Compliance

Veronica DeGuzman, of San Antonio, has been sentenced to 75 months in federal prison for carrying out a mortgage fraud scheme involving three San Antonio and Spring Branch, Texas-based residential properties, three financial institutions and more than $1 million in foreseeable losses. In addition, U.S. District Judge Xavier Rodriguez ordered that DeGuzman pay $1.67 million in restitution to her victims and be placed under supervised release for a period of five years after completing her prison term. On Oct. 2, 2008, DeGuzman pleaded guilty to one count each of financial institution fraud and aggravated identity theft. Her husband, Fred DeGuzman pleaded guilty to the same charges on Nov. 18, 2008. Sentencing for Fred DeGuzman has been scheduled for March 20, 2009 before Judge Rodriguez. By pleading guilty, the defendants admitted that from June to November 2007, Fred DeGuzman, using an alias, and Veronica DeGuzman contacted individual sellers of residential property and enter agreements to purchase the property for an inflated price, with the excess of the stated price over the actual sales price being returned to a corporation owned and controlled by the defendants. Using the alias, as well as falsified employment and income information, Fred and Veronica DeGuzman applied for and obtained 100% financing. After one or two mortgage payments, the mortgage went into default causing losses to the lenders.

Financial institutions filed 62,084 Suspicious Activity Reports for mortgage loan fraud from the year spanning July 1, 2007 through June 30, 2008, according to a new report released by the Financial Crimes Enforcement Network. This is a 44% increase over the preceding year and constitutes 9% of all SAR submissions for the period. Mortgage loan fraud was the third most reported activity during this period. Nearly 900 filing institutions submitted mortgage loan fraud SARs. Of these, according to FinCEN, fewer than 200 institutions submitted 98% (60,800) of the total. The top 10 filing institutions submitted 57% (35,400) of these filings, compared to 30% for the top 10 filing institutions of all SARs. The top 25 filing institutions of mortgage loan fraud SARs submitted 82% (50,900) of filings. FinCEN believe this means there is a high concentration of a small number of depository institutions that account for most mortgage loan fraud filings, as compared to SARs generally.

A St. Louis man pleaded guilty in U.S. District Court for the Southern District of Illinois to making a false statement to a financial institution in connection with a mortgage fraud scheme. Keith L. Pittman was indicted in June 2008 as part of a nationwide crackdown on mortgage fraud. Pittman was one of more than 400 people charged nationwide in mortgage fraud cases that were identified as a result of a Department of Justice initiative known as "Operation Malicious Mortgage." Pittman and others participated in a scheme to obtain residential real estate for himself by making a series of false statements in connection with a series of fraudulent transactions designed to enable him to obtain real property without making an actual downpayment, while simultaneously exposing the lending institution to an undisclosed and increased risk of default. Pittman is scheduled to be sentenced on June 5, 2009.

After pleading guilty in December 2008 to participating in the fraudulent sale of residential property located in Coral Gables and Miami, Florida, Samuel Morejon was sentenced to 27 months in federal prison, followed by three years of supervised release. According to documents filed with the court, the Coral Gables property was flipped three times within about two years, more than doubling the price of the property from $550,000 to $1.2 million. Morejon served as the straw buyer in the second sale of this property and submitted false loan applications to obtain $850,000 in financing to purchase the property. Once the final sale closed, the individual posing as the buyer in the third sale, co-defendant Jose Martinez, allegedly failed to make a single payment on the mortgage and the property ultimately went into foreclosure resulting in a significant loss to the lender. On the same date Morejon posed as a buyer for the Coral Gables property, he served as a straw buyer in the purchase of another residential property in Miami, Florida. Based on fraudulent misrepresentations in the loan application, Morejon obtained $835,000 of financing to purchase this property. He never made a single payment on the mortgage and the property went into foreclosure resulting in a significant loss to the lender. Additionally, U.S. District Court Judge Marcia Cooke ordered a hearing to determine the restitution to be paid by Morejon, which is scheduled for March 18, 2009.

Larry P. Nardelli of Tampa, Florida, was found guilty of six of the eight counts in which he was named as a defendant in a 47-count indictment. According to evidence presented at trial, Nardelli, who was indicted in July 2008 along with three other co-defendants, entered into several bogus purchase/sale contracts, with co-defendant Michael A. Tringali. They pretended that Nardelli had made downpayments totaling $21.5 million to purchase properties owned by Tringali, all for the fraudulent purpose of providing an apparent source of funds. The conspirators allegedly created a scheme in which they agreed that co-defendant Neil Mohammed Husani would enter into a contract with a seller to purchase vacant land in the Sarasota, Florida area and then would immediately flip the property to Tringali at double the price. Tringali then applied for a loan to obtain funding for the purchase. Relying on the sham contracts entered into with defendant Nardelli, Tringali falsely represented to the various banks that he had the required equity to contribute toward the purchase of the property. Tringali also submitted false financial information about himself and his company. Co-defendant John A. Yanchek, in his capacity as the closing attorney for the conspirators, prepared false escrow letters and closing documents. As a result of the criminal activities of the conspirators, the victim banks unwittingly loaned Tringali money totaling approximately 140% of the value of the land. The conspirators purchased the vacant land from the seller and distributed the excess funds among themselves in various amounts. Ultimately, Tringali was unable to pay off the loans. The total face amount of the commercial loans fraudulently obtained from seven banks was $82.7 million. Yanchek pleaded guilty in February 2009 to related charges and awaits sentencing. Tringali pleaded guilty in November 2008 to related charges and is scheduled for sentencing on March 9, 2009. Mr. Husani is a fugitive who was recently arrested in Jordan. Efforts are underway to have him extradited back to the Middle District of Florida. Nardelli's sentencing hearing is scheduled for June 15, 2009.

Four New Yorkers have been indicted for allegedly orchestrating a fraud scheme involving more than $10 million in subprime mortgage loans. Sharmon Howell of Queens, N.Y., was arrested and pleaded not guilty in Manhattan federal court. June Persaud of Brooklyn, N.Y., surrendered to authorities and also pleaded not guilty. David Moore of Brooklyn and Oscar Ancrum of New York, N.Y., remain at large. According to the indictment, from 2006 through 2007, Mr. Howell allegedly led a scheme to obtain dozens of home mortgage loans by submitting applications and supporting documentation containing false and misleading information to various banks and lenders, ultimately obtaining more than $10 million in subprime mortgages. To further the scheme, the defendants allegedly recruited straw buyers from, among other places, a halfway house in New York City that served ex-convicts and a public housing complex in Brooklyn, to purchase properties in and around New York City. The defendants allegedly obtained mortgages on behalf of the straw buyers for amounts greater than the actual sale price of the homes. To do so, the defendants allegedly obtained fraudulent appraisals for the homes and misrepresented various material facts about the straw buyers' income, assets, debts and intent to live in the properties. After obtaining these mortgages, the defendants allegedly distributed the difference between the price of the house and the inflated value of the mortgage among themselves. Currently the vast majority of the mortgages obtained by the defendants are in default and/or foreclosure.

The Obama administration is still standing behind a Real Estate Settlement Procedures Act rule and urged a U.S. district court to dismiss a legal challenge to the rule with "prejudice." Department of Justice attorneys did not present a defense or any praise of the RESPA rule, which the National Association of Mortgage Brokers claims in a lawsuit would place brokers at a "permanent disadvantage in the marketplace." Opponents of the RESPA rule noted that the DOJ response was expected and the new administration still has time to reconsider its position, since the main provisions of the final rule do not go into effect until January 10, 2010. "We hope the new administration will pull back the RESPA rule as they are doing with other regulations that were put into effect by the Bush administration after the election," said Matt Dolan, a NAMB consultant with the Federal Policy Group. The Department of Housing and Urban Development issued the RESPA rule in November. It requires lenders to provide a standardized and expanded good faith estimate disclosure to borrowers shortly after they file a mortgage action. The GFE includes a disclosure of the mortgage broker's compensation, which NAMB claims is unfair - since other originators don't have to disclose their compensation.

The National Association of Mortgage Brokers has filed suit against the Federal Housing Finance Agency to block implementation of a new GSE appraisal rule, claiming it could put brokers out of business and allow appraisal management firms to profit at the expense of independent appraisers and consumers. The new 'Home Valuation Code of Conduct,' which goes into effect May 1, prohibits loan officers and mortgage brokers from directly ordering appraisals. NAMB claims the code has a "bias toward mortgage lenders" and that major banks are already requiring brokers to order appraisals through their affiliated appraisal management companies. The trade groups says the new code of conduct is a result of an investigation led by New York Attorney General Andrew Cuomo into the relationship between an appraisal management company (AMC) and the now defunct Washington Mutual, which sold mortgages to Fannie Mae and Freddie Mac. "Although the WaMu lawsuit ostensibly related to how WaMu's relationship with its AMC generated fraudulent appraisals and contributed to WaMu's financial demise, the resulting agreements focused on mortgage brokers, which had nothing to do with the claims alleged in the WaMu lawsuit," NAMB says. The new appraisal code stems from a GSE/FHFA settlement with the New York AG. The valuation code's "abolition on broker-ordered appraisals will force mortgage brokers and customers to rely on lenders and their affiliates for home value appraisals, disrupting the established business practices of mortgage brokers, decreasing the efficiency of the marketplace and increasing the costs to consumers," NAMB says.

For the second consecutive year, Stewart Information Services Corp., Houston, has posted a full year loss, but a fair amount of the loss is due to agent fraud. The title company lost $234.5 million ($13.37 per share) for the full year 2008, compared with a loss of $40.2 million ($2.21 per share) for 2007. In the fourth quarter 2008, Stewart lost $158.0 million ($8.72 per share), vs. a loss of $31.3 million ($1.74 per share) one year prior Included in the losses are a strengthening of policy reserves by $32.0 million as a result of unusually large claims payments related to policies issued in 2005, 2006 and 2007. An additional $41.7 million of charges are related to large title losses and defalcations attributable to independent agents of the company. "This difficult economy placed significant financial pressures on owners of independent title agencies which resulted in increased escrow fund defalcations and, therefore, higher title losses for us," said Malcolm S. Morris, chairman and co-chief executive. "To address this, and to reduce the overhead costs associated with low-premium volume agents, we cancelled more than 2,500 agencies during 2008. This action, while lowering revenues an insignificant amount, results in an improved risk profile and profit potential for us in future periods."

Joseph A. Baumeister of St. Louis pleaded guilty to one felony count of bank fraud in a mortgage scheme involving 16 area properties. According to court documents, between January 2007 and October 2008, Baumeister operated a scheme to defraud several mortgage lenders through his development company by using straw purchasers to buy 16 residential properties based on misrepresentations to lenders. He then took money from the closings of the properties by artificially inflating the sales price or by falsely claiming that various home improvements had been made. After the closings on these properties, Baumeister found tenants for the properties, collected rent, and made mortgage payments on occasion. Eventually, mortgage payments fell behind or were not made and the majority of these properties went into foreclosure. The funds Baumeister extracted from the closings totaled $364,523. Sentencing is scheduled for May 1.

The leader of a multi-state fraud scheme that cost lenders at least $2.5 million was sentenced to 45 months in prison. After being convicted in April 2008 for masterminding a mortgage fraud scheme involving homes in Phoenix, Las Vegas, San Diego and other areas, Marcus Dozzell of Henderson, Nev., was sentenced while co-defendant Lutrell Sharpe received a term of 88 months in prison. According to U.S. attorney Diane J. Humetewa of Arizona, from May 2002 through May 2007, Dozzell, Sharpe and others conspired to commit mortgage fraud whereby Dozzell and Sharpe fraudulently submitted mortgage loan applications on behalf of straw buyers under false pretenses, obtaining and disbursing the proceeds of fraudulently obtained loans, including directing portions of the proceeds to bank accounts in Dozzell and Sharpe's and other defendants control. Sharpe directed others to prepare fraudulent loan applications misrepresenting salary, assets and liabilities. Ten other co-conspirators were also charged and have pleaded guilty. Sentencing for that group will come in the next few months.

An Oxon Hill, Maryland, man pleaded guilty to mail fraud in connection with the fraudulent purchase of 25 properties in Maryland, the District of Columbia and Virginia. According to prosecutors, Terrence White and others used false mortgage and settlement documents to buy the homes, and paid at least 15 "straw buyers" $10,000 per property to purchase the properties on their behalf. White created false mortgage and settlement documents, many of which misrepresented the straw purchasers' income and assets. White and others also created false invoices to claim that their now defunct company, Brotherly Investment Group, performed "renovations" on some of the properties. Using these false invoices, White and others were "repaid" at closing for the purported renovations. Between 2006 and 2008, White and others received $3.83 million in fraudulent funds. Many of the purchased properties have been foreclosed upon.

House and Senate conferees raised the first-time homebuyer tax credit to $8,000 (a $500 increase) during last-minute negotiations on the pending economic stimulus bill. Also, the effective date of the credit was increased by three months to December 1. The final stimulus bill (H.R. 1) also raises the maximum GSE loan limit to $729,720. At press time the House was voting on the $800 billion package. A Senate vote on final passage could come as early as Friday evening or during the weekend. As reported earlier, the conferees cut a $15,000 homebuyer tax credit approved by Senate in half and limited the tax benefit to first-time homebuyers. The final version of H.R. 1 also restores the maximum $729,750 loan limit for Fannie Mae, Freddie Mac and Federal Housing Administration loans for the rest of this calendar year. (The current limit is $625,500.) Reinstating the higher loan limits will "help to reduce inventory and improve liquidity in the overall mortgage market," said Charles McMillan, president of the National Association of Realtors. Although the $8,000 first-time homebuyer tax credit is a disappointment to many in the industry, the tax writers made it a real tax credit so homebuyers do not have to repay it like an interest-free loan. Eliminating the repayment provision should bring more buyers into the market, Mr. McMillan said. The final stimulus bill also raises the loan limit on FHA-insured reverse mortgages to $625,500 from $417,000 for the rest of the calendar year.

Lee Howlett of Portland, Oregon, pleaded guilty before U.S. District Court Judge Robert E. Jones to charges related to his participation in a mortgage fraud scheme. Howlett was charged as part of Operation Malicious Mortgage, a nationwide mortgage-fraud sweep involving more than 400 defendants. According to Karin J. Immergut, U.S. attorney for the District of Oregon, between 2002 and 2006, Howlett conspired with others to purchase real property in the name of co-conspirators. He caused false information to be given to mortgage lenders in applications for mortgage loans by the co-conspirators to induce lenders to approve mortgage loans. He created false appraisal reports for properties used in the conspiracy and signed the reports using the name and license number of a licensed appraiser without the appraiser's knowledge or authority. Appraisals on some properties were inflated and the higher value was used to apply for larger loans. According to court records, between 2003 and 2006, Howlett made false statements on applications for mortgages on approximately 16 transactions involving seven properties and financing totaling around $3.7 million. Howlett took the excess funds for his own use and to share with his co-conspirators. The properties were either sold or went into default. Sentencing is set for May 5, 2009.

After being convicted in November 2008 for charges related to organizing a mortgage fraud scheme, Mitchel A. Fuchs, a.k.a. "Mike Fox," of Rockford, Illinois, was sentenced by U.S. District Judge Frederick J. Kapala to 144 months in prison. In addition to the 12 years of imprisonment, Judge Kapala also ordered Fuchs to pay $183,890 in restitution. According to Patrick J. Fitzgerald, U.S. attorney for the Northern District of Illinois, Fuchs, and co-conspirators Frank G. Anast of Rockford, and Jessica L. Gibson of Loves Park, Ill., defrauded commercial lenders by causing unqualified loan applicants to receive commercial loans. From 2002 through approximately 2005, Fuchs was a loan officer at two Rockford mortgage brokerage firms that earned fees by assisting customers in obtaining mortgage-backed loans from commercial lenders. From February of 2004 through August of 2004, Gibson worked for Fuchs as a loan processor. During this same time period, Anast was self-employed doing computer work. Fuchs defrauded commercial lenders by deceiving them into funding loans for unqualified loan applicants by paying Anast to create fictitious pay stubs and W-2s for Fuchs' loan customers. In addition, Fuchs and Gibson falsely altered pay stubs and W-2s for other loan customers and altered credit reports for Fuchs' loan customers. Fuchs created fictitious cashier's checks and official bank checks to falsely show that his customers had invested their own funds in the properties. In addition, Fuchs and Gibson created fraudulent investment statements in order to show that loan customers had sufficient funds available to close on the loans they were seeking. Both Anast and Gibson were sentenced on Nov. 14, 2008. Anast was sentenced to five years of probation, 10 months of which are to be served on home confinement and ordered to pay $87,369 in restitution. Gibson was sentenced to four years of probation, two months of which are to be served on home confinement and ordered to pay $29,510 in restitution.

After admitting to leading a scheme to fraudulently obtain more than $12 million in home loans, David Kostelec of Leawood, Kansas, has been sentenced to 154 months in federal prison and ordered to pay more than $1.3 million in restitution. In his plea in October 2008, Kostelec admitted that from July 20, 2002, through Oct. 14, 2005, he and others conspired to defraud lenders by submitting fraudulent loan applications and false real estate appraisals and attempted to conceal the crimes by laundering the money through accounts at various banks. Kostelec submitted false and fraudulent appraisal reports to lenders containing inflated property values and forged signatures of licensed appraisers. Conspirators stole the identities of licensed appraisers by searching the Internet for information including the appraisers' state license numbers. After closing, the conspirators used straw entities to receive the money from escrow companies. Then they moved the money to personal accounts. Kostelec admitted to committing these schemes with properties in Kansas, Missouri and Florida.

Chandra Jones of Lanham, Maryland, pleaded guilty to charges related to a mortgage fraud scheme that falsely promised to help homeowners facing foreclosure keep their homes and repair their damaged credit. According to her plea agreement, in July 2005, Jones was hired to work as a loan processor at the now-defunct Metropolitan Money Store in Lanham, Md., which offered foreclosure consultation and credit services to financially distressed homeowners. At MMS, Jones conspired with others to fraudulently promise to help troubled homeowners avoid foreclosure. 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. Using the homeowners' properties, the conspirators applied for mortgages to extract the maximum available equity from the homes and prepared and submitted to mortgage lenders fraudulent loan applications to obtain inflated loans on the target properties in the straw buyers' names. At settlements, the conspirators imposed numerous fees and required "seller contributions," which were far in excess of industry standards. They also imposed fees for services that were not performed. The total loss attributable to Jones is $4.19 million. Jones, daughter of former MMS CEO Jennifer McCall and her husband Clifford McCall, is the sixth defendant to plead guilty in the MMS mortgage fraud scheme. The McCalls also pleaded guilty to fraud charges connected with the scheme. U.S. District Judge Roger W. Titus scheduled sentencing for Jones on Oct. 5, 2009.

Alexander Kaplan of Brooklyn, New York, was found guilty in Manhattan federal court of participating in a multimillion-dollar mortgage fraud scheme. According to the evidence at trial, from late 2004 through January 2007, Kaplan and his coconspirators, using straw buyers, obtained hundreds of mortgage and home equity loans by submitting loan applications and supporting documents that contained information about, among other things, the prospective borrower's employment, income and assets and intent to reside in the property in question, as well as the fair market value of the property. Additionally, Kaplan and his co-conspirators, using artificially inflated appraisals, sought and obtained mortgages at values that exceeded the properties' actual sale prices and true market values. Kaplan served as the attorney for the straw buyers and the banks in the closings of sales of 10 rent-regulated condominium apartments on the Upper West Side of Manhattan. None of the documents submitted to the lenders in these transactions disclosed that: certain buyers were seeking loans to purchase more than one apartment as a primary residence; each of the apartments was already occupied by a tenant and therefore not suitable for a primary residence; or the apartments were subject to rent regulation laws that precluded the buyer from charging the reported rents. Kaplan presided over the closings and obtained false documents. Almost all of the apartments were then resold to straw buyers within a matter of months. The purported sales prices for each of the flips were almost twice the initial purchase price and Kaplan's co-conspirators obtained almost $13 million in additional loans on the apartments. Of the 26 other defendants originally charged with Kaplan, 25 have pleaded guilty. Sentencing for Kaplan is for May 1, 2009.

John A. Yanchek of Sarasota, Florida, has pleaded guilty to three counts of a 47-count indictment charging him and three other individuals with conspiracy, making false statements in connection with bank loans, scheming to defraud several FDIC-insured banks and money laundering. According to the plea agreement, Yanchek entered into a conspiracy to make false statements to federally insured banks in connection with applications for commercial loans to fund the purchase of vacant land in the Sarasota/Manatee, Fla., area for development. The object of the conspiracy was to obtain a loan from a bank in an amount that was sufficient to allow the conspirators to purchase the property without contributing any equity of their own and to receive excess loan proceeds for their personal use and benefit. To influence the lending decision of the various banks, Yanchek, acting in his legal capacity as the closing attorney, made false statements regarding the financial resources of the borrower, the amount and source of equity contributed by the borrower, compliance with the seller's obligation to provide marketable title to the property and distribution of the loan proceeds. The total face amount of the commercial loans fraudulently obtained from seven banks was $82.7 million. Yanchek was one of four individuals indicted in connection with this scheme, including Neil Mohamed Husani, Larry P. Nardelli and Michael A. Tringali. According to the U.S. attorney's office, co-defendant Tringali pleaded guilty to the conspiracy charge on Nov. 3, 2008, and awaits sentencing. Mr. Nardelli is on trial this week. Mr. Husani has been arrested in Jordan.

The American Securitization Forum has begun its next phase of a project aimed at restoring investor confidence in the moribund market for mortgage- and asset-backed securities that includes a proposal for monthly servicer reporting on deals through maturity. The group, as part of its ongoing Project on Residential Securitization Transparency and Reporting, released a request for comment on its new residential MBS reporting package for the securities that sets guidelines aimed at making the performance of their underlying loans easier to track. The reporting package consists of a proposed package of data fields set to be updated monthly by RMBS servicers throughout the life of an RMBS deal and distributed to investors and credit rating agencies. The ASF, in conjunction with its conference in Las Vegas, also has released for comment a revised version of last year's proposed RMBS disclosure package, a 135-field package of pool and loan-level information that was designed to be used when RMBS deals are initiated and aimed at allowing investors to more easily compare loans and transactions across all issuers and perform some key loan-level analysis. The ASF said it also has issued a set of recommended data fields for manufactured housing securitizations and addressed issues involving information about modifications, second liens, fraud, the definition of "full documentation" and standard terms and identifiers designed to avoid confusion. Both packages include similar recommendations for file naming conventions and were designed to complement each other.