Another HELOC Is Filed

Last week we featured the Kimball case, where a California small business owner had her HELOC line closed - with the bank (WAMU, JP Morgan Chase) claiming that the property value declined, but an on-site appraisal revealed the property was 1.5 times the banks value. When her HELOC was arbitrarily closed down, she claims that it damaged her business.


Well, we know have word that there is a new case coming before the courts. This time the suing party had the lender shut their line down due to changes in income. The Schulken's (the party suing) states that their has been no change to their income so their line was arbitrarily shut down. This is another case involving a small business owner, who relied on their equity to run their business. When the line was closed the business suffered. This article at the PR News Channel titled JPMorgan Chase and WAMU Face More Lawsuits Over Home Loan Recalls. Let's take a look -

The suit alleges that Chase and WAMU had no reasonable basis to conclude that their borrowers’ finances had in fact declined and that the banks broke their written promises to provide customers with two weeks' notice to substantiate their incomes before taking such action.

The suit was brought on behalf of Jeffrey and Jenifer Schulken who allege that their HELOC account was suspended due to a supposed inability to pay the loan. But the couple – who run their own small business – continued to earn the same amount of money and never missed a payment.

Although federal regulations permit account suspensions when a customer’s financial circumstances adversely changes, such action requires both a material change in a borrower’s financial situation and the creditor’s reasonable belief that the borrower will not be able to repay the HELOC account as agreed.

The lawsuit alleges that Chase and WAMU had no such basis here.

“The Schulkens did everything right. They work hard, pay their bills, and have always honored their relationship with Chase/WAMU,” says attorney Jay Edelson, whose law firm, KamberEdelson LLC, represents the Schulkens. “What the banks did to them, and countless others, is simply not right.”

...

The second lawsuit, filed this week by Sherman Oaks attorney David Parisi, is brought on behalf of Garden Grove resident Michael Walsh. Mr. Walsh alleges Chase and WAMU reduced his credit limit after claiming his home had significantly declined in value. In addition to challenging the banks’ use of a faulty AVM, the Walsh case further takes issue with the banks' practice of freezing HELOC accounts based on lower declines in value than those permitted under the federal Truth in Lending Act.

We saw this coming over a year ago. The big question is how long this will drag out. But contracts were signed and agreements made. The lenders can not void the contracts just because of changes in the current economic environment. If there are problems with the contracts that is one thing, but just cancelling the contract because it was a stupid contract to make 5 years ago will not fly.

We will be watching for more lawsuits coming. Don't be surprised if this happens in all 50 states...

(h/t Steven for the link)

Good News For Renters

Our forgotten foreclosure victims just received some new rights. A national law regarding evictions for renters in foreclosure properties. No longer will tenants have to vacate immediately - tenants with leases will have 90 days after the lease expires and tenants without leases will have 90 days. A huge, huge victory for renters everywhere. People will not be told to vacate immediately. Honest rent paying citizens will not have their live thrown into chaos due to a bad landlord. This article from The Record titled New Law Shields Renters In Foreclosure Cases has the details. Let's take a look -

Buried in a housing law signed last week by President Obama are protections that will help thousands of renters stay in their homes — at least for a while — after their landlord has been foreclosed on.

The law allows tenants to remain in their foreclosed rentals through the end of their lease and then 90 days after that before being forced to vacate by the lender. Renters without leases will have 90 days, a significant improvement over what most received before: almost no notice at all.

"Until this law was enacted, there had been no national protections for any of these households," said Linda Couch, deputy director at the National Low Income Housing Coalition. "This gives renters time to adjust their lives."

...

The National Low Income Housing Coalition estimates 40 percent of foreclosed properties in the country have renters and the new law could aid tens of thousands of renters.

Before, many renters booted out of foreclosed homes would have to find emergency shelter with family or friends because they have little savings to cover moving costs, first month’s rent and a security deposit at another apartment. In the worst cases, some families are forced into shelters for temporary housing.

...

While [ Francis Creighton, vice president of the Mortgage Bankers Association] said renters are "blameless" in these situations, honoring their leases could disrupt a foreclosure sale as new owners try to move in. Other times, lenders have no idea renters live in the properties, Creighton said, because the landlords claimed the property was their primary residence, not a rental, to qualify for a lower mortgage rate.

One point not mentioned in the article is that the prior to the new law renters would lose all their money - their deposit, their last months rent and the rest of the months rent they had already paid. Perhaps they could try to sue after they re-organized their lives. Getting two days notice to move for most people would be impossible and unbelievable stressful. Many of these renters had no idea what was coming.

In the past there were two contracts involved - one for the renter (sometimes written and sometimes verbal) and the other for the mortgage. The mortgage contract voided the rental agreement everywhere but Jersey and D.C. Now it is the law of the land! Good news for renters everywhere!

AG Stops 2 Foreclosure Fraud Companies

The big warning lately has been to watch out for companies that claim they will help with foreclosure but end up leaving the victims in worse shape. New Jersey's Attorney General has filed charges against two Union County companies that appear to have taken advantage of their clients misfortunes. The companies are Property Solutions of NJ and PSRE Holding Company. In this article from The Jersey Journal titled State A.G. Says Loan Creeps Stole Homes we get a sense of what the company was doing. Let's take a look -

An 84-year-old Bayonne woman is among the victims of two Union City companies that promised to help homeowners facing foreclosure save their homes, officials say.

But instead of saving people's homes, the companies purchased the houses at deep discounts, saddled the owners-turned-tenants with even bigger monthly payments, and in a number of cases, including that of the Bayonne woman, evicted the previous owners, officials say.

...

The defendants typically approached people shortly before or during the grace period just after the scheduled sheriff's sale of the victims' properties, officials said. They convinced the residents to sell their homes to them for the amount they owed the bank, rather than what is generally a far greater sum arrived at in the auction, officials said.

The defendants offered to help save the victim's home by paying the balance of the homeowner's delinquent mortgage and then entering into a sale/leaseback agreement with the victim, officials said. But the monthly lease payments were often far higher than the mortgage payments the homeowner couldn't make in the first place and they were typically required to buy the home back within 90 days at a far higher price than the defendants' paid, officials said.

In the end, many victims either vacated or were evicted by the defendants, even if they made their payments, officials said.

At best with some of these scams people are paying thousands of dollars for useless services - at worst they are lose their properties, their savings and take a huge hit to their credit. Which is what sounds like happened to the 84 year-old victim. These victims are already vulnerable. Hopefully this deters others from taking advantage from an already bad situation and it will also alert potential marks about what to be on the watch for. Remember the warning signs - paying someone up front or signing over your property.

Not Enough Agents to Combat Mortgage Crime

The FBI knew some of what was going on but did not have adequate staff to prevent the levels of mortgage crimes that arose during the bubble. Between the greed, negligence and lack of law enforcement the country, world actually, is financially devastated. If the devastation really is a "financial 911" and contributed in a large part by the housing bubble - then we may be our own worst (or second worst) enemies.

Considering that as a society we allowed ourselves unsustainable indulgences that really did not make any sense. How could one buy a house, do nothing and a few months later sell it again for a huge profit? People were making their living doing this. Something that had never been done before and historically should not have been possible. Parts of it were stupidity, part was greed, and part was criminal. In an article from the Seattle Post Intelligencer titled FBI saw mortgage fraud early one wonders how much of this disaster was preventable. Lets take a look -

The FBI was aware for years of "pervasive and growing" fraud in the mortgage industry that eventually contributed to America's financial meltdown, but did not take definitive action to stop it.

"It is clear that we had good intelligence on the mortgage-fraud schemes, the corrupt attorneys, the corrupt appraisers, the insider schemes," said a recently retired, high FBI official. Another retired top FBI official confirmed that such intelligence went back to 2002.

...
[John Falvey Jr., a former federal prosecutor who currently does white-collar criminal defense work in Boston] said that financial executives who deliberately chose not to learn the facts about dicey mortgage-lending practices in their companies -- who chose to be "willfully blind" to such practices and the subsequent securitization of those mortgages -- could be vulnerable to prosecution for securities fraud.

Both retired FBI officials asserted that the Bush administration was thoroughly briefed on the mortgage fraud crisis and its potential to cascade out of control with devastating financial consequences, but made the decision not to give back to the FBI the agents it needed to address the problem. After the terrorist attacks of 2001, about 2,400 agents were reassigned to counterterrorism duties.

...
Further complicating efforts to detect and prosecute mortgage fraud, banks and other mortgage lenders were making so much money from the constant churn of transactions and the continually escalating price of homes that the fraud that did arise simply didn't cost the industry enough money to raise their concerns.


...
When FBI Director Robert Mueller was briefed on mortgage fraud, "his eyes would glaze over," the first retired FBI official said. "It was not something that he would consider a high priority. It was not on his radar screen."


...
"The potential impact of mortgage fraud on financial institutions in the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market."

[Chris Swecker, then assistant director of the criminal investigation division, said in October 2004 before the House subcommittee on housing and community opportunity] went on to describe the scenario that ultimately wrecked financial havoc around the world: "Often mortgage loans sold in secondary markets are used by financial institutions as collateral for other investments. ... When loans sold in the secondary market default and have fraudulent or material misrepresentation ... these loans become a nonperforming asset, and in extreme fraud cases, the mortgage-backed security is worthless. Mortgage fraud losses adversely affect loan-loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution itself."

While the article is long, it is chock full of important information about what was known when and what was done or not done about mortgage fraud during the bubble.

The warning of the ripple affect onto the rest of the economy was forewarned within the government in 2004 - and still nothing. Another preventable disaster that was not prevented. People knew what was going on, what the affects could easily be, yet still nothing was done. Maybe worse than nothing - eyes glazed over. Mortgage fraud was too dull or complex to deal with! Shocking, sad and scary.

Justice in Jefferson

The housing bubble helped with scams. So much money was flying around so fast that sometimes it was hard to know what was legit and what was not. Somethings stand out as definitely not - like an $85,000 commission on a $245,000 home equity loan. One of the perpetrators of this crime, and a slew of others, was sentenced yesterday. Now we have one less mortgage scammer running free in Northern New Jersey. The Daily Record brings us the info in an article titled Woman gets 10-year term in $2.7M mortgage scam. Lets take a look -

A 50-year-old woman who aided her boyfriend in a $2.7 million mortgage scam so they could enjoy homes, luxury cars and boats was sentenced Friday to 10 years in state prison despite her claims of being influenced and abused by the ex-beau.

Morganville resident Crystal Velitschkow pleaded guilty in June to money laundering, with the understanding that the state Attorney General's Office was recommending a 10-year term behind bars. Defense lawyer Joseph Ferrante on Friday made a pitch for a seven-year term to Superior Court Judge Salem Vincent Ahto in Morristown, but the judge said he believed the decade stint was warranted.

"Her conduct and that of Mr. Pollatos has wreaked havoc on these people," the judge said of some 20 victims, many elderly Greek people, who Velitschkow and boyfriend Spiro Pollatos, 45, swindled from 2003 to December 2007. Some of the victims live in Morris County.

...
Pollatos, who has a prior conviction for theft by deception related to a mortgage fraud, was the mastermind who set up a company called Lenders Capital Mortgage Co. of Hackensack, which preyed upon unsophisticated investors.

So that is what happened. But what about the back story. Lets take a look at some of the scams -

Authorities said that Pollatos embarked on a slew of scams that allowed him to funnel more than $2.7 million through a Commerce Bank account in Velitschkow's name.

To get the money, he targeted victims in the Greek community and advertised his mortgage company in a Greek newspaper.

He offered to secure hefty loans for victims who could not otherwise get them, and then charged clients excessive loan commissions and fees.

In one case, Pollatos got an $85,000 commission on a $245,000 home equity loan. Another time, he kept $133,000 in check proceeds that he was supposed to use to pay down a first mortgage for the borrower.

He mortgaged homes well beyond their value, including one case in which he urged a borrower to secure $418,500 in loans on a Keansburg property that was worth only $215,000.

There were probably many more out there that did the same thing but just with lower numbers. Instead of pocketing $85,000 they may have just taken just an extra $5000-$10,000. The way that money was flying around during the bubble allowed for dishonest people to take funds, as well as normally honest people to take a little extra off the top. The floodgates to fraud were open during the bubble. Wonder how many more like this couple are out there.

Who is spending your equity?

It is one thing to be underwater through bad choices such as HELOCing the house for a cruise, plasma TV, and landscaping services. It is another to be underwater because someone else - unbeknown to you - HELOCed your house for their cruise, plasma TV, and landscaping services. Just like those identity theft ads on TV for a credit card - people can steal your identity and take all your equity with them. When home values were annually increasing in double digits the problem was big, but not as significant as when people will lose their homes due to these crimes.

Equity theft, like many white collar crimes, requires more man hours, more investment, and are difficult to prove in court due to the complexity of the issues. In the Washington Post there was an article titled Thieves Stole Identities to Tap Equity Lines outlines some of the recently busted crimes. Lets take a look -

The cases highlight what the FBI calls an "emerging scheme" afflicting the struggling real estate and mortgage market. In such crimes, thieves target people with good credit and large, untapped home-equity lines of credit, digging through public records -- such as property deeds and mortgages -- as well as publicly available Internet databases to obtain credit applications, credit reports and victim signatures.

"Home-equity lines of credit are an expanding front in the battle against mortgage fraud," said New Jersey U.S. Attorney Christopher J. Christie. "Homeowners should carefully review their statements to make sure their hard-earned equity is not disappearing from under their noses."

...
In a report released last summer, the Credit Union Information Security Professionals Association said a number of credit unions have beefed up security in response to an increase in home-equity fraud, but those precautions have come with their own costs: "Customer service call times have increased one minute on average due to increased security verifications, and some legitimate members are failing increased security questions," the report noted.

Anne Wallace, president of the Identity Theft Assistance Center, a nonprofit industry group, said properly training bank employees to detect fraud is critical.

"It's a challenging problem for companies across the board," Wallace said, "how to train your employees to balance customer service and protecting critical assets."

Wallace said consumers can help combat this growing form of fraud by keeping a close eye on bank statements and by taking full advantage of a federal law that guarantees consumers a free copy of their credit report from each of the three major credit reporting bureaus. Consumers can request credit reports three times a year for free at each credit bureau.

Restricting access and making more barriers may deter some criminals, but they can also aggravate customers. This will be especially true for people that do nor realize the procedures were set up in place to protect them. Like most victims, they are unaware of their surroundings - even financial ones. The small amount of work to review your credit reports periodically is a lot better than finding out your the victim well after the fact.

Stealing Equity

During the housing bubble extracting equity was quick, easy and common. At one time having a second mortgage was a questionable practice - but during the bubble it seemed as if everyone had one. Lenders were giving them away like candy on Halloween - just ask and you receive with big reward for very little work. Many times things could be done over the computer and with a quick visit to a notary - never having to meet the lender in person.

If you needed equity right away with little documentation home equity loans or lines of credit during the bubble were perfect for you. But requiring little documentation with a fast turn around also made it ripe for fraud. It is no surprise that criminals flocked to an easy way to get large bundles of money. New Jersey became a good target due to its high property values and rapidly increasing property values. An article in the Star Ledger titled ID theft ring targeted N.J. home equity lines of credit discusses a home equity extraction ring that was recently busted. Lets take a look -

Four men were arrested yesterday in connection with an international identity theft scheme that siphoned at least $2.5 million from home equity lines of credit at dozens of banks, including at least 11 in New Jersey, authorities said.

The suspects targeted homeowners with big credit lines at large and small financial institutions, including Citibank, JPMorgan Chase and credit unions in Basking Ridge, Bridgewater and Toms River, authorities said. They used stolen personal data and technological tricks to fool bank employees into transferring funds to accounts in at least seven countries, authorities said.

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In the days of easy mortgages, identity thieves targeted people with shaky credit, taking out illegal loans in their names from subprime lenders who required little documentation, according to the report. But the credit crisis hobbled that scheme, and the FBI report found identity thieves have turned to homeowners with good credit and deep home equity in places like the Garden State.

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The alleged plot hinged on the personal information that is the bedrock of most identity theft scams -- Social Security numbers, mothers' maiden names and online passwords, authorities said.

...
Once armed with data, the men called banks and posed as customers. They used a dial-pad code to block the banks' caller identification system and asked to transfer big chunks from the victims' home equity lines. In one case, they moved $675,000 from Affinity Federal Credit Union in Basking Ridge to the Bank of Tokyo Mitsubishi, authorities said.

The system was ripe for fraud. Even without the technological tricks the system was easy to manipulate. Many mortgage brokers received their fees up front so they had no reason to evaluate or question the loans.

The system was easily manipulated by those with criminal intent. It also did not promote or require safeguards for customers - in many cases the layers of protection was discouraged because it would slow down the process.

During the summer we reviewed a three part series from the Miami Herald on the fraud perpetrated in Florida by loan originators - Part 1, Part 2, and Part 3. When questionable activities were being perpetrated by those within the system what real safeguards are those to prevent fraud from the outside.

Wonder if New Jersey will be a Hot Spot for Mortgage Fraud in the 2008 publication. Here is a map of the 2007 problem areas -

Prosecuting NJ Foreclosure Schemes

There were numerous mortgage scams that occurred during the Great Housing Bubble. Now that we have entered a massive foreclosure phase there are scams in this part as well. Right now prosecutors are trying to prevent a rise of foreclosures due to scams. People think they are getting help in trying to save their homes instead find themselves broke and out on the streets. It is even sadder when it happens to some of societies most vulnerable - one victim was both sick and elderly. At least the people who perpetrated some of the crimes are being prosecuted for their crimes. In today's Star Ledger there is an article titled State accuses firms of running predatory 'foreclosure rescue' schemes. Lets take a look -

Forty-eight New Jersey property owners have lost more than $3 million in home equity through "foreclosure rescue" schemes operated by Vest Financial and JP Global Property Management Inc., according to civil lawsuits filed by the state Attorney General's office.

The lawsuits accuse the two companies, as well as 37 mortgage loan providers, mortgage industry employees, lawyers and others of violating the state's Consumer Fraud Act and the Racketeer Influenced and Corrupt Organizations Act. The state is seeking restitution for the property owners, penalties and permanent bans to keep them offering similar schemes to others.

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A second victim was a senior citizen who, following her husband's death, missed several payments on the Bergen County home where she had lived for 25 years. She went in December 2006 to Vest Financial, which told the woman she could enter into an agreement that would guarantee her the same payments each month as well as $30,000 for outstanding medical bills.

What the company never told her was that it was going to sell the property to a third party in a deal that stripped $87,000 in equity from the home -- leaving her with only $12,000 for the medical bills, according to the lawsuit. It pulled off the scheme by providing an attorney for the woman who never explained the property sale to her.

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"The distressed homeowners are left in a far worse position than they were in before," the lawsuit states. "Not only must they leave their home, but they cannot even sell their homes and benefit from the equity that had accrued in their property over time."

The story sounds awful - taking advantage of a sick, recently widowed senior citizen. Could this group find a more sympathetic victim? Hopefully there will be some kind of intervention so this woman can keep her property. The housing crisis is already hard enough - adding a new level of victimization will make it even harder. Hopefully an aggressive prosecution will prevent foreclosure fraud from becoming epidemic.

What is Mortgage Fraud?

This is a follow-up on the $1 billion of mortgage fraud post. Mortgage Fraud is an often used term so it is interesting to know what exactly it encompasses. The FBI has a list of indicators of Mortgage Fraud. There are several different types of fraud perpetrated by several different actors. Here is the FBI's list -

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses - Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple "Holding Companies" utilized to increase property values.

There are several areas that are limited to the business side of the transactions - mortgage lenders, loan originators, real estate agents, and appraisers. Some categories can be done solely by non-industry affiliated individuals such as flipping, falsifying loan records and having "holding companies" to increase values. Others categories need an industry accomplice.

But looking at the list, it seems almost impossible that only $1 billion of mortgage fraud occurred during the last ten years. In just our little real estate scam post the amount extracted was over half a million.

Let the Lawsuits Commence

Fraud ran rampant during the Great Housing Bubble, and from our recent review of the Miami Herald's Borrowers Betrayed Series.

This Orlando Sentinal headline speaks for itself - Sold for $380,200, now appraised at $125,000: Investors helped heat up Orlando-area housing market, got burned. Lets take a look at a few snippets -

Shaeffer, one of the first investors in Orlando's Cay Club, was part of the mad rush. He was captivated by the promise of two years' worth of rental income upfront. He bought one unit and persuaded his sister to use her late husband's life-insurance proceeds to buy two more.

Cay Club brochures, Internet presentations and sales agents promised buyers across the country $35,000 in condo furnishings and membership privileges that included a jet available for club members to charter for personal use. The reality, as Shaeffer would later learn during a visit, was far from the sales pitch.

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Dozens of Cay Club buyers are now suing. Investors from as far away as Hungary paid an average $300,000 in the development, while similar units nearby cost less than half that amount, appraisers reported. One Cay Club unit that sold for $510,000 two years ago was appraised recently for $90,000, said Chris Cantrell, a Birmingham, Ala., attorney for several buyers who are suing EW Sunvest Development and IMG Academies. The lawsuit contends that Sunvest and IMG shared responsibility for developing Cay Club.

EW Sunvest owns the property, and company attorney Richard W. Epstein said his clients gave Cay Club developers an option to buy the property but that EW had nothing to do with converting or selling the condos. A spokesman for IMG Academies had no comment on any plans for Cay Club, although marketing materials emphasized IMG's development of a "challenging field sports training and tournament destination."

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The network of Cay Clubs stretching from Las Vegas to Key West is now defunct, and the development company has dissolved. Fort Myers attorneys Holly Bower and Charles Phoenix, who previously represented club principals Dave Clark and David Schwarz, each said they have no contact with them. They could not be located to comment for this article.

Now the lawsuits against developers has begun. Expect to see lawsuits for the appraisers to follow suit, as well as the reatlors who sold the properties. Especially in Florida and the other super bubble states where people now can see how they were ripped off.

Crime in the Mortgage Industry Part 3

Last month we discussed the first two parts of the Borrowers Betrayed investigative series from the Miami Herald. The first part discussed the criminal histories of several Floridian mortgage brokers. The second part delved into the shady history of several loan originators. The example of crime and negligence were very powerful in the first two parts.

The third part of the series is now available. This part involves the probe regarding the lackadaisical (probably even criminally negligent) enforcement of regulators. While the first two parts were devastating, this profile on the regulators is even worse. The people who were in charge to protect the consumers seem to be doing nothing. Hopefully Floridians demand the firing of those responsible as well as a full investigation of every dollar spent and every activity undertaken by the regulators.

And just when the negligence could not seem to get any worse the probe uncovers even more. Let's take a look at what the Miami Herald uncovered during their eight month investigation of 1400 orders issues from the Office of Financial Regulation -

[Complaints to the Office of Financial Regulation,] the state agency created to police the industry -- were routinely ignored, leaving consumers to fend for themselves, according to public records and interviews.

...
While the agency was reaping a windfall during the land boom -- licensing fees drove the OFR's bank balance from $2.7 million in 2000 to $29 million last year -- Florida's mortgage fraud rate was steadily rising.

State law gives the OFR sweeping powers to police the industry. Not only can state agents screen license applicants for prior crimes, but they are entrusted to monitor by investigating brokerages, examining files, levying fines, suspending violators and, ultimately, revoking licenses.

Now onto the results of the investigation -

• One in three brokers the OFR discovered committing fraud -- the most serious offense under state law -- were allowed to keep working in the industry with no monitoring.

• Eighty-one brokers were caught siphoning funds from clients' escrow accounts and gouging customers with excessive fees but were allowed to keep peddling loans.

• While the number of fraud cases soared this decade, regulators opened fewer examinations of brokers' books each year, greatly reducing the threat of state sanctions to fraud mills.

• Suspensions -- another tool to protect consumers -- were used so infrequently that for three years, they weren't imposed at all, records show.

• The most frequent reason brokers were booted out of the industry: bouncing checks for licensing fees to the OFR.

The regulators were more interested in collecting fees rather than monitor then protecting the public. From this article the OFR acted more like a trade organization or union - they were more interested in receiving their fees (read as dues) and protecting their members than looking out for the public. The fines they OFR imposed were minuscule compared to the money stolen. In some cases the fines were less than one percent of the money that mortgage brokers and originators stole from their clients.

The OFR was not doing their job. Now Florida will pay the price for years to come. Aside from all of the stolen money, investors will enter the state with great trepidation. Here are the results of the lax enforcement coupled with the Great Housing Bubble -

Time and again, regulators caught mortgage professionals breaking the law -- fraud, forgery, and stealing from clients -- but allowed them to stay in the business with few consequences during the richest housing boom in state history, The Miami Herald found.

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Industry experts say the new opportunities for easy money, and the sheer numbers of new brokers entering the business, drove a nationwide epidemic of fraud. Florida became the center.

The state had the seventh-highest rate of mortgage fraud in the country in 2003. It ranked 5th in 2004, 3rd in 2005 and 1st in 2006 and 2007.

By last year, one out of every five fraudulent mortgage applications filed in the United States was written in Florida, according the Mortgage Asset Research Institute, a Virginia-based industry analyst.

But instead of more aggressive enforcement, state regulators actually did less. In fact, the single most effective tool they had, license revocations, declined as the fraud rate soared, records show.

One out of every five fraudulent mortgage applications filed in the US was written in Florida. This is not the area where anyone wants to be number one. Hopefully this will prompt Florida to investigate their regulatory industry. Perhaps the most efficient thing for Florida to do would be to just close this entire agency and develop a new one. The current system is definitely, definitely not working.

This third part of the series also features several brokers that regularly took advantage of their clients. Some were already in jail on mortgage fraud charges for months before the regulators took any action. Others have only paid a pittance in fees and are still working. The examples are shocking - the stories of people taken advantage of going to a state agency for help and getting nothing, absolutely nothing in return. Make sure to take a look at the article for all of the appalling details.

Crime in the Mortgage Industry Part 2

There is a three part series in the Miami Herald regarding Borrowers Betrayed by the mortgage industry during the Great Housing Bubble. Our review of the first part about criminals infiltrating the ranks of mortgage brokers can be found here.

The second part of the series focuses on the loan originators. These are the unlicensed counter-parts to the mortgage brokers. In Florida mortgage originators do basically the same job as the brokers but do not need the licenses. Criminals figured this out very quickly, some headed straight to Florida right out of prison.

More than half the mortgage professionals registered in Florida -- 120,563 -- entered the industry this decade without being licensed by the state, The Miami Herald found.

Known as loan originators, they perform the same job as mortgage brokers but aren't bound by the same rules.

The state has the highest level of fraud in the nation but the lawmakers did not want any to put up any impediments. Instead of preventing crime, state lawmakers condoned it. Leaders within the mortgage industry repeatedly asked for stricter regulations and more oversight and yet the state did nothing. It is little surprise that Florida ended up being the number one state for mortgage fraud. Another area where being number one has very, very dire consequences.

Here are some of the Miami Herald shocking findings regarding loan originators for the years 2000-2007 -

• 5,306 people with criminal histories became loan originators -- a rate of nearly two a day. Worse, those include 2,201 who had committed financial crimes, such as fraud, money laundering and grand theft.

• Even large lenders hired loan originators with criminal backgrounds. The Miami Herald found that in at least 30 companies with 50 or more employees, more than one in five originators had a criminal record.

• Nearly two dozen people stripped of their licenses as mortgage brokers were able to sidestep regulators by becoming loan originators. Nine others who were denied licenses because of prior crimes or regulatory violations were able to do the same.

Former and current criminals could make a quick dollar in the unregulated loan originator position. Unlicensed and unregulated but still having readily access to any buyer and/or refinancers personal information.

And it gets worse. The state has laws that they are supposed to monitor the originators through their lenders - but that was not being done. Once again Florida regulators were not doing their jobs and the public was paying the price.

If a lender refuses to act on complaints against a loan originator, the state can discipline the lender, said Terry Straub, recently appointed director of the Office of Financial Regulation's Division of Finance.

''We hold them accountable,'' he said. But The Miami Herald found that in at least nine major cases when originators were arrested for mortgage fraud, no action was taken against their lenders.

While Florida requires lenders to report the names of their loan originators every quarter, the newspaper found that hundreds of companies don't follow the law. In the first half of 2005 -- during the peak of the boom -- 355 didn't file required reports, according to the state's own records.

The regulators were not monitoring the industry. What exactly were they doing? Either they were so short staffed that everything was falling through the cracks or they were just not bothering. It is obvious no one was looking over their shoulder to make sure the work was getting done.

Unfortunately it sounds like the tax payer received very little return on the salaries for the regulators. Giving licenses to criminals who never would have been allowed in the industry before the boom. Not following up on loan originators and the companies they work for. It sounds like it was a free-for-all in Florida during the bubble and the most vulnerable payed the price.

The third part of the series - The Probe is not yet available. When its posted we will review the last part in this devastating series. In the meantime we recommend visiting the Borrowers Betrayed main page to check out the video and slide show to hear and see the victims stories.

Crime in the Mortgage Industry

Wow! The Miami Herald has a jaw-dropping series on how borrowers were betrayed in Florida. They were betrayed by the mortgage brokers, loan originators and the authorities who were supposed to monitor the industry.

This is a not to be missed story - and hopefully other blogs will pick it up too. As of this writing the first two sections have been posted with the third still to come. The first part discusses the mortgage brokers. This post the infiltration of criminals as mortgage brokers and the regulators that let them slip through. The second part on loan originators will be the feature of our next post.

The Miami Herald article features criminals with long rap sheets were becoming licensed brokers. Applicants that in the 1990s would have been quickly shown the door were getting approved with no questions asked. Too much work for the regulators to bother to find out who they were licensing. Numerous examples are given throughout the original article. Lets take a look at some of the shocking info regarding borrowers betrayed: mortgage brokers -

State regulators allowed thousands of ex-convicts to enter a profession that gave them access to the most sensitive and personal financial information: credit cards, bank accounts and Social Security numbers.

Those criminals went on to commit nearly $85 million in mortgage fraud, the newspaper found. They stole their customers' identities. They stole their money. They even stole their homes.

Through licensing ex-convicts Florida readily approved this type of activity. Some of the ex-cons went right from prisoners directly to mortgage broker. The lack of oversight by the regulators was appalling. While it may be negligence, it is still unbelievable and unacceptable. Wonder what is happening throughout the other 49 states. And now lets take a look at what the Miami Herald found -

• From 2000 to 2007, regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen, including fraud, bank robbery, racketeering and extortion.

• More than half the people who wrote mortgages in Florida during that period were not subject to any criminal background check. Despite repeated pleas from industry leaders to screen them, Florida regulators have refused.

• Confronted with a growing epidemic of mortgage fraud -- Florida now has the highest rate in the nation -- the number of license revocations declined over the last five years, leaving borrowers at the mercy of predatory brokers.

• During the peak of the housing boom, the Office of Financial Regulation ignored a state law enacted in 2006 that compelled it to perform nationwide criminal background checks on applicants. That failure allowed people convicted in other states -- and in federal court -- to peddle loans in Florida without any scrutiny.

• Regulators allowed at least 20 brokers to keep their licenses even after committing the one crime that seemed sure to get them banned from the industry: mortgage fraud.

The ones who were supposed to enforce the laws were readily breaking them. This is evident with the 2006 requirement to conduct national background checks and the lack of enforcement. No one was enforcing the regulators, and the regulators were obviously not doing their jobs. The regulators were supposed to be screening but instead they become the problem. Here's more shocking on the state regulators -

Through it all, state regulators were the only line of defense, empowered to keep criminals out of the mortgage industry and revoke licenses to protect consumers from fraud.

...
Sometimes state officials themselves broke the law.

In 2006, the year license applications and home-sale prices peaked, the Florida Legislature changed the law to close a significant gap.

The new provision required state officials to send would-be brokers' fingerprints to the FBI to screen for convictions in other states and in federal court, where serious financial crimes and drug-trafficking cases are often prosecuted.

But state officials didn't follow the law. Last February, more than a year after the statute was changed, Greg Oaks, chief of the OFR's Bureau of Regulatory Review, told The Miami Herald that running the FBI checks using the old-fashioned hard-copy fingerprint cards took too long.

Take too long? That is the excuse for not following the law? And these regulators still have their jobs? First they allowed criminals that would be normally screened out. Then the regulators had complete disregard about who became licensed as long as it did not take "too long". Some of these criminals applied for their positions upon being released. One day prisoner, the next day mortgage brokers - and not just metaphorically! These were not Frank Abagnale Jr. (Catch me if you Can) reformed criminals, many went into the industry and remained criminals with no real oversight.

Very scary news. We wonder what the standards and practices are in New Jersey and the rest of the country. Are they all this bad?

Another Problem - Equity Theft

The New York Times has an article regarding the increasing amount of equity theft that has been occurring. While it seems equity theft was at its height during the Great Housing Bubble with easy access to equity and requiring very little proof and paperwork.

The theft became so lucrative that it has not been abandoned - it just adapted to fit the current rules. First lets take a look at the crime -

A home equity line of credit is an ideal vehicle for criminals, according to Steve Bartlett, chief executive of the Financial Services Roundtable, a consortium of banking-related companies that offers financial support to the Identity Theft Assistance Center.

Mr. Bartlett said such credit lines are typically “big pools of money,” and if consumers do not regularly check their accounts, that pool can drain quickly.

The Federal Bureau of Investigation’s annual mortgage fraud report, which was released in April, cited home equity credit fraud as an “emerging scheme” in the slumping real estate and mortgage market.

Those with poor credit have been preyed upon by identity thieves in recent years, because thieves who pretend to be such owners could easily obtain mortgages from subprime lenders with little documentation.

....
Home equity lines are a favorite option because they are almost as easy to open as a credit card account, as long as a criminal has the proper financial information.

Then lets take a look at New Jersey's rates -

The F.B.I. does not break out various types of mortgage fraud by state, but in general, mortgage fraud is a bigger problem in New York, New Jersey and Connecticut than in many other states. New York is among the 10 states with the highest rate of mortgage fraud, while New Jersey and Connecticut rank in the top 20.

Some methods recommended are tracking of your credit reports - either by yourself or with one of the firms that specialize in these services - like Identity Theft Assistance Center.

Perhaps this is one area that people should not have such easy access to anyways. Short term needs can usually be taken care of through a credit card - does equity need to be drained with such immediacy?

The ease of HELOCing a house was too easy during the bubble - no docs needed for 100% or more of equity withdrawal. This was just looking for trouble. Since most HELOCs are in the tens of thousands to hundreds of thousands why not make the borrower jump through a few hoops first - actual appraisals not computer generated and requiring financial documentation that the loans can actually be paid back. These loans should be based on more than just a FICO score.

Show Me The Money

New issues arising at the Wachovia Securities. Here is an article from CNN Money about Regulators raiding Wachovia Securities. And the apparent problems in the "Show Me" State. Let's take a gander -

Securities regulators from several U.S. states on Thursday raided the St. Louis headquarters of Wachovia Securities, seeking documents and records on the company's sales practices.

The move is part of a broad investigation into questionable practices involving auction rate securities, Missouri officials said.

...
"Hundreds of Missouri investors have called my office because of inability to access their money," Carnahan said in a statement. She added that she aims to take actions to "to make these investors whole."

The action, which also sought information on internal evaluations and marketing strategies, comes after more than 70 formal complaints were filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments.

This does not sound like good news. Even it turns out to be nothing in the wake of bank runs and scares this will not instill public confidence.

But the biggest thing that stands out is that Wachovia is one of the companies "tossed to the dogs." Was Wachovia and Washington Mutual left off the restricted short sale list for a reason ? It is starting to look that way.

No More Prepayment Penalties

One lure to get lenders of subprime mortgages was having a clause for a pre-payment penalty. Many consumers of these mortgages do not comprehend the meaning of the penalty. Some felt like they were not moving so the penalty was not of concern to them. Others probably never paid attention to it in the first place. Overall, consumers really did not understand the full terms of prepayment.

As an aside - how many Option ARM customers really understand their loans either? They probably just wanted to hear an affordable monthly payment number. During the bubble people were often told by realtors and mortgage brokers to focus on the monthly payment and not worry about the big numbers. Can you afford $XXX dollars? Yes, than this is the loan for you. Don't work about the other details. Another Great Housing Bubble attitude that has us in trouble today.

Today we find that the Government is (supposedly) working to bar these penalties. The article is brought to us from Bloomberg. Let's take a look

The Federal Reserve, in a bid to end abusive lending practices, will ban penalties on some high-cost mortgages that make it harder for people to refinance, a person familiar with the decision said.

The prohibition on prepayment penalties, part of a broader Fed response to the collapse of the subprime mortgage market, targets high-cost loans with interest rates that reset in the first four years, the person said. Rules also would limit charges when borrowers seek to pay off mortgages in the first two years on other types of high-priced loans, the person said.

The Federal Reserve Board of Governors will vote July 14 on a series of rules to strengthen protections for borrowers taking out subprime home loans. Lenders use prepayment penalties to discourage borrowers from refinancing their loans and can trap borrowers in loans they can't afford, consumer advocates said.

Some points to make so far - this is a proposal. What actually passes can still change. And what actually gets implemented can morph even more. Also, the article does not state when the proposal would go into effect, what the penalties for lenders who violated the new terms would be, and if the plan would be retroactive to alleviate some of the current problems. But at least they have a proposal, right? Let's read on -

...
Dodd had criticized the Fed for not going far enough in its proposal in addressing prepayment penalties when the central bank proposed its rules.

``It raises serious questions as to whether the Federal Reserve is the appropriate institution to house consumer- protection functions,'' Dodd, a Connecticut Democrat, said in a December statement.

...
In May, the Fed proposed rules to prevent ``unfair and deceptive'' credit-card lending by limiting fees and interest- rate increases. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, had prodded the agency to use its authority under the Federal Trade Commission Act to ban ``unfair or deceptive acts or practices.''

Reading the article it seems that there are many proposals that get publicity but never really get implemented. It seems like a Fed bait and switch program. Announce great plans to help consumers, get headlines, then just let the plans fade away. People really do not understand the full impact of having the prepayment fees. And the lenders have the discretion to waive the fees, Wachovia is. Mandatory waiving of fees is basically taking money out of the lenders pockets. So far most of the changes have been voluntary. Will this really work? We will have to wait and see.

"Operation Malicious Mortgage"

"Operation Malicious Mortgage" seems to be the phrase of the day. Headlines throughout the country boasting those arrested for various mortgage fraud schemes. Between the headlines of the Bear Sterns traders being arrested followed with a cross country sweep of mortgage brokers, real estate appraisers, bankers, lenders and realtors. Today on some level there feels like some justice done own the mortgage meltdown.

Here are some key parts of "Operation Malicious Mortgage" as reported by the Los Angeles Times.

The FBI estimated the losses to homeowners and other borrowers who were victims of mortgage fraud at more than $1 billion. That is a small fraction of the near $1 trillion in losses worldwide that have been chalked up to the U.S. mortgage fiasco, and federal officials said the number of cases under investigation continues to grow rapidly.

...
Prosecutors said their crackdown resulted in 60 arrests on Wednesday alone, including in Chicago, Miami and Houston. Mueller said the FBI had seized more than $60 million in assets as part of the sweep, including luxury cars, speedboats and a helicopter.

..
The first category ["fraud for profit"] accounts for about 80% of all mortgage fraud and involves such schemes as skimming equity or borrowing against falsely inflated property values -- scams often carried out by several players working in concert. Fraud-for-housing schemes are perpetrated solely by borrowers who acquire and maintain real estate under false pretenses.

Waiting until well into the aftermath to punish those accountable for crimes committed years ago in some ways seems too little too late. These task forces should have been well underway during the Great Housing Bubble. Perhaps if the high profile mortgage scam arrests were taking place in 2003 the bubble would not inflated to the levels and the current devastation would not be so severe. Now we will just have to wait and see if any big fishes are caught.