By: CHRIS BAGLEY - Staff Writer | ∞
Rialto residents Anna and Mark Richter, with daughter Grace, 1, in front of their Murrieta investment home that is in foreclosure. Anna Richter and another plaintiff are suing several Murrieta men in federal court, alleging that the men facilitated mortgage loans and credit-card debt as part of a vast fraud.
As lenders begin to seize houses that were purchased in an unusual series of transactions two years ago, investors are attempting to arrange complicated sales and several are beginning to struggle with difficult decisions on whether to file for bankruptcy.
Nurses and other middle-class investors bought more than 100 Murrieta-area houses in 2004 and 2005 through Stonewood Consulting Inc., a Murrieta mortgage brokerage that the California Department of Real Estate is now seeking to bar from the industry. The first of those houses fell into the foreclosure process last fall, and the owners began filing lawsuits in January. Stonewood clients often paid far more for their houses than did buyers of comparable houses nearby and, according to numerous neighbors and real estate agents who followed the purchases, $50,000 to $120,000 more than the original asking prices ---- a pattern that raised eyebrows in the slackening market.
Many of the clients bought multiple houses, typically financing each with an 80 percent mortgage and a second, 20 percent mortgage, according to a local real estate database. Several are now saddled with more than $3 million in debt, according to their court filings.
At the time the investors bought the houses, prices in surrounding neighborhoods were still rising, a fact that buyers said led them to conclude they were making solid investments. But market prices leveled off without catching up to the investors' loan balances, leaving them "upside down," in real estate parlance.
Short sales
In recent weeks, the investors and their real estate agents have begun to negotiate with their mortgage lenders, hoping to avoid foreclosure, even as some lenders begin to seize the properties.
Most are attempting to sell properties for less than the balance of the mortgages. Known as "short sales," such transactions can allow an owner to crawl out from under an upside-down mortgage. They don't cause the foreclosure-sized black mark on a credit rating, either, but they can carry a tax penalty because sellers are required to report the difference as income.
Short sales also require the consent of the original lenders, and buyers don't always have the patience to wait through the months of negotiations that this can require. Nor do the lenders, necessarily.
Vicky Reiss, the Temecula resident who filed the first lawsuit Jan. 5, bought five houses through Stonewood, according to a local real estate database. She still owed more than $600,000 on her house on East View Way in Murrieta's Copper Canyon area. A seller offered about $500,000, she said, but the lender didn't bite. It seized the house earlier this month.
"One down, four to go," Reiss said, ruefully.
Reiss' real estate agent, on the other hand, said she's optimistic that she'll be able to win over several of the lenders. The agent said she has received offers on five of the 23 properties owned by former Stonewood clients.
The challenge, agents said, is to show the lender that it wouldn't be able to sell the house for significantly more after seizing it and that the seller would never otherwise be able to repay the remaining balance of the loan. Lenders also consider that federal rules require them to set aside more cash in reserve accounts as they record more foreclosures, agents said.
Foreclosures
But short sales aren't always an attractive option. Several plaintiffs in the lawsuits allege that they refinanced their primary residences to fund investments arranged by Stonewood chief executive Hendrix Montecastro, La Cresta resident James Duncan and Murrieta-area resident Maurice McLeod. These plaintiffs say they now find themselves struggling with monthly mortgage payments as much as double what they were paying before.
"That's where I live," said Temecula resident Mercy Ferido, who is watching her three investment properties slide into foreclosure. "I took another job just to keep up with my payments."
Ferido said she has also made an appointment with a bankruptcy attorney, a move being contemplated by several people who say they invested through Stonewood or related companies.
Rising numbers of foreclosure properties coming onto local real estate markets threaten to weigh on home prices at a time when they've slipped from record highs.
As of June 4, nearly 1,050 lender-owned properties were listed for sale in Riverside County, up from less than a half-dozen in June 2006, according to ZipRealty, an Emeryville, Calif.-based real estate brokerage. Such properties account for about 3.5 percent of the properties for sale in the area, according to the company's data.
More than 30 of the clients have signed onto the six lawsuits against Montecastro, Duncan, McLeod and several of their business partners. The plaintiffs and the Department of Real Estate allege that Montecastro arranged for inflated appraisals and pocketed millions of dollars from excess mortgage payouts.
'Unclean hands'
In many cases, the plaintiffs allege, they were pressured to sign incomplete loan applications that were later completed with false information about their incomes and the reasons they were buying the houses.
The three men promised that part of the surplus payouts from the mortgages would be used to help cover initial mortgage payments, with most being rolled into high-yield, low-risk investments, according to plaintiffs. The houses began to fall into foreclosure when the payments suddenly ceased last summer, the lawsuits allege.
Stonewood's attorney acknowledged that many of the clients paid more for the houses than buyers of surrounding properties, but said the prices ---- and the resulting mortgages ---- were supported by third-party appraisals, including several arranged by the lending institutions.
Allegations that Montecastro helped divert the extra cash toward any sort of investments are "just plain untrue," Riverside attorney Scott Grossman said.
In a June 7 court filing, Grossman argued that Stonewood and Montecastro shouldn't be responsible for investors with "unclean hands" who knowingly signed false or incomplete documents. Montecastro never made payments on the clients' mortgages and never promised to do so, Riverside attorney Scott Grossman said.
"It is hard for me to understand how someone could intend to defraud another person and make one to two years' worth of payments as part of their plan," Grossman said. "The plaintiffs won't produce any evidence that Stonewood ever made any payments on their behalf."
In the meantime, many of the aggrieved clients have become vocal in calling attention to their plight, creating a Web site earlier this year and rallying along Winchester Road near The Promenade shopping center last month. The group plans a second rally Monday, in front of a Riverside courthouse, to demand criminal charges in the matter.
Representatives of the Riverside County district attorney's office have recently confirmed an ongoing investigation but declined to comment further on its status.
District Attorney Rod Pacheco repeated that position earlier this month, adding "In a robbery case you get a report that's three pages long, and you can read it in five minutes. You get a case like this, and there are dozens of boxes of evidence."
New chapter
The lawsuits, which are pending in state and federal courts, allege that the defendants convinced several hundred clients to borrow tens of thousands of dollars each on credit cards that the men arranged for them. A spreadsheet filed as evidence in one of the suits lists 423 "core clients" and "golden clients" with most living in Riverside County and large numbers of others in Contra Costa County, Phoenix and Tucson. Several live as far away as Minnesota and Puerto Rico.
Jon and Angie Jackson, who moved to Lubbock, Texas, from the Phoenix area in 2006, filed last month for Chapter 7 bankruptcy, which would temporarily protect them from creditors while also liquidating most of their assets above a certain threshold. The couple owe about $2.2 million, including a second mortgage on their home near Tucson, full mortgages on two houses in Temecula and mortgages on their house outside of Lubbock, Jon Jackson said. The lender seized the Lubbock house earlier this year, prompting the couple to begin renting a house in town, he said.
Their bankruptcy filing lists 28 creditors, ranging from credit-card companies to Wal-Mart.
With his wife liquidating her business and starting school for a nursing degree, Jackson said he and his wife decided lawsuits would be too expensive and time-consuming, and would delay the rest of their lives.
"It would just complicate the bankruptcy," he said by phone. "In some ways, this is a fresh start for us."
Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.
See also:
State agency targets mortgage brokerage
Sixth lawsuit alleges money laundering
New player emerges in fraud suits
Scope of alleged scam grows
Investors' legal battles span 5 years
Renters latest victims of alleged scam
Real-estate investors bought on faith
High-ball offers raised flags in 2004
Suit alleges massive mortgage scam
There are good investors and there are bad investors wrote on Jun 17, 2007 6:24 AM:Sounds like the (bad) investors did not do their homework and got caught in the hype of increasing real estate values. Had they had experience with real estate they would have realized the predicament they were getting into rather than just believing sales reps who are focused on closing a deal rather than watching out for the investors investment. Tax payers should not have to bail out these investors and they should not be allowed to declare bankruptcy.
hmmmm wrote on Jun 17, 2007 7:20 AM:shame all this mess has one driving factor= greed.
Cry me a river wrote on Jun 17, 2007 7:43 AM:If it sounds too good to be true then guess what. What bothers me is that after all the stupidity and greed transactions that drove up prices in the market 3 years ago, Stonewood's only reward was fees and commissions? All this risk and so little reward for the effort? Nope "pocketed millions of dollars from excess mortgage payouts" and now what surprises me is they hung around after the scheme broke down.
Greed Greed Greed wrote on Jun 17, 2007 9:17 AM:enough said
Confused wrote on Jun 17, 2007 10:57 AM:Why would there be a tax liability on a loss? If you buy a house for $500K and sell it for $400K I would think you would get to write off the $100K loss. Why would someone pay more than market value on an investment? Obviously greed was the driving force behind this but if you are greedy wouldn't you know the value befor you signed? Anyone that signed an incomplete contract deserves whatever happens to them. No pitty here. Another thing, nothing good can come from any investment that you use a credit card to buy in to.
Reardon wrote on Jun 17, 2007 10:58 AM:Investment is always a risk and reward situation -- if all investments were good and delivered high profit potential everyone could do it with terrific success. That isn't the way it works -- it works best when you sell when everyone else is buying and buy when everyone else is selling. Bulls make money, and Bears make money, bu pigs do not make money, and anyone buying into a market with 25%, 35%, and 40% increases, year after year can absolutely BET on a "correction phase." Real estate is a long term investment. Day traders only make out if very cautious.
Floyd wrote on Jun 17, 2007 12:10 PM:The big secret in real estate is to build your reserves and wait for the inevitable crash. You can get some good deals when everyone else is floundering, and when the market recovers you'll do well. As always, "buy low, sell high". Six months from now, the buying window will close and it will be time to start building reserves for the next crash ten or twelve years away!
lawyers wrote on Jun 17, 2007 12:29 PM:Even though lawyers gat a bad rap, it's a GOOD idea to have one for any significant investment, especially in real estate and taxes. We're stuck with a mortgage that has tripled in monthly payments and now is negative affecting our equity, BUT, it's OUR fault, not anyone else's. We didn't protect ourselves, didn't investigate all possibilities and trusted a shyster realtor (very handsome I might add) who of course as since disappeared without a trace. Why sue anyone elses for YOUR errors? Use the lawyer BEFORE that situation arises. Yes, it's very sad that families are losing their homes, but reactive 'blame' versus proactive planning is no contest. As for us, we're using retirment savings, so not fearful of forecosure. However, that's less for our 'golden years' which will be spent in a small cozy cottage in an area of the country where cost of living is 1/5th of that here in Southern CA. Look into it! Friendly people, less crime, no freeways, honest business owners, etc Sadly, some here not only will end up with no home to live in, but no savings to fall back on either. Guess who pays?
Amazed wrote on Jun 17, 2007 1:27 PM:People need to take responsibility for their actions. These lawsuits should be thrown out of court. What will be the basis for their lawsuit? Greed? Oh, you facilitated my greed and now I am going to sue you. Get real learn from your experience and move on. You should have reported them to your local DA if the deal sounded too far-fetched.
Plenty of juice in the North County wrote on Jun 17, 2007 1:35 PM:Hey NCT when are you going to move into the North County scams, the brokers, realtors etc?
Tom wrote on Jun 17, 2007 1:57 PM:Greed, greed, greed. What a bunch a dolts. You can't make a buck by doing nothing, which is what these fools expected. Give me a break...they all did 80/20 100% financing and then thought they could sit back and watch the money roll in. P.T. Barnum said it best, "There's sucker born every minute". It's time to pay the piper...but of course, they are whining. However, I never knew being stupid, greedy, and negligent was a liable defense for a bad financial transaction.
snowman wrote on Jun 17, 2007 3:08 PM:High yield, low risk investments! These words can make me LOL anytime.
RE.Agent wrote on Jun 17, 2007 7:35 PM:It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase. Renters, and anybody born in a future generation, will not be able to afford a $10,000,000 starter home in 15 years. They will live in tent cities, and Hondas. This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.
Escondeeter wrote on Jun 17, 2007 7:54 PM:Snowman's right. If anybody offers you a high yield, low risk investment, run away. Run Far Away!
cake wrote on Jun 17, 2007 9:12 PM:You can't have it both ways. These homeowners are part of the scam themselves and now what the courts to help them.
timmy wrote on Jun 18, 2007 8:29 AM:The bottom line is, 20% year-on-year property appreciation rates made all market participants look past a lot of fraud and impropriety that would never have been allowed to slide in a more sane market. And, of course, they couldn't care less about completely ruining the housing market for people who actually intended to occupy the property and pay it off after some time.
turdly wrote on Jun 18, 2007 5:19 PM:If you have a mortgage of more than 3 times your annual income then you are a thief or a liar or soon to be a failure. PERIOD. [we're talikng 97% of the population, make your lame specific case] If you didn't understand, then understand this; people prey on prey. Too stupid to read, yet think they are smart enough to invest. Jail them now! Who told a nurse, a standard blue collar worker that they were an investor? She wanted to prey on those that bought after her, she wanted to profit from nothing, she sought out a vehiclt to do it. She would of stole from a clerk who gave back too much change, she was an opportunist and should go to jail long before the others. Stonewood had a business plan that failed and may have been illegal. She simply stole appearantly without conscience or a plan other than glory. Jail the BORROWER! I'm so tired of the picture of the family that has been mislead. She probably steals drugs at work! Do you want her in your hospital room? I work in the business and am currently reviewing a complaint made through a state agency. This flaky flipper wants it all back because he 'didn't know what I was signing.'. He's been in the insurance business for 30 years. He took out a second for 70k to spend on just crap. His house went down in value from 318k in sept 05 to 235k today. He doesn't want to make his payment because it's unfair that he's on an adjustable. Borrowers steal and then they whine. When I asked him 'let's say we made you whole, let's say we started all over and dismissed it, bought the house back, and you just walk away, what about the 70k second you took out after the fact? HE SAID NOTHING!!! He reverted back to some lame argument about his mom being ill and he didn't understand. If you have a mortgage of more than 2.5 times your annual income then you are a thief or a liar. PERIOD. If you didn't understand, then understand this; people prey on prey. Too stupid to read, yet think they are smart enough to invest. Jail them now! I don't mean forever, but a debtors prison might wake them up a bit. She'll walk away with a free Hummer from all of this if we don't watch her closely. What did SHE buy with that HELOC?
CFP wrote on Jun 19, 2007 5:20 AM:You got what yo deserved. Sorry.
shopper wrote on Jun 19, 2007 8:53 AM:This whole debacle is interesting because in a nutshell it seems these investors that are suing were just naive and really do not have a case. The stonewood/duncan party sound a little shady, but I doubt anyone will serve any time. I have seen them around town too, so does not look like they have ran off to the carribean or whatever the suit alleges-you are gonna have to move on people-sad but true.
Erin wrote on Jun 19, 2007 6:00 PM:Stonewood et al are a bunch of crooks no lie. They should spend a long time in jail. The victims are just that, victims. The posters here are just Bitter Renters.
sdrenter wrote on Jun 23, 2007 7:25 AM:I think the Stonewood should spend a long time in jail and so should the investors. Investors must also be punished becuase they were ignorant and drove the prices high.
Amazed wrote on Jun 25, 2007 10:45 AM:I used to think this first-time investers/flippers were ignorant and that they got what they deserved. Come on, never before in history have houses appreciated this much, and their greed priced the average joe out of the market. However I have a tiny tiny bit more sympathy for them. I was casually looking at housing and I stumbled into one 100K over my budget. I immediately started to walk out. However the realtor started talking to me about "creative financing." I told her I wanted a retirement one day, and said no thanks. She then wanted to debate me! She said "why pay more than your fair share of interest; why ever own your home?" I told her I have an MBA and have taken several classes in finance. I know the value of a dollar and I know how interest works. She still wanted to debate me and she wanted to help arrange a loan 100K higher than I wanted. My god. I told her that realtors like her are causing problems. She didn't see that. Thankfully I have taken more business classes than she ever will. I hate to think of the stupid people she misleads. However, ultimately, tax payers shouldn't have to bail people out (buyers or realtors) for their stupid greed. To each his own.
Bingfa wrote on Sep 18, 2007 9:01 AM:What did these people think. That they were going to play with the big boys. I don't feel one ounce of pity. Throw out the lawsuits. Let the "victims" lick their wounds for seven years of bankruptcy hell and maybe they will learn.
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