Compliance

A New Jersey nonprofit organization said it will pay $5.4 million to buy mortgages from JPMorgan Chase that originally were part of a fraud scheme. The Orange, N.J. nonprofit, Housing and Neighborhood Development Services Inc., is buying the mortgages on 47 vacant homes in the greater Newark area. HANDS plans to renovate the homes — many of which are run down — and turn them into affordable housing. The loans, which HANDS bought in bulk, were part of a fraud scheme involving one real estate investor who received financing from Washington Mutual. JPMorgan Chase bought WaMu with federal aid.

The trustee for bankrupt subprime giant New Century Financial Corp. is suing the lender's auditor, KPMG, for $1 billion in damages, charging that it abetted the firm in misstating its true financial condition. Among other things, the trustee accuses the auditor with negligence noting that KPMG "did not act as a watchdog." The bankruptcy trustee is represented by the California law firm of Thomas, Alexander & Forrester, which filed claims in New York and California. New Century, whose shares once traded as high as $55, collapsed in the spring of 2007, wiping out shareholders. At its peak, the nation's second largest subprime lender had a market capitalization of almost $3 billion. KPMG issued a statement denying that it was responsible for New Century's collapse, saying it acted "in accordance with professional standards." The accounting firm said it would vigorously fight the lawsuits. A report issued last summer said creditors of NCFC are owed as much as $1.6 billion. KPMG's predecessor firms were sued for negligence by federal regulators during the S&L crisis. Some of those claims were settled out of court.

John Wanek of Phoenix, Arizona, and Robert Swanigan of Mesa, Ariz., have been indicted by the Franklin County, Ohio Grand Jury for allegedly having perpetrated a mortgage fraud scheme in Franklin County, Ohio. The defendants were arrested March 30 in Arizona. According to the indictment, the case alleges that Mr. Wanek orchestrated commercial loan fraud through his Arizona companies. Mr. Swanigan was Mr. Wanek's operations manager. Investigators said that in the past six years Mr. Wanek allegedly obtained commercial loans in the Columbus, Ohio area through the use of false statements and forged documents. Mr. Wanek also obtained loans for the purchase of six Columbus apartment complexes and one Indianapolis apartment complex. Mr. Wanek then defaulted on the loans. Mr. Wanek had been indicted in March 2008 in a case alleging mortgage fraud on Franklin County properties worth more than $15 million. That case was due to go to trial this month. The new indictment incorporates the previous case and adds mortgage fraud allegations concerning properties worth an additional $23 million dollars. No trial date has yet been set. Neither defendant could be reached for comment.

Larry J. Lupton, a real estate broker from Brookfield, Wisconsin, has been found guilty of soliciting a kickback in connection with the state's attempted sale of a $30 million office building in downtown Madison.After hearing testimony and receiving evidence during a court trial earlier this month, U.S. District Judge Lynn Adelman found Lupton guilty on all four counts charged in the indictment: bribery, wire fraud and two counts of making false statements to an FBI agent. Lupton solicited a payment from a particular buyer's broker in exchange for steering the sale to that broker's client. Lupton asked the broker for a $75,000 kickback and suggested to the broker that the payment could be in the form of cash paid directly to Lupton or a consulting fee paid to a defunct company that he owned. Either form of payment would allow Lupton to conceal it from the state and from Equis Corporation, the real estate firm that had retained Lupton as an independent contractor. Sentencing has not yet been scheduled.

Renato Gonzales Quiazon of Hayward, Calif., pleaded guilty to fraud charges arising from a loan kickback scheme. Specifically, Quiazon pled guilty to one of the 11 counts of wire fraud and four counts of filing false tax returns. Quiazon is alleged to have devised a scheme to fraudulently obtain payments of loan kickbacks, commissions and cash outs/extraneous line items from borrowers' escrow accounts. Beginning about January 2000 through October 2004, the defendant was employed as a loan officer with New Century Mortgage in Emeryville, Calif. During this time, Quiazon entered into an agreement with an independent mortgage broker to use his name and broker's license on loans that the defendant processed as the loan officer. By using the mortgage broker's identity on these particular loans, New Century Mortgage issued a 1% commission (1% of the total loan amount) to the mortgage broker. As part of the agreement with the mortgage broker, the mortgage broker was to retain 20% of the commissions and pay Quiazon a kickback of 80% of the commissions, he admitted. In contrast to his arrangement with the mortgage broker, in about 2002, the defendant started to get the commission checks directly and forged the mortgage broker's signature on the back and deposited the checks into his bank account. Quiazon also filed false individual income tax returns for the tax years 2001, 2002, 2003 and 2004. The defendant admitted he deducted expenses that did not exist and failed to report the loan kickbacks and other payments that he received which totaled approximately $430,661 for the period under investigation. New Century did not respond to requests for comment.

Craig Tengowski, a licensed appraiser from Pittsburgh, Pennsylvania, pleaded guilty to wire fraud in connection with a mortgage fraud conspiracy involving inflated appraisals.An interagency Mortgage Fraud Task Force that includes the FBI and other federal, state and local law enforcement agencies conducted the investigation that led to Tengowski's prosecution. Chief U.S. District Judge Donetta Ambrose has scheduled sentencing for Sept. 18.

Operation Madhouse, a federal undercover investigation in which undercover law enforcement agents posed as straw buyers of houses seeking assistance in financing and closing fraudulent mortgage transactions, has resulted in charging 24 defendants for mortgage fraud in the Chicago area. In each of the cases, multiple real estate professionals worked to carry out the frauds. Each case involved a different fraudulent mortgage loan arranged by a different group of defendants based in the Chicago area. Those defendants' alleged roles in the fraudulent transactions included: fraudulently preparing loan applications and other documents; creating fraudulent banking information; fabricating income tax returns; creating fictitious verifications of employment and rental income; creating false appraisals; and submitting the bogus applications and supporting documents to the lenders. In each of the undercover transactions, a cooperating individual allegedly represented that he was selling a house to a nominee buyer who intended to walk away from the property and default on the mortgage after the transaction closed. In reality, the nominee buyers were undercover agents, as were paralegals that assisted in closing the real estate transactions. The houses bought with the fraudulently obtained mortgage loans were actually owned by the federal government. Instead of defaulting on the fraudulently obtained loans after the closings, the government fully repaid the lenders after each transaction closed. The loans involved in the undercover project totaled approximately $1.4 million. In a related case, which did not result from the undercover investigation, the defendants are alleged to have fraudulently obtained approximately $4.2 million in loans, causing losses in excess of approximately $1.1 million. The following individuals have been charged: Mohammed Ali Moallem, Bahidad Javid, Abe Karn, Donna Books, Hichem Julani, Daniel Lietz, Marwan Atieh, Ruwaida Dabbouseh, Khalil Qandil, Khaja Moinuddin, Mohammed Nasir, Louis L. Javell, Aysha M. Arroyo, Juan Gil, Michael Salem, Hakim A. Jaradat, Robert Goldberg, Oscar Paredes, Maryam Khan, Babajan Khoshabe, Sunil Kaushal, James Kotz, Siamak Safavi Fard and Noel Parmar.

The president of Metropolitan Money Store, Joy Jackson of Fort Washington, Md., pleaded guilty for her role in the company's massive mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. According to her plea agreement, Jackson helped incorporate MMS, which offered foreclosure consultation and credit services to financially distressed homeowners. From September 2004 to June 2007, Jackson and others conspired to fraudulently promise to help homeowners avoid foreclosure and repair their damaged credit. The homeowners were directed to allow title to their homes to be put in the names of straw buyers for a year, during which time MMS promised to improve the homeowners' credit ratings, help them obtain more favorable mortgages, and eventually return title to their homes to them. The homeowners were told that the equity withdrawn from the properties would be used to pay the mortgage and expenses on their homes and to repair their credit. The straw buyers were paid up to $10,000 to participate in the scheme and allow the properties to be put in their names. Jackson also served as a straw buyer on several properties in Maryland. In addition, Jackson directed others to transfer the equity proceeds of homeowners into the general checking accounts of MMS as well as her personal accounts. She withdrew these funds and paid for goods and services for herself, including art, cars, clothing, credit card bills, homes, fur coats, furniture, airline trips, gambling expenses, jewelry, limousine services, student tuition and a luxury wedding for herself and an alleged conspirator. As a result of this scheme, the total loss attributable to Jackson, including the estimated losses to the mortgage lenders, is $16.88 million. Jackson is the seventh defendant to plead guilty in the MMS mortgage fraud scheme. Sentencing is scheduled for Nov. 16.

FBI director Robert S. Mueller told Congress that the growing number of mortgage fraud cases are "straining" the agency's resources and that the bureau now has 250 agents working on investigations — double the number from two years ago. In his prepared testimony Mr. Mueller said there are now 2,000 open mortgage fraud cases. Three years ago the agency had 700 open cases. "We have had to shift resources from other criminal programs to address the fiscal crisis," Mr. Mueller said. He noted that the agency is trying to combat mortgage fraud by using computer programs, including what he called "property flipping computer applications."

After being found guilty by a Navarro County jury for orchestrating a $3 million mortgage fraud scheme, Kandace Yancy Marriott of Gun Barrel City, Texas, was sentenced to 99 years in prison, according to a report from the Texas Attorney General's office. According to prosecutors, Marriott received monthly mortgage payments from her clients, failed to remit those payments to the lender and embezzled the homeowners' funds, causing her clients to default on their home loans. Marriott's conviction stems from her involvement in a complex mortgage fraud scheme that defrauded the federal government. The scheme's principal operators were said to be the defendant and her husband who sold manufactured homes through their company, One Way Home & Land. State investigators allege both defendants illegally forged homebuyers' signatures, inaccurately completed loan applications and falsified supporting documents, including the buyers' rent payment verification statements, proof of employment and Social Security Administration benefits data. The scheme involved predominantly low-income purchasers whose residential loans were guaranteed by the U.S. Department of Housing and Urban Development. As a result, when the unqualified buyers defaulted on their home loans, their lenders did not suffer financial losses. Instead, HUD had to cover the default costs. Investigators believe the defendants' scheme cost the taxpayers more than $3 million. The defendants closed the One Way Home & Land after litigation and investigations ensued in late 2005. As a result, they opened a Kaufman County firm under a different assumed name, and additional criminal charges in Kaufman County stem from that later operation.

Michael Hershkowitz, a Manhattan real estate developer, pleaded guilty in federal court to participating in a $27 million mail and wire fraud conspiracy.According to documents filed in this case, as well as statements made during the plea, Hershkowitz, working through a Manhattan real estate development company, the Kingsland Group, and related entities, fraudulently induced 70 individuals to lend the Kingsland Group more than $27 million, purportedly to fund the renovation of 16 multi-family apartment buildings located in upper Manhattan. Hershkowitz and co-conspirator Ivy Woolf-Turk falsely represented that the lenders would hold, as collateral for the loans, interests in first mortgages in the various properties in which they thought they were investing. However, the lenders did not hold recorded, first mortgages in the properties but instead were provided with forged documents falsely reflecting that the mortgages had been properly recorded with New York City. Interest was paid on the loans for some years after they were first made, but ultimately the principal on the loans was not repaid when due. It was determined that the lenders did not have valid first mortgages on the properties in question.

To protect consumers from aggressive lending practices, Congress should consider "curtailing" the powers of federal banking regulators to preempt state consumer protection laws, according to FDIC chairman Sheila Bair.In testimony submitted to the Senate Banking Committee, Ms. Bair said federal preemption was seen as a way to improve efficiencies for federally chartered banks and lower costs for consumers. "While that may have been true in the short run, it has now become clear that abrogating sound state laws, particularly consumer protection laws, created an opportunity for regulatory arbitrage that frankly resulted in a 'race-to-the-bottom' mentality," she said. The Comptroller of the Currency and Office of Thrift Supervision routinely preempted state predatory lending laws during the subprime lending boom. The FDIC chairman said setting a "floor" for consumer protection, based on state and federal laws, would be better than current system of establishing a "ceiling" at the federal level. She suggested that Congress could use a newly proposed financial products safety commission to establish the appropriate floor for consumer protection.

After pleading guilty to bank fraud in connection with a mortgage fraud scheme, Robert C. Culp of New Carlisle, Ind., a police officer, was sentenced to 54 months imprisonment, followed by three years of supervised release and was ordered to pay $1.19 million in restitution. Culp was charged with devising and executing a scheme to defraud mortgage lenders and to obtain money, funds, credits and other property owned by or under the custody or control of mortgage lenders by fraudulent pretenses and representations. According to his plea, Culp purchased inexpensive homes, frequently in need of substantial repair and renovation and then arranged to sell these properties at inflated amounts to persons who obtained mortgage loans based upon falsified mortgage loan applications. Culp, who remains on release, must begin serving the sentence on April 24.

The Financial Accounting Standards Board has proposed changes to its "other-than-temporary impairment" rules that should relieve many institutions from taking sharp losses on their holdings of mortgage-backed securities. For debt securities institutions are holding and do not expect to sell, only credit losses would be reported in earnings and the remainder of the impairment would be reported in "other comprehensive income," according to newly proposed OTTI guidance. "The new guidance makes it clear that effects on income are limited to actual credit losses. Notice that the new FASB guidance on OTTI accounting has little effect on capital," according to credit strategists at Bank of America/Merrill Lynch. Currently, FASB has a tougher ability-to-hold standard and the entire estimated impairment is reported as a loss. The comment period on the FASB guidance ends April 1. FASB also is seeking comment on changes to its fair value rules for determining distressed and inactive markets.

Mortgage-related fraud may have cost the industry between $15 billion and $25 billion last year, according to an estimate made by the Mortgage Asset Research Institute. Speaking at a fraud prevention conference in Las Vegas, MARI's Merle Sharick told the audience, "Mortgage fraud is a giant and growing cause of losses." Speakers at the conference said fraud might be a bigger drain on the mortgage business than most executives realize. The last official FBI count put the industry's annual loss due to mortgage fraud at $5 billion. But Scott Broshears, the special agent in charge of uncovering and prosecuting the crime, said his agency is "probably easily investigating" crimes valued at double that amount. Lending further credence to the belief that much of the fraud for profit taking place is doing so at the hands of organized crime, James Freis, director of the Financial Crimes Enforcement Network, a division of the U.S. Treasury, said his agency has noticed a direct link between mortgage fraud and money laundering. "Mortgage fraud is a highly moving target that requires the disposition of large sums of cash," he said. "These are often interconnected. These are not separate things. Profits need to be integrated into the financial system." Scott Brower, the U.S. attorney for Nevada, told the conference that even with the change in administrations in Washington, mortgage fraud "will be on our radar screens for the foreseeable future." He said, "We're trying to get ahead of the problem, but I'm not sure anybody in law enforcement can. We're just scratching the surface. We're likely to be very, very busy for months and years to come."

A federal bankruptcy court in Newark has approved the hiring of a criminal attorney by CU National Mortgage of New Jersey, as a federal investigation into allegations made against the failed mortgage lender spread.The bankruptcy court, where CU National and its parent US Mortgage Corp., landed last week, has approved the hiring of Gibbons PC as special criminal counsel for the company, and the payment of a $21,178 retainer to the Newark firm. The action comes as a federal grand jury is investigating allegations that the company defrauded dozens of credit unions by selling their mortgages to Fannie Mae without authorization and keeping the proceeds. As many as 30 credit unions in the mid-Atlantic region believe as much as $160 million of their loans may have been fraudulently sold to Fannie Mae.

Reported incidents of mortgage fraud in the U.S. increased by 26% in 2008 from 2007, an all-time high, according to a new report issued by the Mortgage Asset Research Institute. For the first time, Rhode Island ranked first in the nation in regard to mortgage fraud. Released in Las Vegas at the MBA's annual National Fraud Issues Conference, the report found that fraud activity based on the book of business originated in the Ocean State was three times the national average. "Future reports will tell if this is a statistical anomaly," said MARI spokesman Merle Sharick. "But for now, current data suggests that the state has emerged with a problematic and heretofore unnoticed mortgage fraud problem." Rhode Island's rise up the ladder from the fourth position last year knocked Florida down to the second spot. But Nevada and Utah have dropped out of the top10 altogether. California, too, has dropped, from fourth among the list of hot spots for fraud last year to eighth this year. The position changes suggests that there might not be any more money to made in those places hit hardest by the housing downturn, so scam artists are taking their talents elsewhere.

Congressional Democrats and Obama administration officials want to make consumer protection an integral part of any reforms to the mortgage finance system. Consumer protection needs to be at the "very heart of our system of mortgage finance, not an after-thought or relegated to second class status," said Michael Barr, counselor to the White House National Economic Council. Consumers and investors should be able to "rely on the fact that underwriting is being conducted appropriately," Mr. Barr told a mortgage reform forum sponsored by the Center for American Progress. Meanwhile, the Mortgage Bankers Association is working on reform proposals to restore confidence in the system by establishing more effective consumer protections. "We know that these proposals will constrain some in the industry, but they will also help our members and their customers in the long-run," MBA chairman David Kittle told a congressional panel last week.

Three defendants have been sentenced for their involvement in a straw borrower fraud scheme to obtain residential construction loans, defrauding Zions Bank of $20 million. Christopher A. Upchurch, a building contractor from Meridian, Idaho, was sentenced to 33 months in prison, followed by five years of supervised release and ordered to pay $633,634 in restitution to Zions Bank. Barbara L. Cobos, a Zions Bank loan officer from Mountain Home, Idaho, who received $125,000 in kickbacks from Upchurch in order to assure funding of fraudulent loan applications, was sentenced to 18 months in prison, followed by five years of supervised release and ordered to pay $125,000 in restitution. Nicholas R. Gossi of Boise, Idaho, who worked first for a bank and later as a mortgage broker, pleaded guilty to submitting a false loan application to a mortgage lender and was sentenced to six months in prison, followed by six months of home detention and five years of supervised release and to pay restitution to National City Bank in an amount to be determined later. The scheme began in October 2004 and lasted until November 2005. Once straw buyers were located, their information was used as the borrowers' on residential construction loan applications. In many cases, the loan applications overstated the "borrower's" income and credit and falsely said that they were planning to build "owner-occupied" homes. Upchurch and others also forged the borrowers' names on loan documents. The applications were not reviewed or approved by supervisory officials at Zions Bank. Once the fraudulent loans were approved, Upchurch had the straw borrowers sign blank draw requests so he could draw on the loans at any time. He then filled out the draw requests for specific construction purposes, but diverted many of the loan proceeds for his own benefit. The bank did not return a call for comment.

Michael Gee, a Mooresville, N.C-based real estate appraiser, pleaded guilty in connection with his participation in a mortgage fraud scheme involving about $15 million in loans and more than 200 properties. Gee, along with Victoria L. Sprouse and Michael D. Pahutski, both of Charlotte, N.C., were charged in a superseding indictment in Federal District Court for the Western District of North Carolina with perjury, conspiracy to commit money laundering, mail, wire and bank fraud. Ms. Sprouse, a licensed North Carolina real estate attorney, and Pahutski, a mortgage broker, were alleged in the indictment to have participated in a scheme from 2001 through September 2002, in Mecklenburg County, N.C, to obtain money and property by means of false and fraudulent pretenses, representations and artifices to defraud financial institutions of money and their right to honest services. Specifically, Ms. Sprouse and Pahutski were accused of preparing materially false mortgage applications and supporting documents to submit to lenders for approval. The defendants also allegedly prepared and signed materially false HUD-1 settlement statements, appraisals and accepted downpayment checks from persons other than the buyers listed in the HUD-1 settlement statements. Pahutski pleaded guilty and awaits sentencing. Ms. Sprouse has pleaded not guilty and is scheduled to go on trial March 23. She could not be reached for comment at press time.