Compliance and Fraud

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Edward William Farley, a former mortgage broker from Georgia, pleaded guilty in federal district court to charges stemming from a mortgage fraud scheme and a related real estate investment Ponzi scam involving more than 150 victims. According to Sally Quillian Yates, acting U.S. attorney for the Northern District of Georgia, Farley, operating through numerous mortgage firms, defrauded mortgage lenders through same-day property flips throughout the state. He paid an appraiser to fraudulently inflate the value of each property by $50,000 to $100,000 and recruited unqualified borrowers to purchase them from one of his companies. However, Farley did not purchase the properties until the fraudulently obtained loan proceeds on the second purchase had been disbursed. In the real estate investment-Ponzi part of the scheme, Farley then began to operate under the name Alliance Resource Management to conceal his new source of income from prior victims. Real estate investors and lenders were induced through false promises that their investments and loans were fully secured. The same property was used to "fully secure" multiple investors and lenders, causing losses in excess of $20 million. Sentencing is scheduled for Feb. 3, 2010.

The Department of Housing and Urban Development's Mortgagee Review Board is imposing civil money penalties totaling $27,000 on two Federal Housing Administration-approved lenders in Wisconsin and Connecticut for a variety of violations of FHA lending and marketing standards. In the first action, HUD imposed $20,000 in penalties against Green Bay, Wis.-based 1st Rate Mortgage Corp. for allegedly violating HUD/FHA's third-party origination restrictions, making false certifications concerning the compliance with these restrictions and failing to maintain a quality control plan in accordance with HUD/FHA requirements. In the second action, HUD imposed $7,000 in penalties against New Haven, Conn.-based Access Mortgage Corp. for allegedly violating HUD/FHA requirements by improperly using the official FHA logo and failing to notify HUD of a change in its "doing business as" name. Each lender, neither of which responded to requests for comment, will have an opportunity to challenge the imposition of civil money penalties and seek a hearing before an administrative law judge. In addition, HUD reached tentative settlements with four other lenders — Irvine, Calif.-based Nations Direct Mortgage, Grand Rapids, Mich.-based VanDyk Mortgage Corp., Minneapolis-based U.S. Bank NA and Cerritos, Calif.-based Sun West Mortgage Co. — and issued a letter of reprimand to Community Lender Inc. of Boise, Idaho, for allegedly violating HUD regulations.

Tahmeane Elrod of Tyler, Texas, has pleaded guilty to conspiracy to commit wire fraud in connection with a mortgage fraud scheme. According to John Malcolm Bales, U.S. attorney for the Eastern District of Texas, in September 2007 Elrod devised a scheme to defraud mortgage financing companies by submitting false documents in order to qualify for mortgages for the purchase of a residential property. Elrod falsely inflated levels of earned income and forged signatures on a Request for Verification of Employment form as part of a loan application package. Sentencing has not yet been scheduled.

A nine-month investigation done as part of a Florida fraud crackdown has resulted in charges against more than 100 defendants with allegations concerning over $400 million in loans and more than 700 properties. According to A. Brian Albritton, U.S. attorney for the Middle District of Florida, there are currently mortgage fraud-related charges pending against approximately 500 defendants in federal mortgage fraud cases around the nation. The cases concern both mortgage schemes designed to defraud mortgage lenders and "foreclosure rescue schemes" which prey on distressed homeowners. Florida's Mortgage Fraud Surge crackdown was launched in January 2009 in response to the epidemic of mortgage fraud throughout the state, which began during Florida's real estate boom earlier this decade.

A federal judge rejected a request by Angelo Mozilo, the former CEO and founder of Countrywide Financial Corp., to dismiss a Securities and Exchange Commission lawsuit accusing him of securities fraud and insider trading. Mr. Mozilo's lawyer David Siegel called the court's order "disappointing" but added he was confident Mr. Mozilo eventually "will be vindicated." In a court filing, U.S. District Judge John Walter in Los Angeles also rejected requests by David Sambol and Eric Sieracki, respectively Countrywide's former chief operating officer and former chief financial officer, to dismiss related SEC charges. In June the three were slapped with a massive civil fraud suit, accusing them of deliberately misleading investors in the company's stock and engaging in insider trading. They could not be reached for comment. Two years ago CFC's shares were trading in the $40 range. By the time Bank of America bought the firm in the summer of 2008, its stock was trading as low as $3. Investors lost billions on CFC.

Uto Essien, the ringleader of a Colorado based multimillion-dollar mortgage fraud operation, was sentenced to 30 years in the Colorado Department of Corrections. Essien, a Nigerian national, will be deported upon completion of his sentence. An Adams County jury convicted Essien in July after a seven-day trial on four felony charges all related to the use of shell corporations and false invoices to skim money off the top of nearly three-dozen real estate transactions. According to Colorado attorney general John Suthers, Essien and his colleagues fraudulently obtained $10.9 million in mortgages to buy 34 properties in Adams, Arapahoe, Denver and Jefferson counties between April 28, 2004 and Dec. 29, 2006. Essien and his colleagues then skimmed $1.1 million from the transactions to pay for repairs to the properties that the defendants' shell corporations never completed. While acting as a real estate broker, Essien negotiated the property acquisitions and directed the buyers to create the shell corporations. Nine of Essien's co-defendants in the mortgage fraud ring have either pleaded guilty or been convicted.

Michael Chou, a San Francisco mortgage broker, pleaded guilty in federal court to wire fraud conspiracy in connection with a scheme to defraud mortgage lenders. According to Joseph P. Russoniello, U.S. attorney for the Northern District of California, Chou admitted that, in a scheme that began in 2003 and continued through April 2009, he defrauded mortgage lenders and financial institutions by providing false information on loan applications. Working out of an office in San Francisco, Chou and his colleagues assisted individuals who wanted to obtain mortgages for residential properties in Northern California and elsewhere. As a part of this scheme, Chou routinely transmitted fraudulent loan applications to mortgage lenders that inflated the borrowers' creditworthiness. In addition, the loan applications were supported by forged documents that purported to verify the borrowers' employment, income and assets. Chou and others used a network of co-conspirators who posed as the borrowers' employers to falsely verify the employment and income information listed on the loan applications. As a result of Chou's participation in this conspiracy he illegally earned $360,800, which he agreed to forfeit. Eleven other individuals have been charged in connection with the case. Chou, who is currently not in custody, is scheduled for sentencing on March 19, 2010.

U.S. District Judge J. Frederick Motz sentenced Terrence White of Oxon Hill, Maryland, to 42 months in prison, followed by three years of supervised release for mail fraud from fraudulently purchasing 25 properties in Maryland, the District of Columbia and Virginia using false mortgage and settlement documents. Judge Motz also ordered White to pay $4.2 million in restitution. According to Rod J. Rosenstein, U.S. attorney for the District of Maryland, White and others paid straw purchasers to purchase houses for White and others. White created false mortgage and settlement documents, many of which misrepresented the straw purchasers' income and assets. This scheme involved fraudulent loans worth more than $19 million. More than 10 individuals and banks were harmed. The loss amount foreseeable to White is between $2.5 and $7 million. Many of the purchased properties have been foreclosed upon. Co-conspirators Kara McIntosh and Sabrina Weinberg were sentenced to three years and two years in prison, respectively. Osman Sharrieff Al-Bari was sentenced to 78 months in prison. Jamilah Al-Bari and Timothy Reed have pleaded guilty to participating in this scheme and are scheduled for sentencing in the next two months.

The Department of Housing and Urban Development is threatening to stop Financial Mortgage USA, Honolulu, from making Federal Housing Administration reverse mortgages and allegedly taking advantage of seniors. HUD alleges that the mortgage brokerage firm "duped" seniors into using the proceeds of their FHA reverse mortgages to purchase annuities from an affiliated insurance firm. [Reverse mortgages have an annuity feature depending on the payment plan the senior chooses.] The HUD Mortgagee Review Board is "particularly concerned about one case in which the company steered an 88-year-old borrower into purchasing an annuity which did not mature until she reached her 104th birthday," the department said. The MRB has proposed to permanently withdraw Financial Mortgage USA's status as a FHA-approved lender and fine the company $97,500 for violating FHA rules. The Honolulu lender can request an administrative hearing to contest HUD's actions. Company executives could not be reached for comment.

The incidence of property valuation fraud rose 46% in the third quarter compared to the same period a year ago, according to a new report from risk mitigation firm Interthinx. Interthinx noted that on a sequential basis property valuation fraud jumped 25%. The company, whose software helps lender/servicers track fraud, said it is seeing a continued shift to fraudulent schemes involving short sales, real estate owned inventories and refinancing by borrowers whose equity has been impaired by falling real estate values.