400 charged as U.S. cracks down on mortgage fraud
With Wall Street executives handcuffed and paraded in front of TV cameras and dozens of alleged mortgage scam artists arrested in cities nationwide, the penalty phase of the mortgage meltdown has begun in earnest.
The Justice Department said Thursday that more than 400 real estate industry players, including dozens in recent days, had been charged since March in a federal crackdown on incidents of mortgage fraud that have contributed to the housing crisis. Those arrested included brokers, appraisers, bankers and lenders.
The announcement came on the same day that two former hedge fund managers at Bear Stearns Cos. were arrested on suspicion of misleading investors about a fund that invested in sub-prime loans and collapsed at a cost to investors of $1.4 billion.
The executives became the first Wall Street figures to be charged criminally in the wake of the sub-prime debacle. The charges against them could be a road map for authorities to hold other Wall Street executives to account.
The FBI estimated the losses to homeowners and other borrowers who were victims of mortgage fraud at more than $1 billion. That is a small fraction of the near $1 trillion in losses worldwide that have been chalked up to the U.S. mortgage fiasco, and federal officials said the number of cases under investigation continues to grow rapidly.
California has been a center of mortgage fraud. On Thursday, Justice Department officials in Los Angeles announced the formation of a nine-agency task force to target those crimes.
“Whether committed by unscrupulous lenders, real estate professionals or desperate homeowners, mortgage fraud affects all of us,” said Thomas P. O’Brien, the U.S. attorney in Los Angeles. “Defaults on inflated loans and resulting foreclosures impose huge monetary and social costs, as well as making it more expensive for everyone to obtain credit.”
In Washington, FBI Director Robert S. Mueller III said the number of cases of possible mortgage fraud the bureau was investigating had doubled in the last three years to more than 1,400 as of May 31.
“To persons who . . . are involved in such schemes, we will find you. You will be investigated and you will be prosecuted,” he said. “To those who would contemplate . . . engaging in such schemes, you will spend time in jail. That is the message we’re sending out.”
Kevin Stein, associate director of the San Francisco-based California Reinvestment Coalition, said he welcomed the federal crackdown but that it may have come too late “for the thousands upon thousands of borrowers who have been victimized by mortgage fraud.”
Robert Gnaizda, policy director for the Greenlining Institute in Berkeley, said he feared the government would seek to make examples of mortgage brokers when the true culprits were the lenders and Wall Street firms he said had provided loans they knew were unaffordable in the long run.
“Mortgage brokers only did what financial institutions allowed them to do,” Gnaizda said.
FBI officials said their “Operation Malicious Mortgage” focused on individual cases and smaller crime rings. The agency said it was also probing 19 companies, including investment banks and hedge funds, that may have engaged in accounting fraud or other crimes related to mortgage securities.
FBI officials also said they were investigating cases in which gangs and organized crime are suspected of mortgage fraud. “It is a means by which individuals could launder their money,” said Sharon Ormsby, chief of the FBI’s financial crimes section.
Prosecutors said their crackdown resulted in 60 arrests on Wednesday alone, including in Chicago, Miami and Houston. Mueller said the FBI had seized more than $60 million in assets as part of the sweep, including luxury cars, speedboats and a helicopter.
The 400 cases cover a range of mortgage scams, the officials said. The defendants include a suburban Washington couple charged with running a $35-million fraudulent foreclosure rescue operation called the Metropolitan Money Store.
The firm allegedly used fake buyers to take control of homes while promising the homeowners they could continue living there and buy back their property after a year, when they were back on their feet. But Metropolitan allegedly took out loans against the value of the homes, burying them further in debt and making it impossible for the former owners to reclaim them.
Joy Jackson, president of the Metropolitan Money Store of Lanham, Md., and her husband, Kurt Fordham, were arrested last week in North Carolina. Prosecutors allege that Jackson, Fordham and six other defendants used money from the elaborate scheme to pay for a lavish lifestyle that included luxury cars, houses, jewelry, fur coats and travel.
Investigators’ suspicions grew after Jackson and Fordham threw a wedding reception at the Mayflower Hotel in Washington for 360 guests. Jackson reportedly told friends that the event, with lobster and Cristal champagne on the menu and singer Patti LaBelle entertaining, cost nearly $800,000.
In Los Angeles, federal authorities said their new SCAM task force (which stands for Southern California Mortgage) would include the U.S. attorney’s office, the IRS, the U.S. Postal Inspection Service and the Small Business Administration, among other agencies.
It will focus on two types of cases, “fraud for profit” and “fraud for housing,” the FBI said.
The first category accounts for about 80% of all mortgage fraud and involves such schemes as skimming equity or borrowing against falsely inflated property values -- scams often carried out by several players working in concert. Fraud-for-housing schemes are perpetrated solely by borrowers who acquire and maintain real estate under false pretenses.
In what prosecutors believe to be the largest fraud-for-profit case in California history, two well-known Beverly Hills real estate agents are accused of conspiring with others to secure $142 million in loans by falsely inflating the values of homes in exclusive enclaves of Northern and Southern California.
Prosecutors say the losses to two lenders, including Lehman Bros. Bank, exceeded $40 million.
Former star agents Joseph Babajian and Kyle Grasso have pleaded not guilty to a raft of charges, including conspiracy, loan fraud and money laundering. They are scheduled for trial in October.
Seven other people have pleaded guilty and await sentencing, including developers Charles Elliott Fitzgerald and Mark Alan Abrams.
Fitzgerald, who fled the country in 2003 and was later arrested in Samoa, has admitted to reaping at least $5 million from the fraud. He faces a mandatory 10-year sentence on one of the charges, conducting a continuing criminal enterprise, said Assistant U.S. Atty. Jeremy D. Matz, one of the prosecutors.
“The fraud in this case lasted from 1999 to 2003,” Matz said. “Those were some really, obviously plum years for real estate, especially in California, where the market was taking off.”
Lenders, meanwhile, have been accused repeatedly of cheating borrowers. Ameriquest Mortgage Co. of Orange settled with 49 states in 2006 by agreeing to pay $325 million and clean up its lending practices.
New Century Financial Corp. of Irvine, which had been the largest independent sub-prime lender until it collapsed into bankruptcy, has told shareholders it is under federal criminal investigation. The probe centers on allegations that its top executives made millions of dollars exercising stock options while failing to warn how quickly the loans they had sold to Wall Street were going sour. Through attorneys, the executives have denied wrongdoing.
Investigators also have focused on Countrywide Financial Corp., the No. 1 home lender. The Securities and Exchange Commission, the U.S. attorney in Los Angeles and the state attorney general’s office have told The Times they were conducting separate probes of the Calabasas company. Countrywide was near collapse in January, when it agreed to be sold to Bank of America Corp.
Denying that it acted improperly, the company has said it was cooperating with investigators.
Schmitt reported from Washington, Christensen from Los Angeles and Reckard from Orange County.
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Force of law
Federal officials say they are attacking mortgage fraud on multiple fronts, from small lenders and brokers to Wall Street executives who were involved in selling shaky mortgage-backed securities to investors.
What’s behind it
During the real estate boom, lenders made mortgages increasingly easy to obtain, knowing that the risk of default was low as long as property values continued to rise. This triggered lending schemes in which some industry professionals misrepresented the financial status of borrowers and the appraised values of properties. With the housing market in a tailspin, a growing number of cases involve bankruptcy and foreclosure schemes dressed up as rescue operations that are designed to “steal” the homes of borrowers who are struggling with adjustable-rate loans.
Federal investigators say they are focusing on accounting fraud, insider trading and failure to disclose the value of mortgage-related securities and other investments.