Compliance and Fraud

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A college professor in Tennessee has been sentenced to a year and a day in jail following her conviction early this year for mortgage fraud. Pamela Gail Holder was convicted by a jury on charges of bank fraud and wire fraud. Holder, a professor of nursing at Middle Tennessee State University, was accused of orchestrating a multi-million dollar mortgage fraud scheme that involved a straw buyer" with a good credit score. This buyer was deceived by Holder into borrowing $2.4 million for the purpose of purchasing a $1.5 million dollar home in Hendersonville, Tenn. Holder helped prepare or send false documents that, among other things, falsely claimed that the straw buyer was president of "Team Fat Man," an automotive-sales business owned by her deceased husband, and greatly inflated the straw buyer's income. The scheme involved loans obtained at Bank of Nashville, Countrywide Home Loans and First Tennessee Bank. The loan went into default and the property was foreclosed upon.

The Department of Housing and Urban Development will soon publish an advance notice of rule making concerning reverse mortgages that the agency's official who oversees the Home Equity Conversion Mortgage program says "a lot of people may find disconcerting." The notice, which is awaiting approval from the Office of Management and Budget, "asks some very serious questions," Meg Burns, the director of the office of single-family program development at the Federal Housing Administration, said at the National Reverse Mortgage Lenders Association's annual conference in San Diego. One "straight out" question that will be asked is whether borrowers should be allowed to pocket the proceeds of a reverse loan and use the money as the basis of an annuity against falling prices. Another question is whether or not a limit should be placed on how the proceeds are used by the borrower, and a third is whether draws should be limited unless the borrower has an immediate need. "We think it's appropriate to ask these questions because these are the issues the come up all the time with lawmakers," Ms. Burns told the conference. She added HUD would soon publish a proposed regulation that would require all reverse mortgage lenders to determine if the income of a would-be borrower is enough to meet his and/or her current obligations. If so, HUD may place restrictions on how much of the loan proceeds a borrower can draw. Yet another idea on the table at HUD is what's called a "HECM Mini" in which borrowers whose equity in their homes was more than needed would tell the lender what percentage of the value they wanted and the maximum claim limits would be adjusted accordingly.

A former Washington area stripper who ran a foreclosure rescue scam in and around the nation's capitol has been sentenced to 12 years in prison after being convicted of stealing millions from struggling homeowners. Joy Jenise Jackson, former president of Lanham, Md.-based Metropolitan Money Store, also was ordered to pay $16.9 million in restitution. MMS operated as a loan brokerage firm, using table funding from such subprime lenders and New Century Financial Corp. and Argent Mortgage, both of which are no longer in business. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, Jackson co-founded MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others fraudulently promised to help homeowners avoid foreclosure and repair their damaged credit. But instead they took title to their victims' homes, and engaged in an equity skimming scheme that resulted in foreclosure for many. To date, ten defendants have pleaded guilty in the MMS case.

Seven individuals have been charged for their roles in a mortgage fraud scheme that involved more than 100 properties in Northern California. The indictment charges Amy Schloemann, Karim Akil, Wonda Louise Kidd, Michelle McGuire, Kaska Clay, James Ross and Darnell Thomas with conspiracy to commit wire fraud, wire fraud and money laundering. According to Joseph P. Russoniello, U.S. attorney for the Eastern District of California, the defendants, who were unavailable for comment, allegedly participated in a fraud scheme involving the fraudulent purchase of more than 100 properties through the use of straw buyers, real estate appraisers, notaries and escrow agents, and the laundering of profits. The defendants allegedly directed straw buyers to sign loan applications containing false information and allegedly hired notary publics to fraudulently notarize documents. The defendants allegedly increased their profits on the purchase of properties by submitting false documents to lenders. Once the properties were purchased, the defendants allegedly split the proceeds and failed to make payments on the properties, causing lenders to foreclose.

Lenders trying to comply with a new RESPA rule that goes into January 1 will not have to worry about being slapped with an enforcement action if they fall short during the first few months, according to the Department of Housing and Urban Development. HUD has instructed its staff to exercise restraint in taking enforcement actions against Federal Housing Administration-approved lenders during the first 120 days. HUD also is urging other federal and state enforcement agencies to go easy on other lenders that are making a good faith effort to implement the new Real Estate Settlement Procedures Act rule. "We will work with those who are making an honest effort to work with us as we implement these important new consumer protections," said HUD Secretary Shaun Donovan. Lenders and certain other settlement services groups have been urging HUD to delay the implemention date for a few months. But HUD has refused. "While we will not delay implementation of RESPA's new requirements, we are sensitive to the concerns of the industry as it integrates these new rules into their day-to-day business practices," secretary Donovan said.

Jeffrey Todd Crandell, a mortgage broker from Mesa, Ariz., pleaded guilty to running a sophisticated cash-back mortgage fraud scheme in the state. Sentencing is scheduled for Feb. 22, 2010, before U.S. District Judge G. Murray Snow. According to Dennis K. Burke, U.S. Attorney for the District of Arizona, in 2005, Crandell obtained the rights to various parcels of real estate in Queen Creek, obscured his interest in those properties and recruited others to buy the properties for significantly inflated prices. Crandell also acted as the mortgage broker for each transaction. In preparing the buyers' loan applications, Crandell inflated their incomes and assets and falsely stated that the buyers would be making the downpayment. At closing, Crandell supplied the downpayment on the buyers' behalf, providing them with a cash kickback. The properties eventually went into foreclosure. Crandell's conviction is part of "Operation Cash Back," an initiative in which 40 defendants were indicted and arrested in June 2008. To date, 30 have been convicted through guilty pleas or following trial.

Over the past two months the Federal Housing Administration has suspended or "eliminated" at least eight mortgage banking firms from using its insurance program, according to Assistant Housing Secretary David Stevens. Mr. Stevens told reporters at a press conference that the eight firms — which were not identified — "were originating a poor quality book of business." He noted that mortgage banking firms that were approved to do business with the agency between 2005 to 2009 account for just 5% of its overall business. "A vast majority" of FHA's $685 billion book of business consists of what Mr. Stevens called "long tendered institutions." One mortgage banking source told National Mortgage News that the government is now looking into a large number of early payment defaults at a New Jersey-based FHA lender. No further details were available. On Thursday HUD released an audit showing that at the end of September the FHA's Mutual Mortgage Insurance fund had a razor thin capital cushion of just $3.6 billion, or 0.53% of its entire coverage universe. HUD is considering raising premiums to bolster the fund. HUD officials say that despite the thin capital base of the MMI, the fund is constantly bringing in new cash through premiums and that almost 30% of borrowers using the program in fiscal 2009 had a credit score of 720 or better, an all-time high. Four years ago just 12.6% of FHA borrowers had a credit score that high.

U.S. District Judge Lynn N. Hughes sentenced Clarence Lewis III, a licensed mortgage and real estate broker from Houston, to 15 years in federal prison without parole, followed by three years of supervised release, for running a mortgage fraud scheme. Judge Hughes also ordered Lewis to pay restitution, the amount of which will be determined early next year. According to Tim Johnson, U.S. attorney for the Southern District of Texas, Lewis operated Motown Mortgage Group and Lewis and Associates Realtors and used an assumed name business, Astro Construction, to extract loan proceeds from the real estate closings. The loans on the majority of the properties obtained by fraud fell into default and the properties were foreclosed. Lewis obtained more than $12 million in fraudulent residential mortgage loans during the course of his five-year mortgage fraud scheme beginning in 2002.

Two former managers in charge of Bear Stearns hedge funds that invested in subprime bonds and derivatives were found not guilty of fraud charges Tuesday afternoon in New York. A jury in Federal District Court in Brooklyn acquitted former Bear executives Ralph Cioffi and Matthew Tannin, believing the two men did not lie to investors by presenting an upbeat picture without disclosing that the two funds they managed were plummeting in value. In particular, Mr. Cioffi was found not guilty of insider trading charges on accusations that he moved $2 million he had invested in one of the failing subprime hedge funds to another less risky fund while telling investors he was adding to his position. The government accused them of defrauding at least 300 investors out of $1.6 billion. The two had been charged with three counts of securities fraud and two counts of wire fraud. They still face civil damages in regard to the hedge funds. Massachusetts sued Bear Stearns Asset Management, accusing Mr. Cioffi of making hundreds of trades on behalf of the hedge fund with the approval of the fund's independent directors. In late 2007 Bear disclosed in an SEC filing that the funds were the subject of a criminal investigation. Bear, which collapsed in early 2008, was a major player in the subprime mortgage market. Previous to its collapse, Bear operated a trading desk and a warehouse unit, and also owned a mortgage banking firm called Encore Credit. (Photos: Bloomberg News)

Kawana Latrell Melvin of Atlanta pleaded guilty in Superior Court of Clayton County in Georgia to felony charges that she operated a mortgage banking business without a license. She also admitted to making a false statement with respect to her eligibility to work in the state's residential mortgage industry. The Georgia Department of Banking and Finance referred this matter to the State Attorney General's Office after learning she continued to work a as mortgage loan processor for a residential mortgage licensee in violation of a final cease and desist order. Melvin used a false document purportedly written by the Commissioner of the Department that provided that she was not prohibited from engaging in residential mortgage activities. Melvin has been placed on probation for a period of three years and must pay a fine in the amount of $2,000. While on probation, she is prohibited from obtaining employment in any real estate or mortgage business and cannot apply for or obtain professional licenses in either of these industries.