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 originators, Realtor, 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
What a bunch of nasty people to lie, cheat and steal like that.
Very interesting examples of how some of the mortage fraud was accomplished. I am glad that these predators have been found out and hope that many more are exposed and pay the consequences.
Hi Deborah,
There are so many varying degrees of “lie, cheat, and steal” that I decided to just focus on the big cases for this series of blog articles.
There are also many subjective interpretations of “lie cheat, and steal.” For example, I have heard people in this industry talk about “helping” a homebuyer by omitting facts that the lender would have wanted to know in order to make a fair, informed credit decision such as correct occupancy intention, accurate qualifying income, and so forth.
Justifications run all up and down the line such as, “well, if the lender is going to put loan products out there for us to use like stated income, then that’s the lender’s fault.” Or, “it’s the investor’s fault for enticing us to move borrowers into stated income loans because they were offering us so much more money.”
We have inherited 7 to 9 years worth of loan originators who don’t know how to fully qualify borrowers using sane underwriting guidelines and have (in some cases) cut their teeth in a “lie cheat and steal” corporate environment that rewarded people for pushing the limits.
This is where the future, yet-to-be-fully-realized mortgage fraud is going to surface.
Until then we’re left with examining these cases that often contain a charismatic ringleader who believed himself/herself invincible.
Hi Jillayne,
Yes, I am sure it was a slippery slope.
Because of the tone corporate atmosphere there may be some LO’s who may have been effected in ways they might not have if the leadership had been less about “pushing the limits” and more about providing their clients with the best products for them. Coroporate and managerial leadership is important.
If everyone in an office is “pushing the limits” and a new person is without the training to know the difference between honest practices and less-than-honest ones, that person may not be able to make the best judgements in their own business. Although at some point , their past experiences, upbringing and sense of right and wrong should cause them to make a change in their business or to another company once they begin to realize what they are doing.
Wow, what a great post.
I would say that Charles P. Kindleberger predicted this quite well in “Manias, Panics, and Crashes”. A little haunting that these words were written three decades ago:
“The supply of corruption increases in a pro-cyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprout from the woodwork like mushrooms in a soggy forest.”
Hi Deborah,
There’s an article in this month’s issue of a magazine I subscribe to called Ethix, in which they interviewed a local mortgage bank’s CEO and he describes how the company leaders made a calculated decision NOT to enter into the subprime arena but to stay with FHA/VA products instead. Let me see if I can find the link. Here it is; Homestreet Bank:
http://www.ethix.org/article.php3?id=396
At the end of the article, the question remains if this decision would work fine for a privately-held company, but what about a publicly traded corporation which is under pressure to produce profit growth for its shareholders?
Hi fooman,
Thanks for stopping by RCG. Question: Based the Kindleberger prediction, do you believe that we’ll continue to see an INCREASE in mortgage fraud, or just exposure of past mortgage fraud?
“In the absence of more credit, the fraud sprout from the woodwork like mushrooms in a soggy forest.
Liza B’s disgusting fraud was the very reason that I started blogging almost a year ago. I was so upset that this could possibly happen…involving so many people who are suppose to be “ethical professionals” that just went along with this.
When will she get a nice stripped or bright orange outfit? Why isn’t she behind bars?
Sometimes what happens is that a local case ends up being referred to the state attorney general OR to the FBI if the financial crime(s) crossed state lines. She was told to cease and desist originating loans as of Sept 2006.
http://www.dfi.wa.gov/CS%20Orders/C-06-005-06-TD01.pdf
Interestingly, the King County Prosecutor’s office recently posted a job listing for an assistant in the white collar crimes division, focusing specifically on mortgage fraud.
Hi Jillayne,
Good article in “Ethix” on HomeStreet Bank. I particularly liked:
“As a privately owned company that has been in business for 86 years now, we always try to take a long-term perspective. This means making business decisions that are consistent with our longstanding corporate values.
Interestingly, in that article it looks like Costco’s profits have remained flat for a few years. Also, they have had some problems with gender discrimination class action lawsuits of late.
http://genderclassactionagainstcostco.com/costco94.pl
But for the most part, yes, the media loves to profile Costco as a local success story.
Mortgage fraud is pervasive because Wall Street has created it. The (secondary market buys these loans) has unrealistic guidelines/ratio’s for loan applicants. The average American has a 44% back end ratio before their house payment is factored into the equation. Today most Americans are paying 50% or more of their income to mortgage debt. If every home loan application in America was scrutinized, you would find some sort of fraud at various levels. I.E. bogus job verification, inflated rental agreements, not disclosing all debts, etc. etc.
Unfortunately, 70% or more of Americans would be guilty of some kind of mortgage fraud. The true fraud lies in Wall Street, where the unrealistic guides originated in the first. That’s the real fraud!
Hi Kevin,
Thanks for stopping by RCG. I do not believe that “every home loan application in America would contain fraud at various levels.”
“It’s Wall Street’s fault.”
I don’t think anyone from Wall Street flew out to the individual loan originator’s offices and put a gun to the heads of the loan originator and the homebuyer forcing them to commit mortgage fraud or originate subprime loans.
Wall Street may have created a monetary-based incentive environment, but it is still up to the individuals involved to make choices. For example, some of those individuals include managers, business owners, executives, and sales people at the wholesale lender level, retail mortgage salespeople no matter where they work (banker, broker, credit union, consumer finance company), and the individual homebuyer or refinancing homeowner.
If you look at a bell curve, there are homeowners/homebuyers out there all across the spectrum. On one side of the bell, very few consumers understand mortgage lending at all. On the other side, very few consumers know EVERYTHING about mortgage lending including how the secondary market works.
The majority of consumers are in the middle of the bell curve.
They trusted their retail mortgage salesperson.
Because that’s what the retail mortgage sales people say: “get your loan from a trusted source: us.”
Now that trust is gone. It’s going to take a long time to bring it back.
Part of building back credibility is to stop blaming some faceless entity like “Wall Street” and start looking within.
When the retail mortgage sales industry decides to mature, part of that process is to stop blaming others.
http://www.raincityguide.com/2007/09/16/who-is-to-blame-for-the-subprime-meltdown/
There is a difference between a risky subprime mortgage and mortgage fraud. Mortgage fraud is also committed by the consumer and is also taught by some of the AEs to unassuming LOs. Why wouldn’t an LO think it’s okay to overstate an income on a stated income loan when the Account Exec for that lender tells you that’s how you submit the loan for an approval? It happens all the time. AEs would visit my office asking for difficult loans that we could not get approved. They would then review the file and say, “this is easy do a stated income saying they make 3x what they really do”. No thank you!
My blog is getting hits from people entering in searches for “can I get a mortgage with a 500 credit score”. I think people will do just about anything to buy a home not fully thinking of the consequences of what happens when you can’t afford the mortgage payment. They want the lowest rate so they say they’re going to occupy the property when they don’t… or they want the house so bad they’ll state any income on the ap.
Very nice piece Jillayne. It just goes to show you that when the market for something gets too overheated, those nefarious rent seekers always seem to come out of the woodwork.
http://archives.seattletimes.nwsource.com/cgi-bin/texis.cgi/web/vortex/display?slug=frances02m&date=20071202
What a disturbing story!
Susan Kelleher. The Fleecing of Francis Taylor. Seattle Times. December 2, 2007.
Quote from the mortgage broker below
“World Savings funded the loan after it was arranged by a broker with Pacifica Mortgage. It paid him a higher commission for selling Frances a loan with a “prepayment penalty” and a higher interest rate than she otherwise qualified for. The broker, Gene Halsey, said he was trying to find a loan with the lowest payments and that Frances could have shopped around for a better deal.
“My job is to make as much money as I can within limits,” Halsey said.”
How about serving your client’s best interest before yourself?
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Michael, It is disturbing and does not shine a very good light on the industry. Consumers should get referrals from people they trust and respect. I read that story yesterday and it made me sick.
What’s so sad about this story is that Frances trusted someone who obviously did not care about her or helping her find a mortgage professional.
Jillayne has stated before that it’s a LOs job to make as much money as possible for the company which they are employed. Making as much as possible per loan is not how we do business at Mortgage Master and I hope most companies are not like that.
Mortgage companies who employ Mortgage Professionals who have repeat and referral business do not need to “make the most” off of every loan they do. Their business is successful from the numbers of families they help, not the increased revenue per loan.
Mortgage companies who employ hacks, use call centers, cold leads and misleading advertisement DO need to make the most on each transaction because that client is probably not returning or telling their friends and family to use that mortgage company again.
Hello Mr. Smith.
This is Bob calling from Dewey, Cheatham, Howe, & Moore. I’d like to screw you with a loan that has an outrageous interest rate.
And, how about extra high loan fees? Can I interest you in a pre payment penalty today? just because I like you if you sign today, as my gift to you I’ll send you a toaster for the disount price of $59.99. that is a $99.99 value for the toaster Mr. Smith.
Can I sign you up for my frequent borrower program?
Hi laxtosnoco,
What worries me now is the foreclosure “get rich quick” market.
Hi Rhonda and Michael,
Just to clarify:
“Jillayne has stated before that it’s a LOs job to make as much money as possible for the company which they are employed.”
If an LO is a W-2 wage earner employee, yes, AND it’s really the corporate structure that dictates the duty here. Corporations exist to return a profit to shareholders (within the bounds of the law.) If the LO is an employee, managers have a duty to employ people who work towards the company’s best interests.
Realize that the LO and manager must also comply with state and federal laws governing the practice of mortgage lending.
When an LO is a1099-paid worker, that person is an independent contractor and the duties would be to follow state and federal law, and any policies and procedures of that company.
any other duties of care would be spelled out within a company’s code of ethics or, if the LO is a member of a professional organization, ethical duties would be spelled out in that association’s code.
Neither LO has a REQUIRED duty, required by any state or federal law, to look out for the customer’s best interests. The relationship between the LO and the consumer is a retail and contractual relationship, NOT a fiduciary relationship.
LOs can certainly take on the duties of looking out for the client’s best interests, but at this time such higher level of duty is just voluntary, not required, and with nobody overseeing that person’s higher duty of care, it doesn’t really count. Anyone can say “I am a fiduciary.” What counts is a neutral third party overseeing that person’s conduct.
Barney Frank’s proposed Mortgage Reform Act HR3915 makes an attempt to move LOs toward owing higher duties to consumers.
I am very pleased that this story was published in the Seattle Times simply because it gives consumers a better picture of the nature of the relationship between an LO and a consumer.
What Gene Halsey says is today’s current reality.
Readers following my work here on raincityguide already know what LOs can do to change that.
http://www.raincityguide.com/2007/03/24/professional-status-perceptions-and-reality/
Thanks for your comments.
I was discussing this with the President of my company today…and yes I’m paid as a W2 loan originator. However, my profit is based on clients returning and referring…not from how much I can make off of them during one transaction. There’s no way I would have this job as my career if it were…and I’m afraid to say it would be real easy to do if I didn’t need my sleep at night.
sleep at night…..
oh, yeah. occasionally, we turn down business because we don’t want any association with the investor, transaction, or both. I am sure they went somewhere else and completed the deal with another agent. the commission in the short run isn’t worth the long term damage to my sanity, reputation, and business. I need to sleep at night knowing the investor is in a better position because of us and not a worse position.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Hi Rhonda,
Regarding comment 20, yes, and also if a loan originator were not producing any clients and profits at all for the company, the company would not be able to justify keeping that LO on staff.
Being able to rely on repeat and referral business is a sign of a mature, growing company with reputable LOs that already have an established book of business.
How does it work at your firm for a new LO?
I would imagine that eventually that person would have to produce some transactions that earn the company owner a profit, and that also earn the LO a profit for the arrangement to work (no matter if the new LO was paid as a W-2 or a 1099 employee.)
Wow, great article Jillayne. Thank you for the information.
I concur with David and others here, very nice post, Jillayne.
Pingback: Recent Mortgage Fraud Developments and Future Outlook | Rain City Guide | A Seattle Real Estate Blog...
Pingback: Mortgage Fraud | Rain City Guide | A Seattle Real Estate Blog...
wow….It seems the finacial fraud has become more difficult to prevent. However, I highly suggest the home buyer to find the reliabe agents and LOs from their friends. Home buyer needs to do some home works first. And, ask some questions to agents and LOs. Then, you will have basic idea what may be wrong.
I can not believe the story that i just read, it is appalling that these people are so greedy. why not just work with normal ethics and make a descent living instead of the greed. on another note, i do agree with jillayne about human underwriters. in the 80’s and 90’s you knew all the underwriters by name and talked to them constantly about files. now i can rarely even talk to an a/e. i do think we need old school underwriters that evaluate the hole file from top to bottom. i still can’t believe some of the unethical stories that i have read in theses blogs! in the 1% commercial i did not see any “apr” clearly visable.
Well i have an issue that just happened to me. I bought my house for 495k but what my realtor/broker was going to inflate the price slight higher so that i could get back my down. my final closing cost was 535k and never got my money back. I’m really confussed and don’t know what to do. need major advice
Hi Lynn,
Do you have anything in writing as to the agreement between you and the Realtor?
When you say “broker” did you mean real estate broker or mortgage broker?
the only thing i have in writing was i agreed that the purchase price was 495k my home loan was for 500k but when i finally closed escrow it ended up being 535k???
my realtor works for her brother who’s a realestate broker – he was the one who got me my loan.
Hi Lynn,
I am sorry to hear that this happened to you. I have answered your question off-blog in a direct email. Please email me directly in the future and let me know how your case proceeds.
After reading this … makes me think who can I or anyone else trust. What I read here blows my mind. Sad that this kind of thing can happen or that someone would even try thinking they could get away with this!!
Good Morning,
I found you on line and I had a few questions regarding 2 properties that I bought from a mortgage broker. When I first meet her she told me I would be able to refinance my home right away and that I have gained already 9 months of equity. She told me I would be able to pull out about 30 thousand dollars when I refinanced on each house. After I purchased my homes I went to another lending company to refinance me and they told me I did not qualify to refinance because I did not make enough income and I did not have enough equity in the properties. That is when I found out she made fake pay stubs for me to get approved for the loans so she would be able to get the commission. Also when I tried to refinance I found out my homes were over appraised about 40 thousand dollars on each home, and she told me she would have her friends appraise the homes. Now my homes are in foreclosure. I have reported her to the DFI, but they advised me to get a lawyer. Can you recommend any lawyers?
Thank you for your time
Your response would be greatly appreciated.
Jillayne,
I got the above comment as an email from Ales and forwarded it to Craig. My observation was that both properties were possibly purchased as “owner occupied” for mortgage purposes.
Liza Bautista was finally arrested yesterday in Seattle.
http://www.king5.com/news/local/Investigators-Federal-agents-arrest-mortgage-broker-following-KING-5-investigation-100415029.html
I feel like celebrating, Jillayne! She and Suzannah Frame’s coverage of the story is what literally launched me out of bed (watching the evening news) and started my blogging career. I was so disturbed with what Lisa had done and the only thing Suzannah did (besides great coverage on Lisa) was to wrongly state something along the lines of “thank goodness ALL LOs will be licensed”. I had to set the record straight because we know that back in late 2006, that’s not the case, mortgage bankers were not…and today, almost 4 years later, it’s still not the case!
Arrested in SEATTLE??!!! How could she be under our noses for so long??
Rhonda, I have no idea. Let’s hope like hell that she wasn’t originating or working for a lender for the last several years.