Millions at Risk of Foreclosure Fraud
As posted on September 22, 2008 on http://redtape.msnbc.com
By Bob Sullivan
Angela Carter outside the Chicago home she may lose because, she says, she fell for a foreclosure rescue scam. (Chris Ocken for MSNBC.com)
Angela Carter's family has lived for 46 years in the same small two-story home in Chicago, perhaps a 15-minute ride from Barack Obama's adopted Hyde Park neighborhood. But today a piece of paper says someone else owns the property, and a judge will soon decide if Carter and her mom get to stay in her home.
The reason Carter, 55, is facing eviction, she says, is that she fell for a high-stakes scam that’s sweeping the nation, preying on the 1 in 11 consumers who are either behind on their mortgage payments or already in foreclosure.
Interviews with legal aid offices and law enforcement officials around the nation indicate the problem of so-called “foreclosure rescue scams” has spread like wildfire, neatly paralleling the downturn in the mortgage market.
The problem is so bad that in Portland, Ore., local police now automatically send a letter to homeowners who enter foreclosure warning them that they will be inundated with shady offers of help. In one case in Maryland, a single firm is accused of bilking hundreds of residents out of their homes and stealing $60 million in equity. Similar large-scale scams are happening elsewhere; in fact, foreclosure fraud is so common that it's exacerbating the nationwide housing slump, adding to the ranks of distressed homes that pull down the housing market in general, according to some experts.
There are many variations on the scams, but they all boil down to two types. There’s a simple fee-based racket, in which the criminal offers to help the homeowner stave off foreclosure, collects an up-front fee and then disappears. But the more lucrative scam involves seducing homeowners into complicated transactions that allow con artists to steal equity in the house or walk away from the closing table after netting thousands in phony payouts.
How serious is the problem? The proliferation of roadside signs with entreaties like “We buy houses” and late night infomercials promising easy real estate riches offers a clue.
"There is a booming business in selling information on foreclosures,” said Melissa Huelsman, a Seattle-based lawyer who represents victims in predatory lending cases. “There are whole companies that do that and little else. That gives you an idea how big this is.”
Carter -- who might lose her Chicago home -- said she was hit by the worst kind of rescue scam, with her suitor managing to drain nearly $100,000 in equity from her home before she knew what had happened.
She said that she fell behind in her mortgage four years ago after losing her job as a clerk for a company that publishes local "yellow pages." As the bank closed in, a company named Second Chance Program offered to help Carter save her home.
Here is Carter’s version of events: After signing a flurry of paperwork, she signed title of the house over to Second Chance, selling her house for $140,000 with the understanding that she would pay the firm rent and could repurchase the house a year later for $180,000. But almost immediately after signing the deal, Carter said, Second Chance took out a second loan on the property based on her untapped equity and pocketed close to $100,000 -- a common scam called "equity skimming."
“I had no idea what the building was worth,” she said. “And I had no idea they were buying my house. All along I thought they were giving me a loan.”
Two years later, Second Chance sent Carter an eviction notice. With the help of Chicago's nonprofit Home Ownership Preservation Project, she was able to temporarily block the eviction. Now, the two parties are fighting in state court about who holds the rights to the home. Earlier this month, Carter spent a week in court pleading her case. Now she faces a long wait to find out if she'll get to keep her house and what will happen to the $100,000 in equity her family earned from living there for nearly five decades.
"I have no idea how it's going to turn out," she said. "It's like living with a question mark over your head.”
Carter faces a formidable legal opponent. Second Chance is owned by J.T. Foxx, a self-proclaimed real estate investment guru whose motto is "Get Rich or Die Broke." Foxx hosted a Chicago radio talk show every weekend where he offered investment advice.
Foxx did not reply to messages left with his attorney, Bill Sullivan. An operator who answered the phone at Second Chance’s offices said, “They (Second Chance) aren’t with us anymore.” E-mails sent to the address at Foxx’s Web site were undeliverable.
Dan Lindsey, who represents Carter, said the rapid rise and fall of the housing market created an ideal situation for con artists.
“These people are the perfect target for equity strippers,” he said. “It was a niche market that exploded. It seemed everybody was getting into it. Entire companies were formed to do it.”
SOURCE: FBI
Illinois, like many states around the country, has passed new legislation making some foreclosure scam tactics illegal. The state’s law requires that rescue brokers pay homeowners at least 82 percent of the market value of the home in any transaction, for example.
But such rules came too late to help Carter. And new variations on the scam designed specifically to evade new laws and regulations continue to pop up.
"These people are all very smart in a nasty, evil kind of way," said Huelsman, the Seattle attorney. "People who commit white collar crimes just keep at it and just find a different way."
She said she had one client who was a victim of equity skimming who went from owing $90,000 on a mortgage to owing $480,000 after a series of fraudulent loans.
Felons as mortgage brokers
Around the country, while the housing market began to teeter on the edge of a meltdown, state and federal agencies were unprepared to prevent an avalanche of scams. In Florida, which some have called the mortgage fraud capital of the country, a recent Miami Herald investigation found that 10,000 convicted felons had been granted mortgage broker licenses from 2001-2007. More than 4,000 were approved even though they had committed crimes that the Office of Financial Regulation was specifically instructed to screen out, including white collar fraud, the newspaper reported.
Earlier this year, federal officials announced Operation Malicious Mortgage -- 400 indictments against individuals and companies allegedly involved mortgage fraud that led to nearly $1 billion in theft. But authorities say they were only able to target the worst fraud artists.
"We can’t investigate all the cases,” said Portland-based FBI agent Joe Boyer. “We have to prioritize.”
Many homeowners who are victimized by a scam don’t even report the crime to police, and those that do might find that officers won’t take a report, said Portland police Detective Liz Cruthers.
"If they do call police, I can guarantee you police will treat it as a civil problem," said Cruthers, who runs seminars for Oregon police so they will recognize the signs of mortgage fraud. “But our position is it's easier to prevent these cases then to investigate them.”
Mortgage fraud is a general term. It covers the relatively small fibs of home buyers who stretch the truth on income statements to squeeze into a new home. And it covers massive crimes involving con men who buy hundreds of homes using falsified documents.
But many experts say there is an important distinction between “fraud for housing” and “fraud for profit.”
Foreclosure rescue fraud falls in the latter category. While no hard data is available on the prevalence of each type, Arthur Prieston – whose firm, The Prieston Group, sells mortgage fraud insurance -- said he believes that at least half all mortgage fraud involves outright con men. And with the market for easy credit and house flipping all but dried up, mortgage con artists have increasingly trained their eyes on desperate homeowners through foreclosure rescue fraud, he said.
Suckers lists
Two years ago, foreclosure rescue fraud aimed at skimming equity was child’s play. There were many homeowners around the country who could not pay their mortgage but had plenty of equity in their homes. A simple “suckers list” of at-risk owners with high equity could be created simply by cross-referencing public “Notice of Default” lists and local property tax rolls.
That's how former stripper Joy Jenise Jackson and her Washington, D.C. area, firm Metropolitan Money Store managed to target only homeowners in foreclosure with more than $100,000 in equity, prosecutors say. Before her operation was shut down, Jackson had skimmed $35 million in equity from hundreds of homes, according to an indictment unsealed in February 2008.
In another variation of the scam, con artists talk victims into transferring title of their home, then recruit investors know as “straw buyers” to take legal ownership of the property. The straw buyers pay off the old mortgage, take out loans against the full equity of the homes and pocket the difference. The straw buyers’ role is simply to provide a viable credit score and credit profile so a bank will approve the loan.
The criminals make money from both ends of the deal. Straw buyers have no intention of living in the building, so the con men allow the victims to stay in the building and pay rent. Victims are often told they have an option to buy back the house later, as Carter said she was. In some cases, they are told the money they are paying is being used to help pay down their debt or build up their credit.
"Most people don’t even realize they don’t own their home,” said attorney Scott Boroson, who is representing some victims in the Metropolitan Money Store case. “They would come to me when they get notice from the landlord tenant court.” In some cases, multiple loans have been taken out against the victims’ homes, making a clean unraveling of the crime – and ultimately restoring the title to the homeowner -- very difficult. Even after learning of the scam, many banks are unsympathetic, Boroson said.
“The bank says we don't know anything about this, just get your people out of the house,” he said.
Follow the advice – commit a felony
Rich Hagar is a former home appraiser based in Seattle who now runs seminars for law enforcement officials and real estate professionals on detecting fraud. He describes the mortgage fraud problem as "monstrous," noting that bank “Suspicious Activity Reports” for mortgage fraud have jumped nearly 700 percent in the last five years, with 48,000 filed in the first nine months of this year alone. But Hagar said he believes those figures only represent 10 to 15 percent of the total fraud cases – suggesting nearly 1 million more fraudulent mortgages have been closed in the first nine months of this year. One reason he believes that, he said, is that fraudulent strategies remain popular with get-rich-quick real estate investment strategy teachers.
“There’s those late-night infomercials, if follow them, you are committing a felony,” he said. “In most classes they tell investors to get to the homeowner the moment they get to foreclosure and tell them they can save them.” Many foreclosure rescue companies improperly practice law without a license by giving legal advice or negotiating with banks on behalf of consumers, while others violate the Credit Repair Organizations Act by offering bad advice on credit scores or not providing the proper disclosures.
In Florida, authorities are unraveling a set of alleged mortgage scams operated by a firm named the Safe Harbor Foundation. The company was operated by Peter Porcelli, the flashy former owner of a pro softball team called the Tampa Bay Smokers. A direct marketing millionaire, Porcelli pleaded guilty in 2007 to a credit card scheme that defrauded 165,000 victims. In 2004, the Federal Trade Commission prevailed in a lawsuit accusing him of misleading travel advertisements, and he was ordered to repay $12.5 million to consumers. But at the same time, Porcelli was offering mortgage rescue help to Floridians like Kathie Visceglie.
"A judge gave my home to him,” Visceglie, of Hudxon, Flor., said. "I just want to get my title back so I can sell the house and get out of here. This house has nothing but awful memories now.”
Attorney Michael Wasylik, who represents Visceglie in her lawsuit against Porcelli, said equity skimming has largely ended in Florida, and in many other parts of the country where the housing market has collapsed, because few homeowners have any equity left to steal.
But law enforcement officials say it is still going strong in areas like Oregon and Washington, where the real estate downturn was delayed.
Short sale perils
Even when equity is gone, desperate homeowners can be offered a new, false lifeline -- a variety of foreclosure fraud known as the short-sale scam. In a traditional short sale, consumers who owe more on their mortgage than their house is worth make arrangements to sell their home to a third party at below-market prices. Banks then forgive the difference between the sale price and the mortgage.
Financial institutions sometimes agree to such sales because they have little desire to foreclose on homes and incur the expense of selling the property themselves. For consumers, short sales can help them avoid the black mark of a foreclosure and relieve them of potential debt. But the deals are complicated, particularly because many loans are no longer held by the originating bank, but instead by trusts representing investors. A true last resort, short-sales generally take months to complete.
Fraudulent short-sale specialists often promise quick resolution for a fee. They can also hide the true value of the sale from parties involved and pocket the difference. For example, the con artist might persuade a buyer to pay $175,000 for a home with a mortgage of $200,000, then tell the bank the price was $150,000. The short-sale facilitator then pockets the $25,000 difference. Or, the buyer might trick both the homeowner and bank into agreeing on a well-below-market price, then sell the house immediately for a tidy profit, a scam that’s sometimes referred to as “equity creation.”
“There’s a lot of room for fraud in short sales,” said Wasylik, the Florida attorney.
Because victims who are just days away from foreclosure are in no position to negotiate, many accept almost any deal offered to them. The tragedy with short sales is they don’t help the homeowner as much as advertised. They won’t protect the victim’s credit score, for example. Because short sales rarely occur until foreclosure proceedings have begun, that will almost always negatively affect the homeowner’s credit score, says John Ulzheimer, a credit score expert who operates Credit.com.
“The marketing spin that some short sale specialists are putting on this makes me sick,” he said. “They are either lying to their customers or they are ignorant about credit scores. A short sale is considered as bad by the FICO (credit) scoring system as a foreclosure. … Nobody likes to hear that but it's the truth.”
In some cases, short-sale negotiators urge homeowners to agree to unfavorable settlements that leave the homeowner still on the hook for unpaid debt -- the difference between the mortgage and the short sale price. Banks, for obvious reasons, readily agree to such terms.
Confusion of equity
At the core of all these scams is the concept of home equity, which can be confusing for many homeowners. It’s also ephemeral, and can be stolen without a trace.
Consumers who are behind on their mortgage also are often misinformed about the consequences of foreclosure, which doesn’t necessarily result in the loss of all home equity. Many homeowners end up with some payment after their home is purchased in a foreclosure auction. After creditors are paid, former homeowners are entitled to the remainder of the sale proceeds, often a better deal than arrangements offered by rescue scammers.
Angela Carter, who never attended college, said she had no concept of home equity when Second Chance representatives knocked on her door offering “the solution you have been looking for.”
"These are millionaires,” she said. “They are very savvy. They could run a game on me very easily. I don't know anything about real estate. … I just want to stay in my home.”
RED TAPE WRESTLING TIPS
• Consumers facing foreclosure can get help, but they should be very careful where they look. Experts recommend ignoring unexpected solicitations, whether through the mail, by phone or in person. Instead, enlist the help of a HUD-certified counselor. A state-by-state list is available at HUD’s Web site.
• Attorney Dan Lindsey said there’s a reason rescue scam firms have “generic-sounding” names like Equity Preservation Incorporation. “They are hard to Google .. hard to do background checks on,” he said. Any rescue firm or individual seeking an up-front fee is likely running a scam, he said. But many scammers make their money later, at closing, so be wary of any for-profit firm that approaches immediately after foreclosure proceedings begin, he said.
• Consumers who engage in a short sale and benefit from debt forgiveness might get some bad news at the end of the year. In some cases, banks are sending 1099 tax forms to former homeowners, meaning the IRS will treat the forgiven debt as income, which could result in a hefty tax bill.
• Foreclosure can be better than a bad short sale or a bad rescue, despite the stigma attached to it.
• The Illinois law requiring that homeowners in a rescue transaction be paid at least 82 percent of the value of their home may sound like price fixing, but it’s an excellent and necessary guideline in an environment where struggling homeowners are not on equal footing with the parties they are negotiating with. Other states should follow suit. In the meantime, consumers can use Web sites like Zillow.com to get a general idea of the market value of their home, and should never engage in a deal that severely undervalues their equity.
• The worst thing a homeowner in trouble can do is avoid talking to the bank. Many scam artists will insist on that, telling homeowners not to talk to their lenders to facilitate negotiations. The moment an aid company insists on secrecy, run the other direction.
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