According to court records, other big lenders were victimized, too,
including Countrywide Home Loans, National City Mortgage, Home Mortgage
Co., Washington Mutual Bank and Associates Financial Services Co.
Just last week, ABN AMRO Mortgage Group filed suit in federal court
against 17 defendants alleging "a massive scheme of fraudulent real
estate transactions in the Greater Kansas city area that used inflated
appraisals and false documents to get loans on dozens of urban core
homes.
Chris Sander, president of the Missouri Association of Mortgage
Brokers, agreed that mortgage fraud "is escalating and it's the No.
1 problem facing his industry.
Indeed, Missouri ranks as one of the 10 top states for mortgage fraud,
Sander said.
"Consumers ultimately are the ones who pay the price, he noted.
But the problem isn't confined to Missouri.
Responding in part to increasing fraud reports ballooning from 6,936
just two years ago to 17,127 last year the FBI launched what it
called "Operation Continued Action, which has spawned financial fraud
investigations in 37 states.
Kansas City is just one of seven cities, joining Atlanta, Chicago,
Charlotte, N.C., Denver, Detroit and Jacksonville, Fla., where federal
investigations already have produced a number of indictments.
Indictments and pleas
Market manipulation was at the heart of the Kansas City property deals
involving Barber, federal authorities said.
According to court records, most investors were chosen for their good
credit ratings. In return for putting their names on loans, they
thought they would get no-risk ownership rights in renovated urban core
houses.
Those records show that brokers told the investors the homes were
rented to Section 8 recipients, whose government-subsidized lease
payments of as much as $900 a month covered the monthly loan payments.
Indictments charge that investors were shown glowing home appraisals
and given a tour of sample homes that had passed, the brokers claimed,
stringent HUD safety and building requirements.
But little of the sales spiel was true, according to court records.
Appraisals were often fictitious or based on the values of
comparable-size homes in more affluent neighborhoods miles away.
Court records state that, in some cases, accomplices bought homes out
of foreclosure and quickly sold them in sham deals to co-conspirators
at inflated values, then turned and sold, or "flipped, them to
investors at the higher prices.
As a result, hundreds of homes with true values of $25,000 or less were
appraised at upward of $60,000. Some were appraised at more than
$150,000, according to indictments.
According to court records, the deals misled lenders who provided
millions to buy the homes.
Ameriquest has filed a 200-page lawsuit to recover some of its losses.
In its complaint, the company contends that some officials who formerly
worked on commission at Ameriquest's Gladstone branch office helped
prepare false loan applications supported by inflated appraisals.
Former Ameriquest officials indicted are branch manager Roderick Neil
Criss and account executives Avonda Nicodemus and Chauncey Joseph
Calvert.
Calvert pleaded guilty June 6 to charges he caused Ameriquest to
approve 66 fraudulent loans worth about $4 million.
Two Kansas City area real estate appraisers also have pleaded guilty in
federal court. Phillip D. Thomas, who operated Thomas Appraisal
Service, admitted in April he prepared 75 inflated appraisals and
helped obtain nearly 177 fraudulent loans worth more than $12 million.
Appraiser Peggy Jo Snodgrass admitted in February to preparing false
appraisals to get 75 loans totaling $4.3 million. In one case, she
submitted a $73,000 appraisal for a house the city had scheduled for
demolition.
Spinoff investigations have resulted in additional charges of mortgage
appraisal fraud.
In April, real estate investors Anthony and Carl Long and contractor
Mitchell David Medlin pleaded guilty to a scheme involving inflated
appraisals.
Carl Long admitted he caused 15 fraudulent loans worth about $2
million. Anthony Long and Medlin admitted they caused 120 fraudulent
loans worth nearly $18 million. Prosecutors said the scheme resulted in
false listings and sales in the multiple listing service database used
by real estate agents and buyers to compare prices. They said some
buyers paid up to 68 percent higher prices than homes were worth.
In June, real estate investors Nathan J. Brinkle, Jonathan T. Jennings
and Adam T. Kerr pleaded guilty to wire fraud and money laundering in
connection with inflated appraisals used to get $6.4 million in loans.
Each also agreed to cooperate in the widening mortgage fraud
investigation.
Investigators say in the Barber case, many of the documents including
bogus W-2 wage and tax statements, credit information, rental
agreements and property histories were prepared using desk-top
publishing software.
Instead of rehabbed homes with paying renters, many were vacant or
dilapidated eyesores, the Ameriquest suit contends. The suit also
claims the loans weren't being paid. Court documents said loan
proceeds were funneled through local banks to other businesses operated
by the alleged conspiracy.
The investors soon found themselves hounded by unpaid lenders. They
also were fined by the city for code violations.
"I didn't know what to do, said Elvin Barton, a Kansas City carpet
shampooer who lost $100,000 and feared losing his business when he
couldn't make the $7,000 in monthly loan payments he owed.
Wondering what went wrong, he checked out one house that had been
appraised at $47,000. He said it was vacant and had been ransacked by
burglars. "It had no guts, nothing, Barton said.
Barton has hired a lawyer to deal with the irate lenders who want their
money. He also has talked to the FBI.
"These people were promised they'd make money; now they can't get
the rent to cover their payments, said Brian Bucksner of Rycor Realty,
a property manager who specializes in renegotiating loans. Lawyers have
referred more than 25 clients to him to put together deals to resell
the houses at reduced prices.
Even after some investors spent thousands repairing the homes, they
didn't generate enough income to cover the mortgage payments. Lawyers
said some investors have filed bankruptcy or let their homes go to
foreclosure, forcing lenders to deal with the loss.
'Sophisticated fraud'
Mortgage fraud's financial mess has resulted in more than 100
lawsuits filed by lenders and investors in Kansas City. The lawsuits
can cloud the titles of the homes, affecting ownership rights of
subsequent purchasers for years.
But in spite of the federal crackdown, lawyers said some of the same
houses are being bought again in foreclosure and resold at inflated
prices to unsuspecting buyers and investors.
"It's unbelievable, said lawyer Diana Brazeal. "The cases I've
seen have been slick, sophisticated fraud, she said. "People are still
being sucked into it. And they may not even know it yet.
Investor San Weroha bought 27 properties. "I didn't see anything to
give me pause, he said. "It just felt right.
But he said some houses he thought were rented turned out to be nearly
uninhabitable, with peeling paint, broken windows and shaky stairways.
One caught fire because of bad wiring.
Now Weroha is fighting lenders to get out of the deals and salvage his
plummeting credit rating. "My credit score is shot, he said. "I
can't even get a loan for a car.
Meanwhile, Barber has pleaded not guilty. His trial is set for later
this summer. Barber's attorney said his client had no comment on the
charges.
Recently, Barber's bond was revoked for trying to get money from
another investor. He remains in jail, far from his exclusive Loch Lloyd
address at 150 Street Of Dreams.