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mortgage origination fraud case in Anywhere, USA

By David Petrovich

Services for Real Estate Pros with S.P.O.C.H. a 501c3 Charitable NP

February 08, 2007 04:52 AM

Here's an example of a origination fraud scheme I've uncovered in Florida last month involving a mortgage broker, real estate broker, and an appraisal trainee. This type of fraud happens everyday, but is not always reported upon. The property is in Florida, but it could just as well be Anywhere, USA. The purchaser became an unwitting, but participatory victim. The mortgagee who purchased the subprime, 80/20 exploding ARM paper is facing loss, too.

A single Mom, financially unsophisticated, shared in the dream of homeownership. Never before owning a home, and lured by the promise of a 'no money down' purchase, and money back at closing, she entered into contract to purchase a home in obvious disrepair. (A legitimate home inspection report including a termite report was presented to her 45 days after closing, much too late to back out of the deal.) The money back after closing, she reasoned, was to pay for the needed repair including a roof, siding, foundation, plumbing, electrical, flooring, etc..

She had never earned more than $12,000 per year, and said so. The tax returns she provided to the loan officer (who happened to be the real estate broker, too) reflected an income of about $1,000 per month... but the neatly typed, formal loan application presented to the mortgagee for funding stated her income was $60,000.

The money promised to her at closing was used to pay closing costs, nothing more. The total real estate commission, plus mortgage broker commission was almost $20,000. Not to mention the fact the seller of the dwelling sold it for far more than it was worth....

Unable to effectuate emergency repairs (roof leak, rotted plumbing, no potable water) etc. the woman was forced to move out after only a short time. The loan(s) are now foreclosed.

The origination appraisal stated clearly, "needs no repairs" but the dwelling was decrepit, and had no potable water. The inconsistencies in the appraisal report are too numerous to mention, but suffice to say the opinion of value was delusional, at best.

Once the matter landed on my desk, (a referral from a local Realtor needing to construct a preforeclosure short sale) I checked an available database and discovered the licensed real estate broker was facing disciplinary action on another matter....

I constructed the case for short sale consideration, alleging mortgage loan origination fraud, etc. and provided my appraisal review and comparrison to the origination appraisal, etc., and all supportive income verifications, etc.

The lender's in house, loss mitigation appraiser was sent to the property to confirm my accusations... and agreed the dwelling should be bulldozed... and certainly wasn't described accurately in the origination appraisal.

The mortgagee, fully aware it will not recover nearly what it had loaned only 6 months ago, is now deliberating on the (preforeclosure short sale) offer presented, and how best to pursue the orchestrators of this fraud.

============

People would say the woman should have been represented at closing by an attorney. Agreed.
People would say she was too trusting. Agreed.
People would say the mortgage broker/real estate broker and his appraisal buddy should be in jail. Agreed.

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Lanette Branch

Taylor Properties - Bel Air, MD

Bel Air, MD Real Estate Agent

This is an absolute outrage. I am so naive; I honestly thought the days of blatant fraud like this were over. Today's fraud cases seem to take on a different, more subtle sort of nuance (if you know what I mean). How can any broker (real estate or mortgage) do something like this and expect to get away with it? Once all the dust settles and the entire story is disclosed, they need to put these buttholes up under the damn jail. This is ridiculous.

Feb 08, 2007 05:41 AM

Timothy Schwartz

Century 21 Mack Morris Iris Lurie - Marlboro Twp, NJ

David,

Welcome to ActiveRain Hope u are doing well. Monmouth County Rocks!

Feb 08, 2007 04:34 PM

David Petrovich

S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

Thanks, Tim. I enjoy receiving your monthly newsletter. Yes, Monmouth County does indeed "rock" but with all those 80/20 ARM McMansions including some in your "Neck" of the woods, we'll be seeing a listing or two requiring short sale administration.

Feb 08, 2007 11:32 PM

Kelli Fronabarger

Bend River Realty Inc. - Bend, OR

Realtor - Bend Oregon

Seems like with the many rules on the books, these things wouldn't happen anymore. Unfortunately, there's always someone conspiring to do everything they can in the name of GREED. Unfortunate for this woman, I hope she is able to sue them for everything they have.

Feb 22, 2007 05:33 AM

David Petrovich

S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

"I hope she is able to sue them for everything they have."

The majority of these scams go unreported and simply appear as another foreclosure. Firstly, hiring an attorney costs $$$. Secondly, the former homeowners are usually too embarrassed to raise a fuss, not wanting to call attention to their naivety or worse, they might not even know they've been hoodwinked.

Ive seen these cases handled like a hot potato. The lender, not wanting to take a hit, packages and sells the mortgage to a portfolio investor.

Feb 22, 2007 05:38 AM

Lisa Rapose

ReDesign To Sell (TM) - Woodstock, CT

David,

Are you saying that the mortgagee might not pursue this?

Can you keep us updated on this case?

Feb 27, 2007 11:58 PM

David Petrovich

S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

"Are you saying that the mortgagee might not pursue this?"

That is exactly what I am saying. Oftentimes these matters a swept under the rug because they are potentially expensive, and embarrasing.

I hope the mortgagee does pursue the perps. I know the mortgagor has neither the means, nor the time to see this through.

I don't know if my blog mentioned this, but I was interviewed by CNN for a foreclosure segment which runs or ran on Sunday AMs. I asked the producer if CNN was interested in a fully documented case of origination and appraisal fraud. I would walk tyhem thru the specifics and their cameras would recoirdf what was on the appraisal report vs. reality.

CNN, supposedly on the forefront of exposing foreclosure problems were not interested in this story even though it was under its nose in the shadow of their new, corporate offices.

Feb 28, 2007 01:08 AM

Lisa Rapose

ReDesign To Sell (TM) - Woodstock, CT

That's absolutely incredible!

I suppose this doesn't fall into the category of "the public's right to know"? :(

News mediums serve as the greatest impetus for change or reform of "that which is wrong"... This is a huge issue affecting the lives of many, many people. Hard to believe they don't see the value or impact of documentable cases such as this.

I sincerely hope that the mortgagee pursues this and/or some advocacy is undertaken for this woman. I find it sad to see such situations where a hard-working individual faces such life-altering events, through no fault of their own, to be left with little to no options for redemption.

Sadly, even in a litigious society, such as ours, there are still many who don't have a "voice"...

Feb 28, 2007 01:36 AM

David Petrovich

S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

News mediums serve as the greatest impetus for change or reform of "that which is wrong"...

Let's not overlook the fact that We The People don't really have control over our airwaves, having instead ceded the control to corporate conglomerates who, for the most part, dictate what we see, read, or hear. Oftentimes the voices advocating change from 'what which is wrong' are drowned, muffled, or ridiculed as being lunatic, crackpot, or. "fringe"

Feb 28, 2007 01:55 AM

Lisa Rapose

ReDesign To Sell (TM) - Woodstock, CT

Indeed.

Feb 28, 2007 03:41 AM

David A. Podgursky PA

THE PODGURSKY GROUP @ Re/Max Direct - Boynton Beach, FL

THE PODGURSKY GROUP - Make the Right Move!

People would say that someone making $12,000/yr should be renting... there just aren't many properties that she can get for $200/mo

maybe a mobile home would be a better choice...

I'm not bashing any of these systems... just that $12,000 just can't be done.

Mar 01, 2007 02:28 AM

David Petrovich

S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

Well, a friend of someone whom she met in church told her she could.... and she was duped. Ignorance isn't bliss.... but it is highly exploitable.

Mar 01, 2007 03:17 AM

Diane Cipa

The Closing Specialists® - Ligonier, PA

I can't believe so many of you are surprised. Fraud is rampant in real estate. It's only now abating to some extent because people are finally willing to talk about it.

Mar 03, 2007 09:34 AM

Ann Guy

NA - Allentown, PA

All parties are at fault here. Yes, the broker, appraiser, R/E agent should not be allowed to be in this industry. However, if she know that she only made 12k/year, she should have never signed the application and placed the bid. This is, of course, assuming that she was issued RESPA within the 72 hours of application. Was she depending on another person living with her to help her out? Did she have a job where she earned mostly cash (i.e. a waitress) and did in fact state that she made 60k/year?

I just read your blog again. It does seem like this woman was indeed lied to and ripped off. It is a shame that there are people who are willing to do that-put people in a situation where they have no option but to loose their homes. I do indeed hope legal action is taken

Mar 07, 2007 10:39 AM

Diane Cipa

The Closing Specialists® - Ligonier, PA

What is a predator?

Mar 08, 2007 02:07 AM

Anonymous

Rita Bradley

This won't be popular but while I agree that this was fraud, I think this woman bears much of the responsibility as well. Are you telling me that someone can't at least glance at their loan paperwork and see that their payments were too high for their income level?!

I am a little tired of hearing about these "poor, unsophisticated" homeowners. 99% of this type of fraud can't be perpetrated without the colusion of the homeowner. I see it time and again. Homeowners trying to short-sell their property after only having it for 2 months!!! Their interest rate hasn't re-set yet at that point!

Please don't think I don't have a heart, because I do. I just feel that homeowner bear some responsibility as well.

Jul 19, 2007 06:16 AM

#17

Lisa Rapose

ReDesign To Sell (TM) - Woodstock, CT

Rita,

While I can, certainly, understand your point of view...there are individuals out there who do "know" and abuse the system... The fact is that there are, also, individuals out there who don't understand the first thing about the home buying process. Even well-educated individuals...

There is a "disconnect" in this... Just as there is in any field that requires "professionals"... One might be well-educated and still not "understand"... It does not mean that they are stupid or that they are in collusion with perpetrators of fraud or wrongdoing...

Even well-educated individuals who are first-time homebuyers, often, have a difficult time understanding the process. So, if you take an individual who has not ventured out into this arena before? Someone who might not have the education or life experience? Someone without the benefit of an experienced family/friend to guide them?

In our society, we are to "trust" those who are supposed to "know"...to help us and guide us... (i.e., Doctors, Lawyers, Pharmacists, Real Estate Agents, Mortgage Brokers...the list goes on and on...).

The very reason that our society has established "safe guards" via laws, requirements and mandates is to protect those who don't "know" or "understand"... In fact, it is the fundamental basis for "fiduciary responsibility" of professionals...TRUST... We must "trust" in those who are to be acting in "our best interest"... Why? Because they are supposed to "know"...

This trust is to extend to the "well-educated and knowledgable" AND to the "poor, unsophisticated"...

In this blog, an individual was led to believe that "there was a way that she could be a homeowner"...by those she was supposed to be able to TRUST... There is no indication that she received any benefit from the default and I, therefore, must assume that she is innocent of collusion... Perhaps the argument can be made that "common sense" (yada, yada, yada)...but, I find no validity in that argument when there are many in our society who are not equipped to understand the intricacies/nuances of this process...and she appears to fit quite well into this category...

Who doesn't want their slice of the American Dream? If someone says you really can have your slice, are you going to take it?

Jul 21, 2007 07:10 AM

Diane Cipa

The Closing Specialists® - Ligonier, PA

Can you hear my applause, Lisa? Thank you for saying it so well.

Jul 21, 2007 09:31 AM

Diane Cipa

The Closing Specialists® - Ligonier, PA

Just curious. How many believe the Golden Rule is still an effective guide for business ethics?

Jul 21, 2007 10:23 AM

Rita Bradley

Laguna Hills, CA

Valuation Consultant in Orange County California 949-916-3263

"Who doesn't want their slice of the American Dream? If someone says you really can have your slice, are you going to take it?"

NO. I chose not to buy my first home during the boom because I knew that just because I could qualify for a home of my dreams doesn't mean I could afford it. I think some people didn't exercise self control. Sometimes we have to work and wait for what we want. There really is no free lunch.

That being said, you are right that some people just didn't understand how things work and trusted people who they shouldn't have for financial advice. The whole thing is a horrible mess.

Jul 22, 2008 09:13 AM