Tuesday, April 7th, 2009 at 8:35 PM
Mortgage Fraud Bust
From Kelly Bennett, our hero!
Tuesday, April 7, 2009 | Federal prosecutors on Tuesday announced unprecedented charges against individuals involved in an alleged mortgage fraud ring involving 220 properties in San Diego County, with total purchase prices topping $100 million.
The 24 defendants were all charged with participating in a “corrupt enterprise” under a federal law created by the Racketeer Influenced and Corrupt Organizations (RICO) Act, which allows for charging multiple defendants with extended penalties for their participation in an ongoing crime ring.
This was the first known time in the country that defendants in an alleged mortgage fraud scheme have been charged in a RICO conspiracy, U.S. Attorney Karen Hewitt said today. This was the largest mortgage fraud uncovered to date in San Diego, Hewitt said.
http://www.voiceofsandiego.org/articles/2009/04/07/housing/843rico040709.txt
Stanley Gentry, a 49-year-old licensed local real estate broker, allegedly allowed the organization to use his broker’s license to facilitate the purchases, in exchange for $10,000 a month and a cut of the commissions and fees on each deal.
from News 6:
“The individuals charged in this indictment have one thing in common: greed,” said FBI Special Agent in Charge Keith Slotter. “They represent precisely those who have undermined our country’s financial system by perpetuating such egregious schemes,” he said. “The extent to which this group of people went to defraud lenders should also serve as a warning to the public. We urge people to come forward with information of suspicious activities they may encounter when engaged in real estate and mortgage transactions.”
Posted on Tuesday, April 7th, 2009 at 8:35 PM in Fraud | 51 Comments » | 
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Don’t know if you looked at the indictment, Jim, but one of the houses they were involved in was one we made an offer on in La Mesa. The last selling price was $600k and it was on the market for $300k. We offered $225k, were rejected. Lo and behold, the bank took $225k about a month ago (on the market for nearly a year and a half). You didn’t inspect that one with me, but it was clear as day that the $600k price couldn’t have been real, even in the hottest days of the market. Someone might want to point out to Messrs. Geithner, et. al, that buying up the paper on properties like this are a bigger part of the banks’ problems than they would like to admit.
Your comments about Bressi Ranch are apt here: if 25 properties in and around La Mesa hadn’t been bought through this fraudulent scheme, how many of the more legit sales would have been priced differently. How much of the “bubble” was sustained and magnified by a sprinkling of organized crime in the neighborhood, pushing up comps and appraisals? Sad.
lgs | April 7th, 2009 at 8:47 pmThanks lgs for the update, and you’re right, how many other unsuspecting neighbors used these comps to ride their own housing ATM machine to the sky?
You had to bring up BR, I happened to check on them today. Currently there are 26 properties in Bressi that are either in foreclosure, or bank-owned already. I’m not sure how many are in there total, but it can’t be more than 200-300.
Jim the Realtor | April 7th, 2009 at 9:09 pmYou know this is just the tip of the fraud iceberg. Those Bressi statistics are staggering.
The Blur | April 7th, 2009 at 9:20 pmI take it at this rate, it’ll be a couple of years before they indict the run-of-the-mill 10 or 20 straw buyer rings. But progress is progress!
sdbri | April 7th, 2009 at 9:23 pmne of the houses they were involved in was one we made an offer on in La Mesa
Small county, eh?
tj and the bear | April 7th, 2009 at 9:26 pmScratch those BR stats.
According to the tax rolls there are 498 residential homes in BR.
But there were also another eight foreclosures not noted on the previous list.
34/498 = 6.8% doesn’t seem like much, but here’s the staggering part.
TEN of the 34 are the models purchased by the investor group of attorneys – AND THEY USED 20% DOWN PAYMENTS ON ALL OF THEM, AND ARE STILL WALKING AWAY!
No attempt to sell or short-sell, just going down quietly.
Jim the Realtor | April 7th, 2009 at 9:34 pmtj,
Wasn’t it you who asked about how far I go?
lgs is a great example, because we’ve been in the hunt for months, and it’s worked pretty well. Here’s why it’s working:
1. He knows the comps.
I am very reluctant to be sole verifier of value in an area that I don’t know, don’t follow, and have seen none of the comps.
2. He drives by most before I come, and gets in a few.
Santee is a half-day trip for me (at least), which I don’t mind, and I stay enthusiastic because lgs won’t ask me to come unless he’s on to a good one.
3. He adds value.
He’s a great contributor on the blog, he sends me other clients, and I value his input and friendship. He even talked to the NY Times!
The arrangement works out great, and I couldn’t ask for more – I don’t think I could expect this much from everybody. Bottom line: I know he has respect for my time, and that’s all I ask.
Jim the Realtor | April 7th, 2009 at 9:47 pmThanks for the answer, albeit late as it was.
tj and the bear | April 7th, 2009 at 9:50 pmYes, progress is progress. But the real crime continues as we speak. I’ll start with term limits.
3clicks from da Beach | April 7th, 2009 at 10:27 pmWhen are they going to bust She-Who-Shall-Not-Be-Named?
greenlander | April 7th, 2009 at 11:27 pmSo the group purchased over 220 properties at inflated prices and funneled cash out of the sale with straw buyers. Does this mean the fraud enabled comps are still official? The people that get/got screwed by these people (other than the banks who are enablers) are the new buyers that purchased properties at inflated prices using fraud induced “comps”.
This makes me wonder. The group highlighted was obviously a fraud ring. But how many “comps” were set by flippers that used illegal means to purchase multiple properties and have now defaulted on the mortgages. Casey Serin anyone?
shadash | April 7th, 2009 at 11:58 pmI just got done watching ABC News Nightline who had a 6 to 7 minute segment on this San Diego mortgage fraud case. Hopefully they continue to investigate these cases and prosecute those involved such as she-who-shall-not-be-named!
Bryce Lucore | April 8th, 2009 at 12:04 amJim,
This is the first time I have commented/messaged onto your blog site, although I have been reading it for quite some time. I really enjoy reading your perspective on the market. I wanted to pass along the link at the bottom to an interview from CNBC (13:09) that discusses the financial markets and the housing industry. Its probably a good video to share with your audience to get some updated information on the financial markets which, among other things, affect the real estate market. The interview is with Meredith Whitney, a former analyst at Oppenheimer, now has her own firm, renowned for calling out the problems with banks’ toxic assets before the issue became widespread.
The discussion on housing prices starts on minute 5:30, where she discussed that the real estate housing market still needs to drop another 30%.
I am sure you already know but the other shoe to drop in the real estate market is with regard to the commercial loans that will be coming due later this year (approximately $250 billion for 2009, $275 billion for 2010 and reaching $300 billion in 2011). If the retail center, the apartment complex, office building or industrial complex cannot refinance their loans (at the moment there does not appear to be a Commercial Mortgage Backed Securities market) then all hell will break loose. An Irvine based developer just walked away from a portfolio of apartments that are now being shopped to the tune of $500 milion. The receiver handling this sale will be listing other assets from the same developer in the coming months. This is something worth tracking as it will affect the lending that banks may or may not be able to make.
http://www.cnbc.com/id/15840232?play=1&video=1084876450
Wesley | April 8th, 2009 at 1:02 amJim, I enjoy reading your blogs. Thanks for the updates!
Chris Dingman | April 8th, 2009 at 2:42 am“…said FBI Special Agent in Charge Keith Slotter. … “The extent to which this group of people went to defraud lenders should also serve as a warning to the public….”
Remember the words of W C Fields: “You can’t cheat an honest man!”
Downturn | April 8th, 2009 at 4:26 am“We urge people to come forward with information..” I’m sure the FBI man was serious when he said that.
Fraud and conspiracy to commit fraud is all around us. I would guess every 2nd or 3rd house sold in the last 5 years had some kind of fraud associated with it. The fraud is everywhere. The FBI can walk into any real estate office, exam the docs for homes sold, and find some degree of fraud-guaranteed.
What we have here is are a few “high profile arrests” that the govt. hopes will make people believe they are trying to do something.
I want all the “we want small govt. people” to know that this is what you get with “small govt.”
Consultant | April 8th, 2009 at 6:33 amRe BR, a 20% loss on an investment through a short sale/walk away would be a better performance than most of my stock-based investments last year. Just Sayin’
Former RB Resident | April 8th, 2009 at 6:51 amWesley–The commercial banks and conduit lenders do not want commercial properties back. I have a feeling that, if the owners still want to keep the property, they are going to simply extend their current loan terms and or modify accordingly??? We will wait and see–Apartments, at least locally, should do fine since rents are propjected to stay at least as strong. However, the returns on some of the Retail and Office properties have, or will, diminsh, but keep in mind that most of the original purchases were 30-40% down as opposed to houses. If modified, I would think most owners would hold on if they are not shelling out alot of money each month–just depends on cash-flow. Some of the single-tenant NNN’s, that we avoided like the plague, have to be in trouble–They were welling at very low caps with high risk–you stand the chance of being 100% vacant!!!
Local Boy | April 8th, 2009 at 7:37 amBanks are also more likely to foreclose on investment properties than in owner-occupied ones, and all of the loan modification programs only apply to owner-occupied ones. So, that attorney investor group probably saw the writing on the wall and just said screw it.
Geotpf | April 8th, 2009 at 7:58 am“where she discussed that the real estate housing market still needs to drop another 30%”
I didn’t take that away–I did however take away that she feels that it is NOT over. She said last year she predictied 40%, now she is predicting 50%–First, let’s keep in mind that Real estate markets are local, and she seems to be talking national. When all is said and done, if a 50% drop is the final number for US housing market, with that in mind some markets may end-up dropping 10% (DFW?), some may drop 75% (PHX, LV, MIA??) If San Diego drops say 50%, softer sub-markets such as O-Side, Esco and Chula may end-up dropping drop 70%, while stronger coastal areas may only drop 25%-30%–who knows, but again, RE boils down to a local market, each with its local supply and demand factors.
Local Boy | April 8th, 2009 at 8:53 amWhere were they 4 years ago when fraud was running amuck?
I think some places in the phx area are already off 70%.
Buy when everyone else is scared to.
arizonadude | April 8th, 2009 at 9:07 amFrom 2004
Bubbahotep | April 8th, 2009 at 9:40 amFBI warns of mortgage fraud ‘epidemic’
http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/
Thanks Bubba, from September, 2004:
“It has the potential to be an epidemic,” said Swecker, who heads the Criminal Division at FBI headquarters in Washington. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.
The worst of the fraud was 2006 and early 2007, so they had two-plus years to handle it. How much did they stop? Any? I don’t remember hearing about any busts in the 2004-2006 era.
Jim the Realtor | April 8th, 2009 at 9:51 amI live in Bressi Ranch. I bought my home in 2005 for $800K. My neighbor few doors down just sold for $630K (bank-owned). I am about to cry!
Susan | April 8th, 2009 at 10:37 am“Re BR, a 20% loss on an investment through a short sale/walk away would be a better performance than most of my stock-based investments last year. Just Sayin’”
They actually lost 100% of their equity…
MIj the Realtor | April 8th, 2009 at 11:40 amSusan,
What sucks is this in just the beginning. The next round of foreclosures is going to be at even lower prices. And then after that people that can afford their current mortgage will bail because it makes more sense NOT to pay it off and just take the free rent and BK.
shadash | April 8th, 2009 at 12:37 pm@Consultant
I want all the “we want small govt. people” to know that this is what you get with “small govt.”
How does that follow?? When you have large government trying to do everything for everybody, it is impossible to deal with all the problems that may arise. Simple systems are easier to audit, track and control. “Small Government People” only want enforcement of the laws that are in place and to stop trying to aid everyone who claims they have a problem… run the country, not everyone’s life. Fraud is fraud, theft is theft and it has been illegal in one form or another since before biblical times.
ucodegen | April 8th, 2009 at 12:46 pm–
On a more “on-topic” statement, I wonder if there is going to be a problem of “statute of limitations” on these cases if law enforcement continues to move glacially.
shadash…
GameAgent | April 8th, 2009 at 1:25 pmYou sure know how to rub salt in a wound.
So many crocodile tears over mortgage fraud. Any number of us have been on the “there’s tons of fraud” bandwagon for years and it did squat. Now after the horse has run out of the barn, the FBI arrives to examine the poop left behind. Nice timing.
Dwip | April 8th, 2009 at 1:56 pmGameAgent,
It’s called reality. The sooner people face it the better off they’ll be.
shadash | April 8th, 2009 at 2:09 pm70% is for amateurs. I’ve seen greater than 80% in Riverside on multiple occassions. Granted, garbage properties in bad parts of town, but still-80% off!
There are many decent ones for 60% or more off, though.
Geotpf | April 8th, 2009 at 2:17 pmLeverage is fun on the way up. Kinda sucks on the way down, ask my uncle who lost about $5 million over the last year. Putting heloc money into the stock market wasn’t such a good idea as it turned out. Cautioning greedy people is an exercise in futility, I may as well have been lecturing a prostitute on the virtues of abstinence.
If they really wanted to prosecute they could start with the no-docs; or convert part of the DEA into a fraud enforcement agency.
Genius | April 8th, 2009 at 2:23 pmDon’t fell sorry for the investor group that owned the models in BR. They continued to rent out the houses while not pay the mortgages. The bank holding the lein on 11 of them foreclosed a few weeks ago. So now all of the tenants are facing possible eviction depending on what the bank decides to do with the properties.
There is also all of the half finished homes and empty lots by Barrat that Bank of America foreclosed on last December. At lease BofA decided to finish the outside of the homes. Many of these stood there for months with open windows and doors. Some with just tar paper on the outside. Can’t wait to see what unsuspecting homeowner buys one of those.
tbc | April 8th, 2009 at 4:32 pmShadash,
I see the fire is still lit. Right on!
3clicks from da Beach | April 8th, 2009 at 5:47 pmDwip wrote:
So many crocodile tears over mortgage fraud. Any number of us have been on the “there’s tons of fraud” bandwagon for years and it did squat. Now after the horse has run out of the barn, the FBI arrives to examine the poop left behind. Nice timing.
——————–
Absolutely correct! Many of us have been calling the FBI and other agencies trying to warn them about possibly fraudulent transactions. From my experience, they couldn’t have acted more disinterested.
Also, I had asked them about 9-12 months ago about the potential for fraud with short sales, where the “owner” sells it back to himself through a third party, using a friend/relative who’s a Realtor (so they can hold all the legitimate offers back and only submit their associate’s offer to the lender). The FBI agent I spoke with did some research into whether or not they were looking into it and called me back to say that that was not an area they were going to persue at the time because they weren’t aware of any large-scale crimes being committed.
Essentially, the FBI (and other regulatory agencies) are always going to be a step behind the fraudsters because they refuse to get out in front of the problems.
They could just read the blogs, and they’d have better knowledge than whatever it is they are doing now.
CA renter | April 8th, 2009 at 7:00 pmGiven how revenue starved the government is, you think they’d compare liar loan docs to tax returns and then prosecute those that misstated their income. If the income on the loan docs was correct, they’re guilty of tax evasion; OTOH, if the income is a lie they’re guilty of mortgage fraud. Couldn’t be a simpler case.
tj and the bear | April 8th, 2009 at 7:47 pmJim The Realtor – Hey, have you seen any banks just abandon foreclosures in San Diego? There was a nytimes.com article a week ago about this. The homeowner was evicted, the house trashed, then the bank just walked away leaving the homeowner with the bill to demolish the hopelessly trashed house.
Michael N. | April 8th, 2009 at 9:03 pmLove your blog. As a 35-year real estate veteran I saw this disaster coming as well as a lot of suspected fraud early on. The magnitude of fraud is overwhelming – just check out http://www.mortgagefraudblog.com for a little taste of the arrests and indictments underway nationwide. Billions$$$ on a weekly basis being discovered. According to Geithner, PIMCO and BLACKROCK are going to bundle up these toxic assets and pass them off to investors as high yield bond funds. Where will it ever end????
Diane | April 8th, 2009 at 9:13 pmDon’t worry about BR; It won’t take long for the Carlsbad City Council to subsidize 36 million dollar homes homes in Bressi “assisted living” ranch…
Timeye | April 8th, 2009 at 10:21 pmOn the Calculated Risk blogspot, there was a link to this PBS video with William Black, former S&L regulator, who said that almost all fraud agents were pulled off fraud to cover terriorism. Hardly any ever replaced–still! Hard to cover the issue, if no one’s there to do it.
http://www.pbs.org/moyers/journal/04032009/watch.html
shoppingaround | April 9th, 2009 at 1:03 amWhat about the builders (who shall remain nameless) who use bogus “3rd-party” appraisers who write up nonsense appraisals that include concessions that do not exist? How do they fit in to this? But if it happens to you, you better not call them on it or else they’ll accuse you of extortion! Superiology, indeed!
Watching | April 9th, 2009 at 8:12 am@Watching,
You mean DAPS? Ha, they are alive and well, thanks to the legislature AND the wonderful system that allows lobbyist to work and game the system. Just take a look at opensecrets dot org and you will see that Home Builders have given lots of money to the political system and that include NAR who make the top 5. Term limits for all.
3clicks from da Beach | April 9th, 2009 at 8:43 amI bought a house in Las Vegas for 83.5% off its 2005 price, and the fact that it has no equity still keeps me up at night! (But it is cash-flowing nicely!)
IRE | April 9th, 2009 at 12:06 pmIRE–If you are in for the long-haul, I wouldn’t sweat it. Hold it for cash-flow and stay positioned. We have been buying rentals as well–the last one I bought was priced at 6.5 times gross. I don’t expect it to actually be worth more than we paid for years to come. If I choose to never put a loan against it it is providing a 12% net cash-on-cash return. The way I look at it, I re-coup my money in roughly 7 years and whatever it is worth, it is worth.
Local Boy | April 9th, 2009 at 12:28 pm“The way I look at it, I re-coup my money in roughly 7 years and whatever it is worth, it is worth.”
What kind of financial logic is that? You can put the down payment it would take to purchase a decent rental property in a back CD at 3% for 7 years and have something rather than nothing. And you don’t have to babysit your investment.
You’re just assuming that house prices will eventually go back up again. This is not a bet I’d take in the current economy. Staying liquid is the way to go to take advantage of the HUGE price drops right around the corner.
shadash | April 9th, 2009 at 1:31 pmShadash–What good is liquidity if you are too scared to invest it? If you stay liquid your net worth WILL continue to dillute. It is called Inflation–The Fed WILL conitune to print money, and by simple definition, each time that printing press turns, your money is worth a little less–I don’t mind babysitting properties-I have done that for the last 25 years–I find it kind of fun!
Local Boy | April 9th, 2009 at 1:52 pmOne thing I don’t have to worry about is that I have a house in a nice place we can stay for a LONG time that we can afford with no sweat. Now we can focus on living and life family life progression in this mad world =P
3clicks from da Beach | April 9th, 2009 at 1:54 pmShaddash–I ran your numbers and mine–Here are the results after 7 years (no tax benefits considered) $141,000 (I bought cash) compounded at 3% in a CD for 7 years is $173,412.
Local Boy | April 9th, 2009 at 2:11 pmNET Retnal Income (considering flat rents) for 7 years is $120,624. I would be willing to bet that house is worth more than $52,788 in 2016–Don’t forget, I can still invest and compound the rental income as it comes in.
1. I didn’t think you were investing all cash
2. Property taxes
3. Repair and upkeep
4. You have to be a landlord.
5. God forbid you have to evict someone and they get 3-4 months of free rent out of you.
Ps. I never said buying rental properties is a bad thing. Just be realistic when you describe it against other investments. (even crappy ones like CD’s)
shadash | April 9th, 2009 at 3:08 pmShadash, I don’t think the low end can fall much more. Once you get into cash-flowing territory, it’s just a question of how diligent you want to be with finding the best return. I’ve already noticed this in Virginia where most of the subprime stuff has already been flushed through and there aren’t many low-end foreclosures anymore. How long it will take for appreciation to start again is mainly dependent on inflation. First-time buyers are typically going to be interested in better properties that can now be had at a low price, so the truly low end will be investor-dominated for years to come.
IRE | April 9th, 2009 at 3:14 pmWell it seems like everyone is jumping on board the appreciation train again. I wish you all the best. But I think what’s going on right now is a dead cat bounce. Have companies stopped laying off employees? Has California cut back on taxing it’s residents? Are the people that caused all the market chaos in jail or are they still receiving a paycheck just waiting for the next chance they can get to screw people over?
shadash | April 9th, 2009 at 4:00 pm