California Real Estate Fraud Report

In an article published today on its website, the Association of Certified Fraud Examiners’ chairman questions what the best way to prevent fraud is, and whether our society can do more to prevent fraud than it is doing currently.

Joseph T. Wells is a former FBI agent and CPA who specialized in fraud cases before he founded the Association of Fraud Examiners (ACFE) and developed the rigorous training program that can result in professionals earning the CFE - Certified Fraud Examiner certification.

Published on the ACFE’s website today, Wells’ article first reviews how Bernard Madoff created the largest Ponzi scheme ever recorded, then describes the mathematical impossibility of Madoff’s scheme and that it was bound to unravel. All Ponzi schemes depend on earlier groups of investors being paid off by later, larger groups. Eventually it becomes exhausting for the person operating the Ponzi scheme to keep the fraud going; we all know the rest.

All that being the case, what is most surprising is that ten years ago, a CFE named Harry Markopolos, hired by a Madoff rival to reverse-engineer Madoff’s successful strategy, determined that Madoff was most likely operating a Ponzi scheme, yet Markopolos’ verbal and written reports to authorities such as the SEC (Securities and Exchange Commission) were rebuffed. All those early investors were laughing all the way to the bank and future wannabe investors plus Madoff’s many friends in the federal government, had their collective ears and eyes wide shut.

Joseph Wells argues that in addition to the prison sentence handed out to Bernard Madoff, Madoff also should be required to educate consumers from the confines of his prison cell about how he conceived and carried out his Ponzi scheme for so long. This, argues Wells, is one of the best ways to prevent fraud: by educating and deterring.

But in the case of Bernard Madoff, it is not clear whether the public being educated would have had much, if any, impact or a deterrence effect upon Madoff. As noted, Madoff never advertised his services or successes, so there was essentially a wall of ignorance separating each investor group from the other. It was this inability to see the forest through the trees, as well as most investors trusting their investment managers to have knowledge of the true abilities of the world’s Madoffs, that allowed Madoff to operate freely and without concern of being detected for so long.

Click here to read the editorial by Joseph Wells on the ACFE website.

The Office of the Inspector General (OIG) is the taxpayers’ watchdog for large-scale fraud at the federal level. If ever there was a federal program whose funding should not be cut, it is the OIG.

Now, the special agent in charge of the OIG’s Crimination Investigation at HUD, the federal Housing and Urban Development that oversees FHA loans for low-income, first-time buyers, is sounding the alarm about fraud in the FHA loan program.

Speaking on a panel at the Government Housing and Loan Production Conference sponsored by the Mortgage Bankers Association, Special Agent Anthony Medici asserted that the higher loan limits for FHA loans are attracting more fraud. He cited the increase by 42% in the rate of 90-day delinquent FHA loans from fiscal 2007 to fiscal 2008. He also noted that past due FHA loans are now almost 14 percent.

Read the Full Article on AllBusiness.com

Here’s a scheme that has sprouted from the increase in bank-owned, aka REO (real estate owned) market. It should outrage every honest, hard-working person who plays by the rules and doesn’t want to subsidize those who don’t.

Read my article on my channel as the L.A. Fraud Examiner on Examiner.com

Many of the issues that are reported in the California Real Estate Fraud report - elder financial fraud, rental fraud, and the now tradition (sic) mortgage fraud, loan fraud and real estate fraud that became so common they qualified as business-as-usual during the subprime mania - were topics of discussion at a panel of real estate experts held in downtown Antioch last week.

Billed as the Contra Costa County Real Estate Fraud Summit, the summit included Terrence Christopher Patterson, of the state Department of Real Estate, an agent from the U.S. Secret Service who discussed identity theft resulting from loan applications being mined for personal data, and other local professionals.

Read the Full Article in the San Jose Mercury News.

Congresswoman Tammy Baldwin (D-WI) and Congressman Howard Coble (R-NC) have introduced the Senior Financial Empowerment Act of 2009 (H.R. 3040). The legislation, if passed, will help stop abusive mail, telemarketing and Internet fraud that targets senior citizens.

Congresswoman Baldwin says she became aware of the vulnerability of seniors to predators while helping her own grandmother.

Read the Full Article in TMC News.

New York State Attorney General Andrew Cuomo thought he was solving a problem. Failed subprime lender WaMu had been accused by Cuomo of pressuring eAppraiseIT and its appraisers to pump the valuations of homes during the subprime mania. Higher home appraisal values meant higher commissions to WaMu loan officers; also subprime loans had a higher profit margin - again, higher commissions.

Some of the appraisers, independent contractors, had resisted WaMu’s strong-arming them and interfering with not only the appraisers’ independent judgment, but also their already existing code of professional ethics. At the risk of being blacklisted and losing work, some appraisers caved in, while others resisted and fought back with lawsuits against WaMu.

Cuomo, after doing a great job of nailing WaMu, came up with the lame and bone-headed idea of the Home Valuation Code of Conduct for appraisers. It’s lame and bone-headed for three reasons:

(1) HVCC institutes guidelines that appraisers already follow when not under economic duress;

(2) HVCC avoids directing the blame where it lies - with the mortgage lenders;

(3) HVCC creates a new bureaucracy, i.e. 3rd party “appraisal firms” that subcontract with appraisers. Appraisers, lenders and real estate agents complain that this has slowed-down the ordering and completion of appraisals, thereby endangering the approval and funding of loans and closing transactions (escrows).

For a well-written article on HVCC, see Julie Messina’s discussion of the HVCC on Examiner.com

That’s strong language. Unfortunately, many real estate agents and their buyers, after being shut out of numerous purchases of homes, are concluding just that.

In a conventional sale of a residential property (but this applies to commercial and industrial too), the buyer’s agent, also known as the “selling agent”, presents a written offer to purchase to the listing agent. The listing agent then presents that offer to the seller(s), who can accept the offer, make a counter-offer, or reject the offer outright.

Conventional sales are a rare beast these days, replaced in disproprtionate quantities by short sales and REOs, both of which present opportunities for less-than-ethical behavior by some listing agents, along with their sellers. In some neighborhoods in the San Fernando Valley, I’ve calculated that 93% of the properties currently listed, are foreclosure properties, either short sales, or REOs.

In contrast to the above description of a conventional sale, both the short sale and REO (Real Estate Owned, bank-owned properties) involve negotiation with a bank, lender or servicing firm that represents an investment bank, e.g., Deutsche Bank. Under such circumstances, neither the buyer nor his/her agent has the ability to meet the seller/bank. They therefore have no assurance that their offer was actually transmitted to the lending institution for consideration.

Why, do you ask, wouldn’t the listing agent transmit all offers - especially when there is multiple bidding for a property - to the seller/bank? There is only one reason: the listing agent has his/her own buyer and wants to “double pop”, or collect both commissions. If the listing agent’s own buyer does not have the highest offer, s/he moves their buyer to the top of the pile by not transmitting all the offers. The bank doesn’t know, and the other buyers and their agents don’t know either. They’re just told their own offer was rejectd. Only after escrow closes, when they see that the selling (buyer’s) agent was also the listing agent, and the sale price was lower, do they realize what happened.

What next? What can buyers who have been defrauded out of a purchase do? Very little, for the most part. Most banks hide their asset management (REO) and short sale departments because they don’t want contact with the public. Even their fraud departments show little interest in following up on complaints by jilted buyers or their agents. And the listing agent, who was the doorkeeper to the entire transaction, certainly won’t confess to his/her tactic.

For another story on buyer frustration with short sales, see this in the San Bernardino County Sun. There is a brief paragraph with me at the end of the article. The newspapers’ editors apparently didn’t want to touch the topic of real estate fraud.

No news to honest real estate professionals, home buyers and sellers: the San Fernando Valley is “awash” in real estate fraud, mortgage fraud, appraisal fraud, foreclosure fraud, rental fraud - you name it, we have it.

Residents wanting to learn more about foreclosure fraud were treated to excellent speakers at a meeting hosted by the Shepard of the Hills church in Porter Ranch. Detective Erin Camphouse, of the LAPD Real Estate Fraud Unit observed  “I think the Valley and South Los Angeles are two higher frequency areas (of foreclosure fraud).”

Read the Full Article in the San Fernando Valley Sun.

An escrow officer has been convicted of two counts each of felony grand theft and felony identity theft by an Alameda County jury.

Former Financial Title escrow officer Wonda Kidd, 58, was convicted for her vital role for aiding and abetting a “massive” Vallejo-based real estate fraud scheme, according to prosecutors. She faces up to five years in  state prison when she is sentenced. Co-conspirator and accused mastermind Karim Akil, 42, already pleaded guilty to grand theft charges in 2008 and is currently serving a three-year sentence in state prison.

Read the Full Article in the Times Herald.

According to the Contra Costa Times “Mortgage fraud has increased so dramatically in the San Joaquin Valley that a task force of federal, state and local agencies has been formed to fight back”.

My question - and probably yours too - is where has mortgage fraud NOT increased?

In unprecedented cooperation between federal and local agencies, the FBI, IRS, Secret Service, Department of Housing and D.A.s in Fresno, Tulare have formed a task force to investigate mortgage fraud and other foreclosure scams in the central region of California. The FBI has already set up 65 similar task forces around the country.

Here’s some unsurprising statistics: in 2008,  the FBI received 28,873 reports of suspected mortgage fraud in the U.S. and had more than 2,000 cases under investigation. But they only opened 734 cases, about 2.5% of the total reported. Not good news for victims . . .

Read the Full Article in the Contra Costa Times.