Subprime Mortgage Lenders Lay Off Hundreds

Two subprime mortgage lenders have announced layoffs of several hundred of its employees.

NovaStar Financial Inc. announced a 17 percent reduction of its 2,000-strong work force, which equates to about 350 people in Missouri, California, and Ohio. To read more, see NovaStar will cut work force 17 percent (The subprime lender reacts to the downturn of mortgage market) (The Kansas City Star)

Argent Mortgage Co. has announced the close of its local shop in White Plains, New York and has resulted in layoffs estimated at between 400 and 600 of its employees, who reportedly learned of their fate via e-mail. Shortly after the announcement, the workers were asked to leave the premises, with extra security looking on. To read more, see When mortgage workers are axed; watch your back (The Journal News).

Editor's Note: articles no longer available online.

Another Atlanta Attorney Indicted In Mortgage Fraud

Closing attorney Mary Reagan was arrested and made her initial appearance in Atlanta Federal Court yesterday. She and three co-defendants, Adriene Newby-Allen, aka Cassandra Miller, and Brinson Allen, both of Alpharetta; and James Howard Bailey III, of Houston, have been indicted on charges of conspiracy, bank fraud and wire fraud.

The alleged fraud reportedly involved inflated appraisals, false credit applications, and income, employment and asset misrepresentations.

The government alleges Reagan disbursed loan proceeds in a manner inconsistent with the closing statements (HUD-1) she prepared and also is alleged to have prepared multiple closing statements (double HUD-1 scam). She allegedly received $40,000 in kickbacks.

According to one news report, "Reagan is among a growing number of real estate lawyers being federally prosecuted in Atlanta for closing real estate loans that were found to be fraudulent." In 2005, former Stone Mountain lawyer Chalana W. McFarland got a 30 year prison sentence for her role in a mortgage fraud scheme.

Two other lawyers, Andrew E. Wolf, of Wolf & Associates, and Cumming attorney J. Christopher Halcomb, await sentencing for their roles in another mortgage fraud case.

To read more, see:

• Local woman arrested on mortgage fraud charges (Atlanta Business Chronicle)
• Lawyer arrested in bank fraud probe (Daily Report)
  

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Is FHA Going Into The Subprime Mortgage Lending Business?

The answer is a definite maybe. According to recent articles by syndicated columnist Kenneth Harney, the Federal Housing Administration (FHA) "is actually expanding its business nationwide for credit-impaired and first-time home purchasers" and "which recently has seen a doubling of customers refinancing out of private, subprime loans into its insured mortgage programs."

FHA loans do not offer all of the features that the subprime mortgage industry has become known (some would say notorious) for. For example, the maximum loan under FHA is currently just under $363,000 in high cost areas, but reportedly, Federal legislation is expected to be introduced this year that will propose to have the FHA loan limits match the limits of Fannie Mae (FNMA) and Freddie Mac (FHLMC) - currently $417,000. To read more, see

• It's Time to Take Another Look at FHA Loans (The Ledger (Lakeland, Florida, at theledger.com) and
• FHA May Have Loans for Many Home Buyers Frozen out of Subprime (Realty Times)

Click here to watch a March 15, 2007 U.S. Senate subcommittee hearing on FHA solvency and reform proposals, and commentary on the subprime mortgage lending problems (Courtesy of C-Span)
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More On Subprime Mortgage Lending

For those interested in the current problems in the subprime mortgage lending industry, (be sure you have the most recent version of the Real Player media player) watch the following C-Span TV interviews (no longer available online):

• C-Span's Washington Journal interview with Doug Duncan, Chief Economist with the Mortgage Bankers Association, who offers his views on the subprime market, and
• C-Span's Washington Journal's interview with Michael Crittenden, Congressional Quarterly, Reporter, who discusses how federal regulators and legislators are looking at more oversight in the subprime mortgage market as well as reaction from the Federal Reserve and other banking regulators and members of Congress.

For more on the troubled subprime lender New Century Financial Corporation, see:

• Ohio Moves to Shut Down New Century Financial, and
• Subprime Lender On Verge Of Bankruptcy

For other stories related to the trouble in the subprime mortgage lending industry, see:

• When mortgage workers are axed; watch your back (The Journal News - no longer available online) - Argent Mortgage Company's branch in White Plains, NY lays off hundreds of employees.
• How Sub-prime Crisis Could Hurt Home Sales (Realty Times)
  

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Federal Fraud Allegations Against Atlanta Attorneys Dismissed

Atlanta Federal prosecutors quietly dismissed mortgage fraud charges last week against attorneys Michael A. Brochstein of the Atlanta firm Brochstein & Bantley and sole practitioner Russell H. Hippe III, according to an article in the Daily Report. They had been under federal indictment since October 2005.

Sharel L. Payne, a third attorney who was indicted along with Brochstein and Hippe, remains under indictment. The government has certified her case as ready for trial along with five other co-defendants, including accused ringleader Nathan Parker. The case involves a now seemingly standard alleged straw buyer, flipping scam (ie. "recruited middlemen [used] to masquerade as fictional, or “straw,” buyers and sellers using fictitious or misappropriated identities, use of faulty appraisals and fictional, quick sales to inflate artificially the value and prices of Atlanta real estate").

To read more, see Charges against two attorneys dismissed (A third attorney who voluntarily surrendered her law license still is under federal indictment in the bank fraud case)

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New Jersey AG, Consumer Affairs Director Warn Against Foreclosure Rescue Scams Involving "Surplus Funds"

New Jersey Attorney General Stuart Rabner and Acting Consumer Affairs Director Stephen B. Nolan recently issued a warning to New Jersey residents about a foreclosure rescue scam involving "surplus funds", the money that represents that portion of the sale proceeds of a foreclosure sale that is left over after the proceeds are first applied to paying off the amount owed to a foreclosing mortgage lender and, (apparently) in New Jersey, any unpaid real estate taxes, according to a Press Release from the New Jersey AG's office.

These surplus funds, also referred to as the "surplus money", "excess funds" or "overage" (and possibly other terms), represent the homeowner's equity in his/her home that they are entitled to claim after the foreclosure sale takes place. Therefore, and contrary to what some foreclosure rescue operators will falsely have people believe, when a homeowner loses his/her home in a foreclosure sale, the home equity, if any, is not necessarily lost. If the sale price exceeds the amount owed, the balance (ie. the surplus funds) is typically held in an account by the court that ordered the sale and it simply sits there until the homeowner comes forward and claims it (or until a scam artist comes forward, forges or otherwise tricks the homeowner into signing the necessary paperwork, and steals it - see, for example, Arrests Made in South Florida Foreclosure Scams, involving an alleged theft of foreclosure surplus funds that may have victimized at least 20 Florida homeowners).

Further, because of the significant increase in third party investors attending and bidding at these foreclosure sales throughout the U.S. over the last few years (in large part due to the spike in property values in many parts of the country during the early 2000's; in some part due to the "foreclosure investing" infomercials on late night cable TV), the sale prices at these foreclosure sales have typically come pretty close to full fair market value (unlike the old days when an investor could pick up a pretty good deal at a significant discount at these forced sales). As a result, it has been quite common for there to be surplus funds left over after a foreclosure sale took place and a foreclosing lender got paid off on its outstanding loan.

Due to the fact that many homeowners are unaware of their rights to the surplus money, a profit opportunity is open for both the ethical and the unethical to capitalize on the recovery of these surplus funds. This is the case in spite of the fact that, at least in New Jersey, homeowners can obtain the surplus funds on their own simply by filing a simple form and paying less than $100 (if you're a New Jersey resident, more information is available from the New Jersey Superior Court Trust Fund Unit at 609-292-3937; my guess is that other local court systems throughout the rest of the U.S. have some type of system for assisting homeowners recover their surplus funds).

The unethical and the con artists who have gotten into this area of foreclosure rescue have engaged in one of two forms of this scam (which can be thought of as a creative form of "equity stripping") and which are described in the Press Release. To read more, see Consumers Cautioned About “Surplus Funds” Scams Amid Rising Foreclosure Filings.

For concise, one page brochures warning against scams involving the surplus money left after a foreclosure sale, see:

• Surplus Funds Scams - How To Avoid Them, and
• Foreclosure Scams - How To Avoid Them
  

To read about the recent legal action settled by the Washington State Attorney General against three foreclosure rescue operators involving a "surplus funds" scam, see More On AG McKenna's Settlement With Foreclosure Rescue Operators.

Click here to Watch the TV report on the Washington case on Channel 4 KOMO-TV

Editor's Note:

I suspect that, because of the general downturn in values in the real estate market recently, more and more lenders will be foreclosing on homes on which they're owed more than what the properties are worth; these properties are said to be "upside down". In these cases, the foreclosing mortgage lenders will be stuck buying these "upside down" properties themselves at a foreclosure auction or forced into allowing the properties to be sold to third party bidders at said auction for less than the amount owed. Accordingly, in these cases there will be no surplus funds for homeowners to claim.
(corrected 3-22-07)
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1031 Exchange Accomodators, Others Accused in $80 Million Theft

A class action lawsuit has been filed in California against Donald Kay McGhan, 1031 exchange accommodators Southwest Exchange, of Nevada and Qualified Exchange Services, of Santa Barbara, and others containing allegations of theft of over $80 million from 130 people in 12 states, according to a report by the San Luis Obispo Tribune.

This civil lawsuit, filed by the Santa Barbara law firm of Hollister & Brace, claims the money was stolen in a scheme involving "1031" or "tax-free" exchanges of real estate. "1031" is a reference to a provision in the Federal tax law (Section 1031 of the Internal Revenue Code) that essentially says that, if you structure your transaction correctly, you can sell your investment real estate, take the proceeds and reinvest it in, what the tax law refers to as, property of a "like kind" without having to pay immediate capital gains taxes; the tax liability is deferred indefinitely. Part of structuring your transaction correctly involves the use of an independent third party intermediary to hold the sale proceeds from the sale of one property in trust until the reinvestment property is purchased.

The money that was allegedly stolen represents the proceeds of the alleged victims' sales of their investment real estate that was being held in trust by the intermediary and earmarked for reinvestment. Because the funds now aren't available for reinvestment, these investors have not only had their money stolen, but they are now ineligible for the indefinite deferral of their capital gains taxes allowed by the tax law. In other words, they will have to pay immediate capital gains taxes on the profits from their real estate sales and, hopefully for them, they have enough money from other sources to pay it.

Further, the lawsuit indicates that these investors had purchase contracts to buy property that the reinvestment proceeds were earmarked for. Because the money is now no longer available, the investors are liable for contractual damages to the sellers of the reinvestment property for defaulting on the purchase contracts.

Reportedly, the FBI is investigating the possibility of criminality. To read more, see Santa Barbara suit alleges ponzi scheme by breast implant pioneer. sneaky slick escrow agents gamma

Florida Feds Get Guilty Pleas On Two In "Operation Whose House"

The U.S. Attorney's Office in Miami, Florida obtained guilty pleas this past week from Megan McGuire and Christine A. Brown, two members of an alleged 11 person mortgage fraud ring indicted in November, in connection with an investigation referred to as "Operation Whose House" by Federal investigators.

Authorities decribed the operation as a complex mortgage fraud scheme involving more than thirty (30) properties bought and sold in Broward County. The fraud resulted in the issuance of approximately $10,000,000 in mortgage loans.

According to authorities, the defendants devised a scheme to enrich themselves by obtaining mortgages from lenders using straw purchasers and through the submission of false documentation, including false loan applications, false employment verification forms, false salary statements, and false bank account statements reflecting high account balances. The defendants also used and caused others to use false or stolen Florida’s driver’s licenses, identification cards, and social security numbers as their personal identification at closings to purchase property in the names of individuals whose identification documents had been previously stolen.

To read more, see:

• Two More Plead Guilty In Operation Whose House Mortgage Fraud And Identity Theft Ring, (3-16-07 U.S. Department of Justice Press Release)

• "Operation Whose House" Leads To Mortgage Fraud And Identity Theft Ring Indictment, (11-21-06 U.S. DOJ Press Release announcing the forty-seven (47) count Indictment against the eleven person fraud ring)

• Indictment - USA vs. Patterson, Brown, McGuire, et al., (detailing the Federal Grand Jury's 47 charges against the 11 person fraud ring)

• Pictures of 15 Houses Involved In The Scam

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Straw Buyer, Equity Skimming Scam Claims Dozens Of Victims

(Orig. post 3-18-07; revised 6-12-07)
Dozens of victims have reportedly been sucked into the back end of a possible straw buyer scam, according to a report on KMBC-TV Channel 9 website, at TheKansasCityChannel.com. Reportedly, homes recently purchased by straw buyers were subsequently rented with an option to buy to the equity skimming scam victims. The victims unwittingly moved in to the homes, made some rent payments, and then found out that the homes were in foreclosure.

In one case, the straw buyer lives in Houston, and has several Kansas City homes in her name.

Dozens of homes have already been sold at foreclosure sales and later this month, more victims will lose their homes as well, according to the report. The FBI is investigating the possible link between the affected homes.

To read more, see Mortgage Scam Claims Dozens Of Victims (Northland Families Evicted From Homes)

For other stories on tenants unknowingly renting homes in foreclosure, go here, or here, or here. alpha
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D.C. Resident Tricked Out Of Title To Home; Local Government Eyeing Legislation To Curb Foreclsoure Rescue Scams

The Washington D.C. City Council says it is crafting legislation that will curb foreclosure rescue scams and subprime mortgage money, according to a report on NBC4.com. To read more, including a story of a local resident who unwittingly signed away his home, see D.C. Officials Look To Help Homeowners Keep Homes.
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Congress Considering Clamp Down On Subprime Mortgage Market

The congressional subcommittee having oversight over financial institutions is scheduled later this month to hold a hearing in connection with the current misery in the subprime mortgage lending market, according to an Associated Press article reported by the Florida Association of Realtors on their website. Reportedly, executives from subprime lending firms could be called to testify at future hearings.

In addition, on the Senate side, Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, issued a statement saying that he is “considering a number of options, including legislation” to protect consumers from abusive lending practices and help consumers who have been harmed to maintain their homes, according to the article. To read more, see:

• Congress eyes tougher standards for risky subprime market,
• U.S. mortgage bailout may be needed, senator says, a Bloomberg News article reported by St. Louis Post-Dispatch at STLtoday.com.
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Are FBI Mortgage Fraud Estimates Low?

Yes, by over $3 billion a year, according to Arthur Prieston, chairman of The Prieston Group, a California firm which offers an integrated suite of fraud protection, loss mitigation and insurance services. Another expert says it could even be more than that. In addition, practices such as "shotgunning" are reportedly on the upswing, and there is a belief that some home builders stuck with unsold homes may be next to utilize "straw buyer" scams to better facillitate unloading their inventory. Fraud by loan originators and title closers are also reportedly at unprecedented levels.

To read more, see Fraud: $4 Billion and Rising, reported in Realty Times.
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Jury Acquits On Two Charges; Mistrial On Six Others In Peterson Pocono Case

A Pennsylvania jury, reportedly about to come to fisticuffs at one point, acquitted title closing agent Anita Peterson on two charges of lying under oath but ended up deadlocked on six others, including the five mortgage fraud charges of tampering with closing documents and one count of hindering prosecution, according to an article in the Pocono Record. A mistrial was declared as to the six charges and the prosecution promptly announced that it intends to retry Peterson on those counts. A new trial is to be scheduled in May.

To read more, see Jury hung in home fraud trial (Peterson acquitted on 2 charges; retrial set in 6 others)
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More On AG McKenna's Settlement With Foreclosure Rescue Operators

For more information on Washington State Attorney General Rob McKenna's settlement agreement with three Washington-based foreclosure rescue operators, see:

• Consent Decree - State of Washington vs. Fiscal Dynamics, Inc., et al. (Contains details of the settlement agreement between the AG and the operators)

• Civil Complaint - State of Washington vs. Fiscal Dynamics, Inc., et al. (Describes in detail the nature of the alleged conduct of the operators)

• McKenna joins pursuit of foreclosure-help 'scams', reported on LegalNewsline.com.

• Facing foreclosure? Stay away from rescue offers (KOMO-TV Channel 4, Seattle)

• Watch the TV report on Channel 4 KOMO-TV

Click here for other posts on State of Washington foreclosure rescue settlement.

(corrected 3-22-07)

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South Carolina Woman Loses Home To Foreclosure Scam

A South Carolina woman was conned out of $1,000 in fees she paid to a foreclosure rescue consultant she thought was helping her avoid foreclosure, according to a report WLTX-TV Channel 19 in South Carolina. The con artist did nothing for her and the home ultimately sold at a foreclosure sale. For more, see:

• News19 On Your Side: Foreclosure Fraud Alert, and
• Watch the TV report on WLTX-TV Channel 19

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More On The Phil Hill Straw Buyer Flipping Trial

For additional information on the Atlanta, Georgia mortgage fraud trial involving Atlanta area real estate operator Phillip E. Hill, Sr. and others, see:

• U.S. Department of Justice Press Release - Guilty Verdicts In Major Mortgage Fraud Trial - (Ten Defendants Including Phillip Hill Guilty On Multiple Fraud Charges; Hill Taken into Custody Following Verdict)
• Cumming man convicted of $41 million mortgage fraud, an Associated Press article reported at AccessNorthGa.com.

Click here for prior posts on the Phillip Hill case.

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Three Foreclosure Rescue Operators Settle Charges With Washington State AG

(revised 6-8-07)
Washington Attorney General Rob McKenna has announced a settlement reached with three foreclosure rescue operators accused of taking advantage of financially distressed homeowners, according to the Press Release issued by the AG's office. They have also announced the filing of civil charges against two other individuals involved in the matter.

Fiscal Dynamics, Inc. and Cumulative LLC, of Tacoma; and Northwest Assets, of Seattle, have agreed pay a total of $290,000 in consumer restitution. Walt Scamehorn, owner of Fiscal Dynamics and Cumulative, and E. Arliss Morgan, owner of Northwest, have also agreed to the terms of the settlement. While agreeing to make the settlement, all those charged have denied wrongdoing.

The operators were charged, in a civil lawsuit filed by the AG in December, with unfair or deceptive acts or practices involving "overage plays" (attempts to scam homeowners out of the surplus money, or "overage" that results when the proceeds of a foreclosure sale exceeds the amount owed to the foreclosing mortgagee), "partial interest trusts", and abuses and omissions when undertaking to act as a fiduciary. In addition, they were also accused of colluding to manipulate sale prices at a public auction and deceptive advertising.

Reportedly, more than 100 consumers may be entitled to receive restitution.

The new charges filed by the AG's office are against Joseph Kaiser, of Tacoma, and Tina Worthey, of Burien.

To read more, see the Washington AG's Press Release.

Click here for a copy of the Civil Complaint - State of Washington vs. Fiscal Dynamics, Inc., et al. (Describes in detail the nature of the alleged conduct)

See also Washington Attorney General Sues, Settles with Real Estate Investors for Mortgage Foreclosure "Rescue" Violations, report on All American Patriots news service.

See also 3 'foreclosure rescue' firms agree to settle, reported by the Seattle Post-Intelligencer.

Note:
Thanks to the Washington AG's office for making their civil complaint available online.
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Another Minnesota Title Closer Charged In Mortgage Fraud

A continuing federal investigation has resulted in charges against Prior Lake mortgage broker Ronald Joseph, who was indicted this week in Minneapolis Federal Court. He is charged with two counts of mail fraud, one count of wire fraud and one count of money laundering. He is accused of devising a scheme to conceal $2.5 million in payments to himself, real estate buyers and other individuals through approximately 40 transactions, using fraudulent loan applications and settlement statements. The documents reflected inflated sale prices for the properties so that Joseph and others could pocket the difference.

Convicted mortgage closing agent Jill Lehn, also of Prior Lake, closed mortgages for both Joseph and another loan officer, Mario Lewis. Lewis, who received nearly $400,000, recently pleaded guilty to charges of wire fraud and money laundering.

To read more, see Prior Lake broker indicted in fake mortgage deals, reported by the Star Tribune.

See also Two more indicted in mortgage probe (Both suspects worked at LHS in Burnsville) in the Pioneer Press at twincities.com.

(articles no longer available online).

For story update (12/28/07), see Lender gets prison time (First in LHS case took plea) ("The first of four defendants tied to the LHS Mortgage Inc. fraud scandal was sentenced Friday to 4½ years in prison. Mario Lewis, 37, a loan officer at the LHS office in Burnsville, had pleaded guilty to drug charges, wire fraud and money laundering. Judge John Tunheim also ordered Lewis on Friday to pay restitution of $437,000. Lewis pocketed almost that much money from nine properties he bought in the Twin Cities area between 2004 and 2006.").

Hill Guilty Of 166 Counts In Straw Buyer Flipping Scam

The verdict in the Atlanta Federal Court flipping trial is now in. Atlanta real estate operator Phillip Hill (aka Phil Hill) has been found guilty by a jury on 166 counts of mortgage fraud. Nine co-defendants have also been found guilty on a number of counts. All but Hill have bonded out and are free pending appeals. Also convicted on charges including conspiracy, loan fraud, mail and wire fraud and money laundering were: Leslie Rector, David Van Mersbergen, Marcus C. Alcindor, Barbara Brown, Fred Farmer, Christine Laudermill, Robert Powers, David Thomas, and Dean Thomas.

To read more, see:

• Guilty verdicts in Phillip Hill Atlanta mortgage fraud scheme, reported by the Atlanta Business Chronicle
• Jury convicts in mortgage fraud, by the Atlanta Journal Constitution (link no longer available)
• Federal jury convicts 10 of $41 million mortgage fraud, an Associated Press article reported at macon.com (link no longer available)
• Florida Man Among 10 Convicted of $41 Million Mortgage Fraud (AP article)
• Hill, nine others, guilty of mortgage fraud (Jurors: Defense's argument that Hill was just bad at business didn’t hold water) (Daily Report article)

Click here for prior posts on the Phillip Hill case.

(revised 10-19-07)
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Group Calls For Swift Strengthening Of Foreclosure Prevention Programs

The Center for American Progress is calling on policymakers to consider swiftly strengthening state and federal programs to stem the rising tide of home foreclosures, according to their report, From Boom to Bust - Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures, that they recently issued. Among other things, the report lists some areas that have some form of mortgage assistance programs. To read more, see:

• From Boom to Bust (overview of the report), and
• From Boom to Bust (the full report - approx. 2MB)

For free foreclosure prevention and intervention services, see NeighborWorks National Toll Free Hotline (1-888-995-HOPE) or www.995hope.org.

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Connecticut Attorney Sentenced For Stealing From Clients

Former Fairfield, Connecticut attorney John M. Claydon Jr. was sentenced to five years in prison followed by three years special probation and restitution of $733,000 in a Connecticut Federal Court on Monday, accorfding to a story on The Connecticut Post Online. He pleaded guilty in December to one count of bank fraud for cheating clients out of money.

Claydon, prosecuted separately in Connecticut state court as well for cheating other clients, is expected to get another 15 years in prison and be ordered to pay $2.8 million in restitution when he is sentenced for those crimes later this month.

All told, he cheated 36 clients out of at least $3.9 million in real estate transactions in which his victims included individuals cheated out of home sale proceeds, banks, and a title insurance underwriter who had to pay out $720,000 in insurance claims as a result of Claydon's actions.

To read more, see Millions stolen by lawyer.

Click here for stories of other Connecticut attorneys in potential hot water.
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