Big bucks made in mortgage fraud
One out of every 52 adult Californians has a real estate license. Most agents are honest and attempt to make a living selling homes or originating mortgage loans. The Department of Real Estate, DRE, has more licensed agents than at any time in its history. The recent market correction is now revealing another record for the DRE. The number of fraudulent sales and loan transactions committed by licensed agents over the past few years is keeping investigators working overtime.
Each quarter the DRE publishes hundreds of license violations, suspensions and revocations. Most are minor infractions and procedural errors, mistakes happen. An improperly filed form or earnest money deposit check handled incorrectly is grounds for a reprimand. With significant license violators, the DRE files a legal action to revoke or suspend a license. Last year was a record for DRE with 1,900 filings against licensed agents. Officials at the department expect even more formal filings this year.
What has been surprising to the department and industry officials is not the number of complaints against licensed agents but the astonishing dollar amount of the claims involved. There has always been the dishonest agent who pockets their trust account or the swindler who pressured some poor soul out of their savings. But the recent unveiling of organized fraud against lenders and sellers is reaching Enron proportions.
A federal grand jury in Sacramento returned an indictment last month, charging the primary owners of VFM Investment Group, Esnian Mortgage Realty and Freedom Capital Mortgage with bank fraud, conspiracy to launder money and making false statements on loan applications. The three defendants, James Martin, Mario Fellini, and Sal Gallo, are accused of a straw buyer mortgage fraud scheme involving 19 homes and more than $8 million in loans. If convicted, they could be sentenced for up to 30 years in prison. What were they thinking?
What they are accused of thinking works like this. The key requirement is finding a straw buyer with a good credit history in order to qualify for a loan. The buyer’s employment and income were not necessary since that can be falsified and neither was verified. The straw buyer is attracted by financial incentives on the purchase of the home. The buyer is assured they will never need to make a house payment, the deal will not cost them any money and after they sign the loan documents they will receive a portion of the broker’s commission or a flat fee. How’s that for a quick few thousands bucks?
If the straw buyers were concerned about their liability for the loan, they were assured that the house would be resold and the loan paid in full. What actually happens is after the loan closes the house is refinanced or additional cash extracted through a home equity loan, which may involve inflated appraisals. As long as property values keep climbing who cares, right?
Two former real estate agents of Prudential California Realty in Los Angeles used a different scam using bogus appraisals. Joe Babajian and Kyle Grasso were indicted by a federal grand jury claming that their actions contributed to $40 million in losses by federally insured banks. The indictment charges the defendants sent false documentation, including bogus purchase agreements and appraisals, to victim banks in order to deceive them into unwittingly funding loans for hundreds of thousands of dollars higher than the home was worth.
To work, this scheme requires the participation of the seller, a licensed appraiser and an in-house escrow company. According to the indictment, Grasso and co-conspirators Fitzgerald and Abrams, would enter into a purchase agreement with a seller for the market value of the property but with the condition the sellers and their agents would not reveal the purchase price. Then they would draft another purchase agreement on the same property for hundreds of thousands of dollars more than the real purchase price. Along with a dummy appraisal and other falsified documents, the bank would fund the loan for the higher amount. Guess who would pocket the difference between their real purchase price and the amount the lender financed? According to the indictment, Lehman Brothers Bank funded 80 such loans between 2000 and 2003 resulting in the loss of millions.
A Northern California broker has had a lot of explaining to do recently for his involvement in the sale of 21 homes in Elk Grove and Natomas raided this summer by the DEA for illegal gardening activities. Kevin Parker, an agent with Prudential California Realty acted as the buyer’s agent in all but five of the homes.
June Barlow, vice president and general counsel for the California Association of Realtors, said she was not familiar with the details of the case but said, “If you see something suspicious right in front of you, you might want to ask a few probing questions before you participate. One of the hardest decisions a professional faces is to walk away from a deal because it has too much risk or because there might be something inappropriate going on.” Good advice for all of us to remember.
Each quarter the DRE publishes hundreds of license violations, suspensions and revocations. Most are minor infractions and procedural errors, mistakes happen. An improperly filed form or earnest money deposit check handled incorrectly is grounds for a reprimand. With significant license violators, the DRE files a legal action to revoke or suspend a license. Last year was a record for DRE with 1,900 filings against licensed agents. Officials at the department expect even more formal filings this year.
What has been surprising to the department and industry officials is not the number of complaints against licensed agents but the astonishing dollar amount of the claims involved. There has always been the dishonest agent who pockets their trust account or the swindler who pressured some poor soul out of their savings. But the recent unveiling of organized fraud against lenders and sellers is reaching Enron proportions.
A federal grand jury in Sacramento returned an indictment last month, charging the primary owners of VFM Investment Group, Esnian Mortgage Realty and Freedom Capital Mortgage with bank fraud, conspiracy to launder money and making false statements on loan applications. The three defendants, James Martin, Mario Fellini, and Sal Gallo, are accused of a straw buyer mortgage fraud scheme involving 19 homes and more than $8 million in loans. If convicted, they could be sentenced for up to 30 years in prison. What were they thinking?
What they are accused of thinking works like this. The key requirement is finding a straw buyer with a good credit history in order to qualify for a loan. The buyer’s employment and income were not necessary since that can be falsified and neither was verified. The straw buyer is attracted by financial incentives on the purchase of the home. The buyer is assured they will never need to make a house payment, the deal will not cost them any money and after they sign the loan documents they will receive a portion of the broker’s commission or a flat fee. How’s that for a quick few thousands bucks?
If the straw buyers were concerned about their liability for the loan, they were assured that the house would be resold and the loan paid in full. What actually happens is after the loan closes the house is refinanced or additional cash extracted through a home equity loan, which may involve inflated appraisals. As long as property values keep climbing who cares, right?
Two former real estate agents of Prudential California Realty in Los Angeles used a different scam using bogus appraisals. Joe Babajian and Kyle Grasso were indicted by a federal grand jury claming that their actions contributed to $40 million in losses by federally insured banks. The indictment charges the defendants sent false documentation, including bogus purchase agreements and appraisals, to victim banks in order to deceive them into unwittingly funding loans for hundreds of thousands of dollars higher than the home was worth.
To work, this scheme requires the participation of the seller, a licensed appraiser and an in-house escrow company. According to the indictment, Grasso and co-conspirators Fitzgerald and Abrams, would enter into a purchase agreement with a seller for the market value of the property but with the condition the sellers and their agents would not reveal the purchase price. Then they would draft another purchase agreement on the same property for hundreds of thousands of dollars more than the real purchase price. Along with a dummy appraisal and other falsified documents, the bank would fund the loan for the higher amount. Guess who would pocket the difference between their real purchase price and the amount the lender financed? According to the indictment, Lehman Brothers Bank funded 80 such loans between 2000 and 2003 resulting in the loss of millions.
A Northern California broker has had a lot of explaining to do recently for his involvement in the sale of 21 homes in Elk Grove and Natomas raided this summer by the DEA for illegal gardening activities. Kevin Parker, an agent with Prudential California Realty acted as the buyer’s agent in all but five of the homes.
June Barlow, vice president and general counsel for the California Association of Realtors, said she was not familiar with the details of the case but said, “If you see something suspicious right in front of you, you might want to ask a few probing questions before you participate. One of the hardest decisions a professional faces is to walk away from a deal because it has too much risk or because there might be something inappropriate going on.” Good advice for all of us to remember.
posted by Ken Calhoon at 7:58 AM
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