March 24, 2008

CALIFORNIA, THE HOTBED OF HOUSING FRAUD
U.S. Attorneys Investigate, Plan Prosecutions for Wide Range of Claims Involving Mortgages
By Linda Rapattoni
Daily Journal Staff Writer
This article appears on Page 1

SACRAMENTO - California prosecutors are mining a mother lode of mortgage fraud cases, revealing that an astonishing amount of lying and bribing took place during the biggest housing boom since World War II.
"When you do start looking, it's amazing how widespread it is," said McGregor Scott, the U.S. attorney in Sacramento. "I don't think anybody has any idea how much fraud is going to be written down here."
Fueling the growth was the availability of credit and loans and a rise in subprime mortgages aimed at buyers who lacked the creditworthiness necessary for the best market rates. The subprime market rose from 2.5 percent of the overall market in 2001 to 14 percent in 2005, said Kevin Baker, FBI supervisory special agent for the financial crimes squad in Sacramento. By 2006, 40 percent of all new mortgages were financed subprime.
Federal law enforcement officers are investigating cases involving a wide range of claims, including straw buyers getting paid to stand in for people with bad credit, loan officers being bribed by brokers to process fraudulent loans, mortgage brokers falsifying documents to get commissions, and buyers falsifying information on loan applications and filing for bankruptcy to avoid loan payments.
FBI Director Robert Mueller told the nation's U.S. attorneys that mortgage fraud was "front and center" on their target list after terrorism at a meeting in Washington, D.C., in February. Hot spots include California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas and Utah.
"We need to start thinking about this in terms of the savings and loan crisis in the 1980s and Enron," said Scott, who attended Mueller's meeting.
Baker said the FBI got a surge of complaints in 2004 from a number of financial institutions required to report suspicious activity, such as false information on mortgage loan applications or a series of mortgage transactions involving the same person, all of which have a history of early payment defaults, large cash outs or very recent sales activity. The FBI didn't open many cases immediately because loans were performing and few homeowners were reporting losses, he said.
The next year, financial institutions referred 500 cases of suspicious activity in the Sacramento region, which doubled to 1,000 in 2006 and doubled again to 2,000 in 2007, Baker said.
California sits squarely at the epicenter of the subprime mortgage maelstrom. Los Angeles ranked first nationwide for mortgage fraud complaints among the 56 FBI regions around the nation, with 8,000 complaints, far outpacing Miami, ranked No. 2 with 2,700. San Francisco ranked No. 3, with 2,500 complaints, and Sacramento came in at No. 7.
A year ago, when Scott, who oversees the Eastern District of California, got serious about mortgage fraud, he appointed a task force headed by Assistant U.S. Attorney Matthew Stegman to coordinate efforts by various agencies, including the IRS, FBI, U.S. Department of Housing and Urban Development and California Department of Real Estate. His office has obtained indictments in four cases.
In one, a senior loan officer at Long Beach Mortgage pleaded guilty to falsely testifying he didn't receive any money from a broker for processing fraudulent loan applications when records showed he got $100,000. U.S. v. Ahmad, 2:07-CR-0386. In another case in Stockton, four men were charged with defrauding Washington Mutual Bank and Fremont Investment and Loan through a mortgage fraud scheme that asked people to buy homes on behalf of others with bad credit.
Scott has another dozen cases under investigation.
"Stockton led the nation in foreclosures, and there are multiple areas in our district that are among the top 10 in foreclosure rates," he said.
California's real estate market is the most expensive in the nation, and higher prices attract greater mortgage fraud because there is more money to be made, he said. Central California was attracting scores of homebuyers priced out of the real estate market in other parts of the state, and builders were answering their demand with large-scale developments.
Scott's counterpart in San Francisco, recently appointed U.S. Attorney Joseph P. Russoniello, said his office probably would see "the big slug of cases" arrive late this year or early next year.
"Alameda and Contra Costa counties have been identified as two of the most heavily impacted counties in the country for subprime lending, and I'm sure we're going to have significant referrals," Russoniello said.
In the Los Angeles area, Thomas P. O'Brien, U.S. attorney for the Central District, has obtained indictments in two cases in which real estate agents and appraisers defrauded lenders of $40 million by sending them false documents, bogus purchase contracts and inflated appraisals.
In a separate case in November, the office charged four officers of now-defunct Mortgage One Corp. of Hesperia and M-1 Capital Corp., based in Riverside and Rancho Cucamonga, of defrauding government and private lenders of $10 million by fraudulently obtaining loans and selling the notes to private lenders.
"We see several types of mortgage-related frauds," said Thom Mrozek, a spokesman for the office. "We also tend to do very large cases, easily among the largest in the nation."
The typical federal case involves six to 10 individuals and 20 to 300 properties, Baker said. The FBI is looking at both loan origination fraud, in which a borrower inflates income or fails to report all debt, and corporate fraud involving subprime lenders who were fudging their books by underreporting the number of defaults in their loans.
Corporate fraud cases take longer to investigate, Baker said. Complicating the investigations are the subprime lenders who went bankrupt last year, making it harder to obtain loan documentation, Baker added.
"A lot of man-hours go into these," Scott said. "You have multiple jurisdictions that are affected. There's an investigation in Fresno that involves a Utah-based corporation."
The targets of the investigations are primarily mortgage brokers who repeatedly fudged documents by, for example, falsely stating the buyers' income, employment and the price of the home they were buying to get their commissions, and officers who were bribed by the brokers to approve the loans, he said.
"One lending institution, if the witnesses are to be believed, had multiple loan officers who were involved in mortgage fraud loans and were bought off by the brokers," Scott said. "Forty to 50 percent of all the loans were fraudulent. This is a major lending institution we are talking about."
Meanwhile, other government agencies are getting in on the action. Attorney General Jerry Brown last week shut down six lending companies in and around Los Angeles that employed telemarketers, notaries, brokers and escrow officers who peddled fraudulent loan applications and pushed homeowners into loans they could not afford.
A court froze the assets of Lifetime Financial, Nations Mortgage, Greenleaf Lending, Virtual Escrow, Olympic Escrow and Direct Credit Solutions. Seven defendants faced civil penalties and restitution of $20 million.
Brown joined other states in early 2006 to prosecute Ameriquest Mortgage Co., the nation's sixth-largest subprime mortgage company, for allegedly misrepresenting loan terms, which resulted in a $325 million settlement.
And other government agencies are involved, as well. The California Department of Justice has an "active and ongoing" investigation into mortgage fraud, said Benjaimin Diehl, a Los Angeles deputy attorney general in the department's consumer section.
Malcolm Segal, a former U.S. attorney now a partner in Segal & Kirby of Sacramento, said he anticipates a lot more cases to come along. He said his clients are mostly individuals and small mortgage brokerage firms or officers in national firms.
"Anyone who has a federal practice is getting calls," said Mark Reichel, a Sacramento sole practitioner, who said lawyers could see a 10 percent to 25 percent increase in retainer fees. "This is just the beginning, and a whole bunch more are coming."
Most white-collar criminal defense lawyers in Sacramento are one-lawyer shops like Reichel's. Some of his clients first contacted him a year ago and are calling now to say they believe they are close to being indicted, he said.
"If they wanted to, the courtrooms could be filled five days a week with loan fraud and mortgage fraud cases," he said. "It's an epidemic. That's where the business is and will be for a couple of years."
Another Sacramento defense lawyer isn't quite so sure. Christopher Wing said he anticipates a steady stream of cases rather than a tidal wave.
"There's only so many FBI agents, prosecutors and probation officers," Wing said. "I don't think it's going to get crazy."

Staff Writer Adam Gorlick contributed to this report

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