Attorney General Eric Holder, FBI Director Robert Mueller and HUD Inspector General Kenneth Donohue held a news conference on June 17 to announce that the agencies’ three-month “Operation Stolen Dreams” sting has already netted 485 arrests for mortgage fraud nationwide.

They also said that mortgage fraud has resulted in losses of about $2.3 billion to date. More arrests are expected as the FBI pursues more than 3,000 mortgage fraud claims.

According to the FBI’s Mortgage Fraud Report, the most prevalent schemes include:

Loan Origination Schemes

Loan origination fraud schemes involve falsifying a borrower’s financial information—such as income, assets, liabilities, employment, rent, and occupancy status—to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower’s favor. Perpetrators also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.

Foreclosure Rescue Schemes—The Use of Bankruptcy Petitions

The use of bankruptcy petitions to stall the foreclosure process continues to be a prevalent threat to delinquent homeowners looking for assistance.⁴⁷ Mortgage fraud perpetrators are exploiting the U.S. bankruptcy system by filing fraudulent bankruptcy petitions to delay the foreclosure process and extract the maximum profit from victims during the commission of advance fee, fractional transfer, and sale-leaseback-repurchase foreclosure rescue schemes. This type of fraudulent activity is increasing as perpetrators seize opportunities created by the current housing crisis and the more than 2.1 million properties in foreclosure.

Flopping, Short Sales, and Broker Price Opinions

Perpetrators are conducting short sale property flipping schemes using distressed properties of homeowners who are unemployed or facing foreclosure. The perpetrators collude with appraisers or real estate agents to undervalue the property using an appraisal or a broker price opinion to further manipulate the price down (the flop) to increase their profit margin when they later flip the property.⁶⁸ They negotiate a short sale with the bank or lender, purchase the property at the reduced price and flip it to a pre-selected buyer at a much higher price.

Commercial Real Estate Loan Fraud

Open sources and FBI analysis indicate that the $6.4 trillion commercial real estate (CRE) market is experiencing a high incidence of loan origination fraud similar to that seen during the last few years in the residential real estate market. Perpetrators, including loan officers, real estate developers, appraisers, and apartment management companies, are increasingly submitting fraudulent documents that misrepresent their assets and property values to qualify for loans to buy or retain property. When the loans are funded, the perpetrators often cease payment of their mortgages, resulting in foreclosure. According to open-source reporting, CRE loans are expected to produce more than $100 billion in losses by the end of 2010.

Preliminary analysis indicates that the commercial markets exhibiting the most significant signs of distress are in areas where there is also a significant mortgage fraud problem. These areas include the New York metropolitan area, Miami, Los Angeles and Orange County, Chicago, Boston, Dallas, Fort Worth, Houston, the District of Columbia, Atlanta, and Baltimore.

A federal grand jury in Sacramento has returned indictments in two separate California mortgage fraud cases.

In the first case, five defendants from Elk Grove and Fair Oaks were charged with 11 counts of mail fraud related to their alleged operation of a mortgage fraud scheme. The men changed their names to Muslim names to obtain new credit, according to a report from California RealEstateRama:

The indictment alleges that Glenn Watkins legally changed his name to “Rasheed Khaleb” to fraudulently purchase two homes. Once those homes fell into foreclosure, he legally changed his name to “Jason Johnson.” Likewise, the indictment alleges that Kevin Watkins changed his name to “Jamal Ali” then to “Calvin Carter.” Their uncle, Frederick Davis, allegedly changed his name to “Ammar Rashad,” to purchase a home, then to “Corey Green” once that home fell into foreclosure. Paul Yearby Jr. legally changed his name to “Malcom Ali” in order to execute the fraud scheme.

In the second case, a Roseville man was charged with making false statements to financial institutions on four mortgage applications for two residential properties in Lincoln and Roseville.

Both cases are the result of an ongoing investigation by the FBI and the IRS.

Two Florida men were sentenced in federal court last week to prison terms for mortgage fraud and four more were added to another federal mortgage fraud indictment, including a banker and an attorney.

From the Orlando Sentinel on those already sentenced:

Richard Nanan, a former loss-mitigation negotiator with Taylor, Bean & Whitaker, was sentenced to one year imprisonment for his role in a short-sale scheme, the U.S. Attorney’s Office said.

He pleaded guilty in December to a conspiracy charge.

Also sentenced Wednesday was Mark J. Moncher, owner of Dream Home Management, who had earlier pleaded guilty to a count of conspiracy to commit mail and wire fraud.

He was sentenced to nearly five years imprisonment.

Federal prosecutors have said Nanan was part of a short-sale scheme with fellow Taylor, Bean & Whitaker employee Victor Cedeno.

Nanan and Cedeno worked with real-estate agents, homebuyers, lenders and title agents during sales financed by Taylor, Bean & Whitaker.

Nanan negotiated and approved short sales of foreclosed homes with mortgages for about 90 percent of the mortgage value of the properties. Then, prosecutors said, they falsely reported they approved the sales at about 80 percent of the mortgaged value.

And from the Palm Beach Post on the new indictees:

Included in the superseding indictment this week was Joseph Miller, 63, a Palm Beach Gardens attorney, Peter Hartofilis, 33, of New York, Robert Hofler, 52, a former vice president of First Southern Bank in Boca Raton and resident of Pembroke Pines, and Steve Vento, 41. Vento, formerly of Jupiter, is currently in prison on unrelated charges.

According to the indictment, Vitulano and Hartofilis were branch managers of the TopDot Mortgage office in Boca Raton.

Vento is alleged to have submitted two false loan applications to buy two houses worth more than $1 million each. Miller is alleged to have acted as closing agent and title agent on several of the transactions. The indictment says Hofler signed false verification of deposit forms.

More than $5 million for homes in Palm Beach and Broward counties was obtained with the false information between 2006 and 2007.

Russell Jay Williams, a Fort Lauderdale attorney representing Vitulano, said charges also should be filed against underwriters and banks that approved the loans.

“Bottom line is, everybody’s dirty in this,” he said. “It was like the wild, wild west out there.”

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A mortgage broker who took out astronomical loans on behalf of “straw buyers” has been sentenced to a five-year term in federal prison (“the big house”) for the mortgage fraud scheme.

Viktor Kobzar, a Federal Way mortgage broker, and six other associates charged in the scheme had falsified income documents to obtain loans and then siphoned money prior to attempting to resell the homes.

According to news reports, Kobzar obtained a $1.2 million loan for a house cleaner earning less than $20,000 a year. A janitor earning $16,600 annually had his income falsified to reflect an annual income of $385,000.

Former U.S. Attorney for Seattle Jeffrey Sullivan noted that the banks extending the loans — primarily Washington Mutual and ING Bank — could have prevented the fraud by conducting “a little more due diligence.” (A janitor earning $385K a year? Ya think?)

All six defendants have been tried and sentenced; all but one is serving time in prison (an accountant who falsified income statements got probation and 200 hours of community service).

And what of Washington Mutual and ING? WaMu got eaten by Chase and ING just got gobbled up by Julius Baer Group, Ltd., a private Swiss bank.

And the American taxpayer? Still choking on the leftovers.

Knowledge is power…and a powerful weapon that can be used against you in litigation if you don’t pay enough attention to the rules and regulations that govern California real estate transactions.

Several new laws took effect while you were out celebrating the New Year or catching the bowl games…do you know what they are? We won’t make you dig…we’ll spell them out for you right here this week. In fact, we provide this and other kinds of useful information to all our Risk Management Program clients free of charge (you can sign up here).

We’ll start with a big one, which you can remember by its use of two very bad f-words: fraud and felony:

SB 239 – Effective Jan. 1, 2010: Fraud on a Mortgage Loan Application will be a Felony.
Mortgage Fraud Becomes a State Crime: As of January 1, 2010, anyone who deliberately makes any misrepresentation or omission during the mortgage lending process with the intent of influencing that process will be guilty of mortgage fraud under California law. A violation of this law is a crime punishable by one-year imprisonment. Under existing federal law, loan fraud against a federally insured lender is a crime punishable by a $1 million fine, plus one-year imprisonment (18 U.S.C. section 1014).

This law adds section 523f (a) to the Penal Code, which provides:
“A person commits mortgage fraud if, with the intent to defraud, the person does any of the following:

(1) Deliberately makes any misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it is relied on by a mortgage lender, borrower, or any other party to the mortgage lending process.

(2) Deliberately uses or facilitates the use of any misstatement, misrepresentation, or omission, knowing the same to contain a misstatement, misrepresentation, or omission, during the mortgage lending process with the intention that it be relied upon by a mortgage lender, borrower, or any other party to the mortgage lending process.

(3) Receives any proceeds or any other funds in connection with a mortgage loan closing that the person knew resulted from a violation of paragraph (1) or (2) of this subdivision.

(4) Files or causes to be filed with the recorder of any county in connection with a mortgage loan transaction any document the person knows to contain a deliberate misstatement, misrepresentation, or omission.”