Real estate prosecutions increase

Wave of complaints follows market's ebb

By CHRIS BAGLEY - Staff Writer | Saturday, March 22, 2008 10:04 PM PDT ∞

A pair of recent FBI raids in Murrieta illustrates caseloads that are growing as homeowners allege recent ---- and not-so-recent --- incidents of real estate fraud, law-enforcement officials said in interviews this month.

It has been a year or more since Southern California's most recent real estate wave began to ebb, and court dockets are still filling up with allegations of fraud from the boom. And reports of identity theft and bogus reverse mortgages continue to roll in.

The numbers of investigations, prosecutions and convictions are rising across the nation as home sales fall and foreclosures increase.

Nationwide, lenders and other financial institutions filed 46,717 reports of attempted or suspected mortgage fraud to authorities between September 2006 and October 2007, up 32 percent from the 2005-06 fiscal year and nearly seven times as many as in the 2002-03 fiscal year, according to records compiled by the U.S. Treasury Department.

The California Department of Real Estate, reported investigating about 9,100 complaints against real estate agents and mortgage brokers in its 2007 fiscal year. That number has risen steadily for four years.

And the FBI tallied 260 convictions on mortgage-related crimes in the year through October, more than double the 123 convictions in 2005-06, according to a bureau spokesman.

Barry Minkow, a former white-collar convict who runs the Fraud Discovery Institute in San Diego, said the combination of modest stock appreciation on Wall Street and skyrocketing home prices in Southern California made 2004 and 2005 "a perfect fraud storm" in real estate.

San Diego County Deputy District Attorney Michael Groch, who oversees real estate fraud prosecutions, said his caseload has increased markedly since then. The real estate division launched 64 investigations and obtained nine convictions last year, he said; many of those incidents date to 2006 or earlier, when allegedly crooked real estate professionals attempted to squeeze equity out of buyers and owners who put too much faith in rising prices. A spokeswoman for the Riverside County district attorney's office said she wasn't able to provide comparable figures.

"There's a lot of fraud when the market is good that people don't report," Groch said. "It's when the market goes down that these things are exposed."

Boom's dark side

Among mortgages that originated in 2005, California ranked 18th among U.S. states in frequency of fraud by borrowers, according to an analysis published earlier this month by the Mortgage Asset Research Institute. The state peaked at No. 2 in 2006 and then fell back to fourth last year, according to the analysis.

The FBI's two raids in Murrieta, in late February, sought records from transactions that former clients and other government agencies allege to have occurred between late 2004 and summer 2006.

Authorities in San Bernardino and Los Angeles counties arrested at least seven mortgage agents and financial consultants last week on suspicion of defrauding hundreds of investors over the course of 2006 and 2007. Prosecutors say the group arranged for inflated home appraisals to qualify homeowners for excessive loans. In some cases, the group allegedly pressured the clients to sign. In other cases, prosecutors say, the group simply forged and photocopied signatures.

New varieties

More recently, Groch said, homeowners are reporting bogus schemes to "rescue" them from foreclosure. The homeowners are easy targets because notices associated with the foreclosure process are available ---- sometimes by the thousand ---- through a wide range of subscription services.

The growing number of reports prompted the district attorney's real estate division to hire a fourth investigator last year, he said.

One typical foreclosure scam is to persuade the residents to deed their house to the con artist under the pretext that he'll make payments on it until they straighten out their finances, Groch said. But then he sells the house without their knowledge and walks away with the money.

A group of investment managers in Murrieta allegedly tried to pull this trick on a group of houses they had helped a couple buy just a couple of years earlier, according to a series of lawsuits filed last year by residents of North County and southwestern Riverside County. The couple and other investors in the group ended up losing more than 100 properties to foreclosure since late 2006.

The couple later withdrew the lawsuit; the FBI is continuing to investigate.

Poway real estate appraiser Todd Lackner said he's beginning to notice new patterns of unethical buying and selling behavior taking the place of large cases of outright fraud.

One scenario involves a homeowner who is "underwater" ---- owing, for example, $700,000 on a house that she could sell for only $500,000. She wants to remain a homeowner in the same neighborhood, so she buys a comparable house down the street for $500,000 and moves into it. The lender typically doesn't care ---- or even know ---- that she's underwater on the first house, as long as she's current on payments.

After moving, she stops paying off the mortgage on the first house. The resulting foreclosure ruins her credit score for the next few years, but she doesn't worry because she doesn't plan to buy a house anytime soon.

Red flags

Recent unethical or fraudulent transactions are small compared with what was going on from 2004 to 2006, Lackner said. Since he began combing through records of home listings and sales a couple of years ago, he said, he has discovered several dozen transactions in North County that appeared to involve some sort of fraud, and 500 more in Riverside County.

The fact that so many turn up in a simple search of title records indicates that many lenders were lax in screening buyers for their ability and intention to repay, he said.

And those numbers don't even include stated-income mortgage applications, which didn't require borrowers to provide proof of income. A 2006 study by the Mortgage Asset Research Institute found that 95 percent of stated-income borrowers overstated their incomes by more than 5 percent; 60 percent of the borrowers in the study exaggerated their incomes by more than half. The statistics underscored nicknames such as "liar loans" and "overstated income loans" that the product had taken on.

"That was almost its intention," Lackner said.

Federal officials have estimated that such loans accounted for 30 percent of all loans in some recent years, and more than half of the loans issued in California.

"Liar loans" aside, a frequent red flag near the end of the boom involved last-minute changes to asking prices in the listing database. Lackner said his reviews of listing and transaction records have turned up hundreds of cases in which a house sat on the market for several months, then suddenly had its list price raised by $10,000 or more, and immediately went into escrow: That's a potential sign that the buyer's agent conspired to collect an oversized and undeserved commission on the property.

Another red flag goes up when Lackner notices an individual who bought multiple houses with 90 percent to 100 percent mortgages within a couple of weeks of each other. Hundreds of buyers may have used the tactic to apply as owner-occupants on multiple loans, allowing them lower interest rates and smaller down payments without giving lenders the chance to turn up earlier loans made on similar terms, Lackner said.

Two large groups of recently foreclosed homes in Murrieta, including the one under investigation by the FBI, have fit this pattern, according to Realist, a database of property records used by real estate agents.

Still, Lackner said, schemes along those lines have recently become smaller in scale and less numerous, partly because of increased attention from law enforcement agencies. That's partly because most houses' lower equity ratios make them less desirable targets for equity theft than in 2004 and 2005, when many inexperienced homeowners were suddenly finding themselves with $200,000 in equity.

Many of the buyers and sellers of those houses have recently reported the transactions to authorities, but Lackner said statutes of limitations, typically two or three years, could prevent some from being prosecuted.

"My only concern is that the statutes are going to run out," he said.

Contact staff writer Chris Bagley at 760-740-5444 or cbagley@nctimes.com. Comment at www.nctimes.com.

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