Compliance

The Minnesota Department of Commerce has revoked Michael Prieskorn's mortgage originator license and fined him $2.2 million for his involvement in the allegedly fraudulent sale of homes in high-growth areas including Eagan, Buffalo, Rochester and St. Cloud. The department charges that Mr. Prieskorn participated in a "builder bailout" scheme where he persuaded investors to purchase 220 homes at substantially inflated prices, allowing the sellers to make profits and Mr. Prieskorn to collect "management fees" ranging from $22,000 to $105,000. Instead of keeping up on the mortgage and utility payments, the department charges that Mr. Prieskorn spent the money himself. In April 2007, Mr. Prieskorn allegedly emptied his bank accounts, stopped making payments and failed to purchase any of the investors' homes as promised. Most of the homes have fallen into foreclosure. Mr. Prieskorn has been at large since he failed to appear at an administrative hearing on the matter in December 2008 and could not be reached for comment. Bill Walsh, a spokesman for the department, said this "looks like criminal activity" and the department has often seen cases like this result in criminal investigations. But he said he was not aware of any criminal investigation into the activity and referred questions as to whether there was one to the U.S. attorney's office. A spokesman for the U.S. attorney's office said he could neither confirm nor deny the existence of a criminal investigation into the matter.

A Florida man who operated and worked with companies that sold sex toys and pornographic videos this week pleaded guilty to his involvement in a mortgage fraud scheme. According to the Florida attorney general's office, between May 2007 and August 2007, Rory V. Porter of Columbia County, Fla., befriended homeowners whose homes were free of any liens, vacant and for sale. Using information he obtained from the homeowners and public records, Porter forged documents and recorded deeds to transfer the homes to his possession. He then located private lenders and borrowed money using the homes as collateral. The AG's office believes Porter stole homes in the Gainesville and Lake City areas worth more than $800,000 and obtained loans against those homes for more than $500,000. After obtaining the proceeds from the new home mortgages, Porter laundered the money through different banks and companies that he controlled or did business with, including companies that sold adult sex toys and pornographic videos. In just over two months, he laundered the proceeds through at least four banks and closed the accounts. Porter will be sentenced in June.

Thomas Hastert of Nevada City, Calif., pleaded guilty to 59 felony counts related to orchestrating a $20 million real estate scheme. According to California Attorney General Edmund G. Brown Jr., between September 2004 and September 2007, Hastert brokered more than 270 hard-money loans in Nevada, Sacramento, Sutter, Butte, Placer and Yolo Counties for real estate development projects. He secured $20 million from several investors, using the funds to broker hard-money loans to borrowers seeking to develop homes on real estate. He told investors that the borrowers had excellent credit scores and were capable of repaying the loans, when in fact many had poor credit scores, didn't make regular loan payments and held properties in foreclosure. Rather than place the loans he brokered into a special trust account overseen by a third-party escrow firm to ensure the project was being built, Hastert instead used the money to pay his office expenses and other development projects. Though he told investors he'd personally oversee the development of the land, investors once asked Hastert to drive them to a property supposedly under development and he was unable to find it. To keep concerned investors at bay, Hastert set up fake investors/straw men. If a legitimate investor tried to initiate foreclosure proceedings, he'd contend that the supposed majority owner opposed the action. He also took all his fees up-front as if the loans were fully funded, when in fact some loans never fully funded and others took more than a year to fully fund. Hastert will be sentenced on June 25 in Nevada County Superior Court.

A man responsible for digging up Social Security numbers and other personal data that was used to siphon millions of phony home equity lines of credit from credit unions and banks was convicted on bank fraud charges last week. Yomi Jagunna, a 44-year-old Nigerian immigrant, is one of a handful of small players to plead guilty in this international scheme, which stole as much as $5 million from U.S. credit unions and banks and wired the proceeds overseas, beyond the reach of U.S. law enforcement. Jagunna, who held back tears during last week's plea hearing, told authorities he set up a sham collection agency to gain access to a commercial database. He admitted selling 39 Social Security numbers for $30 a piece, but authorities said he had access to a database of more than 100,000 Social Security numbers. Jagunna is one of 17 individuals charged in the nationwide HELOC scheme that fooled credit union and bank employees into transferring funds to accounts in at least seven countries, authorities said.

Five people have been indicted in connection with a $14 million mortgage fraud scheme in Wisconsin. According to the U.S. attorney's office for the Eastern District of Wisconsin, Paul J. Zaleski and Robert Farrell, both formerly of Richmond, Ill.; Michael Pembroke of Twin Lakes, Wisc.; John F. Hochrek, Jr., of Spring Grove, Ill.; and Patricia Lynn Kay of Kenosha, Wisc., have been charged in a 24-count indictment, accused of wire fraud and money laundering. The indictment alleges that Mr. Zaleski orchestrated the purchase of at least 40 real estate properties by straw buyers who were led to believe that they were members of an investment group. In order to secure mortgage loans, Messrs. Zaleski and Farrell, working as loan originators in Kenosha, Wisc., allegedly prepared fraudulent loan applications containing inflated appraisals in the names of the buyers. Mortgage lenders advanced more than $14 million in loans. The mortgages subsequently went into default and then foreclosure. An initial appearance for Mr. Pembroke, Mr. Hochrek and Ms. Kay has been scheduled for May 14 before Judge William E. Callahan. Mr. Zaleski and Mr. Farrell have been arrested in California and are awaiting return to Wisconsin.

Education and existing law might be better ways to tackle loan modification fraud than new legislation, given the potential for "unexpected interpretations" of the latter, a Mortgage Bankers Association executive testified before a House subcommittee. The House Financial Services Subcommittee on Housing and Community Opportunity held a hearing in Washington Wednesday to examine the need for federal legislation to prevent foreclosure rescue fraud and loan modification scams. MBA chairman-elect Robert E. Story, Jr., testified before the subcommittee, stating that — although the MBA shares the subcommittee's concerns about the rapid rise in loan mod and foreclosure rescue scams — it does not believe that new laws are needed to investigate and prosecute these fraud schemes. "Unlike new legislation, which always carries with it the risk of unexpected interpretations, existing law is tested by years of judicial precedent and can be applied by federal law enforcement officers with confidence," he said. According to Mr. Story, the MBA believes educating borrowers on how to identify and avoid foreclosure rescue scams and increasing law enforcement officials' level of resources will be more effective. "MBA believes the first way to stop this fraud is by raising awareness of these scams," said Mr. Story.

After conning thousands of dollars from seniors and homeowners facing foreclosure in a loan modification scam, Anna Santos of Los Angeles County pleaded guilty to mortgage fraud. Santos was arrested in March after using forged documents to convince victims to hand over thousands of dollars for nonexistent loan mod services. According to the California Attorney General's office, Santos obtained a fictitious business permit through Los Angeles for "Payment Processing Department," opened several bank accounts and two post office boxes under that name and then mailed flyers to vulnerable homeowners appearing to be from victims' lenders or a government agency. The flyer advised homeowners that they qualified for a special program to save their home from foreclosure. After signing up for "loan modification services," homeowners then received phony confirmation that their lender had been notified and forged loan mod documents that falsely appeared to be from their lender. The victims were informed they had been placed in a probationary program and their payments should be sent to a given post office box address, none of which were credited to the victims' home loans, but were instead retrieved by Santos and deposited into the bank accounts she had opened. The AG's office believes she scammed more than 100 victims, who lost on average $3,000. "Santos conned thousands of dollars from homeowners trying to save their homes through a cruel and sophisticated scam," said AG Edmund G. Brown, Jr., in a statement. "She held out hope, but in reality did not provide an ounce of loan modification, leaving her victims in far worse straits." Santos, who is currently out on bail, is scheduled for sentencing on May 20 in Los Angeles Superior Court.

An MBIA Inc. subsidiary and LaCrosse Financial Products LLC have filed a lawsuit against two Merrill Lynch entities for misrepresentation and breach of contract in connection with credit default swaps tied to subprime residential mortgages.A spokesman for Merrill, which is now owned by Bank of America, declined to comment on the lawsuit which was filed in New York State Supreme Court. The plaintiffs are seeking rescission and damages. MBIA alleges in the suit that Merrill's "effort to market the CDS contracts to MBIA was part of a deliberate strategy to offload billions of dollars in deteriorating U.S. subprime residential mortgages that Merrill held on its books by packaging them into collateralized debt obligations or hedging their exposure through swaps guaranteed by insurers." The plaintiffs charge that "as a direct result of Merrill Lynch's misrepresentations" and breaches of contract, MBIA now faces expected losses of almost $700 million on four CDOs.

The Georgia Department of Banking and Finance issued Cease and Desist Orders to two mortgage companies that were unlicensed to do business in the state. The first order was issued to Kalle Kivinen, doing business as Loan Restructuring Solutions in Chandler, Ariz. The second order went to Atlanta Loan Modifications Inc. of Alpharetta, Ga. Both of these orders were issued after the Department obtained evidence that both Atlanta Loan Modifications and Mr. Kivinen through Loan Restructuring Solutions were engaged in mortgage broker/lending activities without a license. According to Rod Carnes, deputy commissioner for non-depository financial institutions, these orders "only indicate that they were not licensed in the state. This action is just for Georgia." Mr. Carnes would not comment on how investigations of these two companies came about, nor would he comment on whether the entities were engaged in fraudulent activity. Mr. Kivinen, who is still doing business through Loan Restructuring Solutions — though not in Georgia — did not return calls seeking comment.

U.S. District Judge James S. Moody has sentenced a St. Petersburg, Fla. mortgage broker who pled guilty to fraud charges to five years in federal prison. The broker, Victor Thomas Clavizzao, also was sentenced to pay more than $2 million in restitution, as well as to forfeit an additional $6 million. According to court documents, Clavizzao acted as mortgage broker in the purchase of 13 different properties and conspired with Mark Lepzinski, a property flipper from Clearwater, Fla., to submit false and fraudulent information to various lenders in order to induce the lenders to fund bad loans. U.S. District Judge James D. Whittemore previously sentenced Lepzinski to 13 months in prison for his role in the conspiracy.

Mark Anthony McBride of East Point, Georgia, pleaded guilty in federal district court to obtaining millions of dollars in fraudulent mortgages and other loans and to a bankruptcy fraud designed to stay foreclosures on dozens of fraudulently obtained properties. According to the information presented in court, immediately after being released from prison in 2001, McBride began a mortgage fraud scheme that continued through 2002, when he had to report for service of another federal prison sentence. As soon as he was released from prison again in November 2006, McBride continued his scheme by completing fraudulent mortgage loans and other extensions of credit in his name, in his aliases, in a number of stolen identities, including those of his children and in the identities of other unqualified borrowers. These fraudulent loans continued until McBride was arrested in September 2008 for violating his supervised release. Dozens of banks and other funded fraudulent loans for McBride. McBride generated mortgage loan proceeds for himself using inflated valuations for properties, securing the loans and sharing those proceeds with his straw borrowers and other conspirators. He was able to retain proceeds from the frauds by filing eight bankruptcy cases in Georgia, Alabama and South Carolina. The last such fraudulent filing was a May 2008 petition in Atlanta, filed in a phony name and stolen Social Security Number. The petition falsely stated he had never filed bankruptcy in the past. Sentencing is scheduled for July 9 before U.S. District Judge Jack T. Camp.

Appraisal management companies have cornered nearly two-thirds of the single-family appraisal market and Rep. Paul Kanjorski, D-Pa., is concerned there is very little oversight of these entities. "We must establish oversight of appraisal management companies. They now touch 64% of written appraisals but are subject to little supervision," Rep. Kanjorski said. The high ranking member of the House Financial Services Committee said he is preparing a "comprehensive" appraisal reform amendment that he plans to offer when the committee meets to mark up a mortgage reform bill. The Appraisal Institute and other appraiser trade groups have warned the committee that the use of AMCs increases costs for consumers. The management firms rely on less experienced and less competent appraisers and keep "half the appraisal fee in most cases," Appraisal Institute president Jim Amorin testified. "One remedy is to direct that appraisal fees be clearly disclosed to borrowers and differentiated from the management or service fees on all relevant mortgage loan documents," Mr. Amorin said.

Appraisal management companies have cornered nearly two-thirds of the single-family appraisal market and Rep. Paul Kanjorski, D-Pa., is concerned there is very little oversight of these entities. "We must establish oversight of appraisal management companies. They now touch 64% of written appraisals but are subject to little supervision," Rep. Kanjorski said. The high ranking member of the House Financial Services Committee said he is preparing a "comprehensive" appraisal reform amendment that he plans to offer when the committee meets to mark up a mortgage reform bill. The Appraisal Institute and other appraiser trade groups have warned the committee that the use of AMCs increases costs for consumers. The management firms rely on less experienced and less competent appraisers and keep "half the appraisal fee in most cases," Appraisal Institute president Jim Amorin testified. "One remedy is to direct that appraisal fees be clearly disclosed to borrowers and differentiated from the management or service fees on all relevant mortgage loan documents," Mr. Amorin said.

Patrick M. Singletary, Robert D. Singletary and Peter J. Russo, all from Jacksonville, Florida, have been sentenced on charges related to a mortgage scheme to defraud the Federal Housing Administration of $2.5 million. Patrick Singletary was sentenced to 18 months in federal prison and ordered to forfeit $1 million. Robert Singletary and Peter Russo were each sentenced to serve one year in federal prison. Robert Singletary was ordered to forfeit $1 million and Russo was ordered to forfeit $500,000. All three defendants had pleaded guilty in October 2008. According to court documents, the defendants submitted false documentation to obtain FHA-insured loans for buyers of single-family properties in Jacksonville between 1997 and September 2004.

Lisa Lievanos of Fontana, Calif., has been convicted of charges related to her being a straw borrower in a mortgage fraud scheme that fraudulently collected more than $1 million in loan proceeds. Lievanos is the fourth defendant in this case. Angela Cotton, who ran a bogus title company, pleaded guilty and is scheduled for sentencing on June 15. Terral Toole pleaded guilty and is scheduled for sentencing on June 1. Miles Davis, a loan processor, pleaded guilty and was sentenced to three years of probation, including six months of home detention. The evidence presented at Lievanos' trial showed that Cotton found properties in Rancho Cucamonga and, with the assistance of real estate professionals and people such as Lievanos who agreed to sell their personal information, fraudulently "purchased" one of the properties and obtained a $635,000 loan. A second loan involved a refi of Lievanos' residence, which netted the defendants $526,500. In the loan application, Lievanos included false employment information, income information, occupancy declarations, and rental agreements relating to her financial condition. On the loan applications, the four defendants allegedly included false employment information. Cotton established fraudulent escrow companies to complete the fraudulent sale transactions. As a result of the scheme, banks suffered losses of nearly $2 million. U.S. District Judge Florence-Marie Cooper has scheduled sentencing for Lievanos for July 13.

With foreclosure rescue schemes and short sales scams on the rise, the Portland office of the FBI and the U.S. attorney's office for the District of Oregon are expanding their efforts to identify and prosecute mortgage fraud in the state by establishing special Internet and phone tip lines to handle reports of mortgage fraud. The Oregon Mortgage Fraud Working Group, which has been operating since 2007, will handle the investigations. The majority of the Oregon Mortgage Fraud Working Group investigators are working major cases involving multiple suspects, multiple borrowers and millions of dollars in fraudulent loans. The Oregon Mortgage Fraud Working Group also focuses on emerging crime trends that are associated with the growing tide of foreclosures, such as foreclosure rescue schemes and short sales. People are urged to report any mortgage fraud activity or information by visiting Portland FBI's website at http://portland.fbi.gov, calling the phone tip line at (503) 273-5813, or emailing mortgagefraudtips.portland@ic.fbi.gov.

Peter Affatati of Coral Springs, Fla., has been sentenced to 156 months in prison in federal court in West Palm Beach for his role in a multi-million dollar mortgage fraud scheme. Affatati was also ordered to pay restitution in the amount of $8.8 million. Affatati was charged with and pled guilty to orchestrating a $40 million mortgage fraud scheme that involved more than 50 residential mortgages, most of them in South Florida. Affatati used straw buyers to purchase the residential properties. Affatati used his title company to falsify the staw buyers' employment, income and asset information to qualify them for large mortgages from institutional lenders. Upon the funding of the mortgage, he diverted a large portion of the proceeds for his personal benefit. Affatati was also charged with defrauding a victim in North Carolina by selling to the victim fictitious securities in the amount of $390,000. The mortgage lenders suffered actual losses after the properties were foreclosed upon of more than $8 million.

Despite the pleas of mortgage bankers, the government sponsored agencies have no intention of lowering their guarantee fees, their representatives said at the Mortgage Bankers Association's National Secondary Market Conference in Chicago. "No," said Donald Bisenius, Freddie Mac's senior vice of single-family credit guarantee business, when asked by MBA chairman-elect Rob Story whether the GSEs are considering such a move. Thomas Lund, executive vice president of single-family mortgage business at Fannie Mae, said the current fee structure strikes a balance between providing liquidity to the mortgage market and protecting taxpayers from footing the bill for loans that go sour. Mr. Lund also pointed out that the guarantee fees charged by the GSEs are "still far below" those charged in the jumbo market by non-agency investors. Even though the overall credit profile of borrowers has improved, Mr. Bisenius told the meeting, the fees need to remain at their current levels because "the housing market is very, very fragile. Prices at best are flat, and still falling in many places. We need to balance against that risk." On a more positive note, the two GSE spokesmen also said that once their companies, which are in federal receivership, get up to speed on their purchase of conforming jumbo mortgages, the current 150 basis point spread in pricing "should shrink dramatically."

Mortgage brokers are staging a last-ditch lobbying effort to get Congress to block the implementation of a new appraisal code that applies to all loans sold to Fannie Mae and Freddie Mac. The new code, which goes into effect May 1, prohibits the government sponsored enterprises from purchasing mortgages if loan officers or mortgage brokers are involved in selecting appraisers or influencing the appraisal process. The National Association of Mortgage Brokers claims the GSE code will marginalize brokers and independent appraisers by encouraging major lenders to rely on "unregulated" appraisal management companies. "Please contact your Senators and Representatives today to urge them to stop or delay (for at least 12 months) the implementation of the Home Valuation Code of Conduct, which is de facto regulation, forced on Freddie Mac and Fannie Mae by New York Attorney General Andrew Cuomo," NAMB says in a "Call to Action" emailed to its members on April 16. "Please contact your legislators today at their in-district offices, as Congress currently is in recess." The appraisal management company model is "flawed," NAMB says, and it will produce "poor quality" appraisals at an increased cost to consumers.

Five Florida residents have been arrested for their alleged involvement in a criminal mortgage fraud operation that defrauded several financial institutions of $4.5 million. Emerio Lima, Inocencia Soto, Pedro Fornos and Josefa Herrera, all from Miami, and Stephen Zalka of Parkland, Fla., are facing charges of organized fraud, mortgage fraud and grand theft. They allegedly recruited straw buyers who lent their names and credit to purchase numerous properties. They were told that they wouldn't have to make any mortgage payments, since the properties would be flipped in a few months. The scheme also included a certified public accountant who allegedly provided falsified employment verification letters for the straw buyers. With the straw buyers lined up, HUD-1 statements with inflated sales prices were submitted to lenders for funding. The title agent, acting on behalf of the other co-conspirators, allegedly transferred the funds into a bank account of either a third party or a shell company controlled by one of the co-conspirators. The arrest affidavit identifies nine properties located in Miami-Dade, Broward, Lee and Charlotte counties, which were allegedly used by the defendants to facilitate their scheme. Most of the properties are now in foreclosure. The five defendants were unavailable for comment. According to the Attorney General's Office of Statewide Prosecution, the investigation is ongoing and additional arrests are expected.