Mortgage Fraud Case Studies

We’re lucky to be living far, far away from the mortgage fraud happening in other parts of the United States, right?  Not so fast. In part two of this three part series, we’ll take a look at some mortgage fraud cases in Washington State.

Case Study: Century Mortgage; How to succeed in a down market and earn six figures your first year with no experience.
This case involved a mortgage broker, loan originators, a Realtor, an escrow closer, and an appraiser.  Homes in a Spokane neighborhood had been on the market for many months with no sale.  The mortgage broker talked the Realtor into taking the homes off the market and then relisting them with an increased price.  Straw buyers were found; people who could not otherwise qualify to purchase a home but wanted to become homeowners.  The terms were as follows: 80% first mortgage loan and a 20% second mortgage carried back by the seller.  The mortgage lender was very happy with the 80% LTV loan. At closing the seller’s second mortgage was discounted to $1.00 and paid off.  So the lender believes they are making an 80% LTV loan when they are really making a 100% LTV loan.  Of course the home must appraise for the higher amount so the appraiser made some extra cash off of each on of these deals as did the Realtor and escrow closer, for knowingly hiding the facts from the lender.  The Century Mortgage scheme (no relation to defunct subprime lender New Century) was played out in many neighborhoods in the Spokane area.  The mortgage broker, loan originatorsRealtor, closer, and appraiser all lost their license, and banned from the industry for life or for a specified number of years, and some were sentenced to do jail time in the federal pen.  What concerns me about this case is that this could likely happen again because this scheme needs one important element: desperate sellers.

Case Study: Property Flipping; How to get rich quick and then go directly to jail
Ekram Almussa and Josh Kebede bought homes in Seattle and on the Eastside, and sold the homes in a matter of days and sometimes hours later, for thousands more. Here’s an example of how it went down: They would purchase a home for, say, $315,000 and hire an appraiser, the same one each time who magically finds that the home is worth $415,000.  The homes are sold to straw borrowers whose names show on title and on the new mortgage documents, but agree to make payments to Almussa and Kebede, who in return promise to pay the mortgage.  All the loans were owner occupied, but none of the properties were occupied by the owner of record. All the loans were sent to the same underwriter at the now defunct subprime lender New Century, Almussa and Kebede’s lender of choice each time. Almussa and Kebede pocket the $100K, plus the mortgage payments that went into their pocket.  Both Almussa and Kebede were arrested and pleaded guilty to federal fraud charges. John Gonzalez, who helped verify employment for the straw buyers, decided to testify against them.

Case Study: Church is where the sinners are
Liza Bautista was a mortgage broker with a strong client base inside her Christian church in Tukwila. After successfully closing several prime loans for folk with A-paper credit, she targeted consumers who were turned down by lenders in 2005 and 2006 (Hello? Who couldn’t get a mortgage in ’05 and ’06?) and created two sets of loan [photopress:liza_1.jpg,thumb,alignleft]documents.  She submitted the credit history and identity of her prime, A paper clients to the lender funding the loan.  When it was time to sign papers, she forged her A paper client’s names on the loan documents and sent everything in for funding.  For the poor credit clients, she hand carried a second set of documents to be signed and then made a special offer to personally hand carry their mortgage payment to the lender each month.  (Note to consumers, don’t ever agree to this.) Of course, the payments never made it to the bank. Liza kept the money and subsequently, the lender started to foreclose on the A-paper owners, whose name appeared on title as the owners of record. When the A-paper clients were finally contacted by the lender and claimed they did not own said house, Liza started running out of places to hide.  The poor credit clients who were thrilled to be homeowners were obviously upset that their name were not on the title to the home and they were evicted after foreclosure.  Liza has lost her mortgage broker’s license. Rumor has it that she is still originating loans under a different name. From a quick search of the King County Court records (search by her name) you can see several court actions indicating the A-paper former clients have sued and won. The escrow company that Liza used had been operating without a license at the time.

As you can see, the most egregious cases of mortgage fraud are more than just a single person acting alone. There is usually a charismatic ringleader who recruits others. Sometimes the ringleader will target new or financially struggling loan originators, Realtors, escrow companies, and appraisers, who are all offered additional cash for participating.

The question that remains is how many defaults/foreclosures are the result of large-scale, organized mortgage fraud, and how many are the result of much smaller scale fraud that likely won’t see prosecution.  There never has been nor will there ever be enough government resources to regulate every single transaction written by every single industry person out there.  It is up to us to help point investigators in the right direction. 

Consumers as well as those of us in the industry can report mortgage fraud tips by following this link.

On CalculatedRisk, I recently read a blog post about securities rating agency Fitch (link opens the 11-page PDF report and requires site registration, but it’s free) opening up 45 loan files inside one of the failed CDOs, and guess what they found? Mortgage fraud galore and very shoddy underwriting which I will outline in Part 3.

Part 1 Mortgage Fraud Basics
Part 2 Case Studies
Part 3 Recent Mortgage Fraud Developments, and Future Outlook