California Real Estate Fraud Report

Five loan officers from Creative Financial Solutions, Inc. (CF) have pled guilty to wire fire and admitted that CFS, a mortgage brokering company, obtained mortgage loans for unqualified borrowers by submitting false loan applications, false bank statements, and false income documentation. In total, the lenders who funded their loans, may have lost up to $16 million on properties that have been foreclosed or are in the foreclosure process.

Read the Full Article in the Imperial Valley News.

The San Mateo County Investment Pool has filed a civil lawsuit against executives for Lehman Brothers Holdings Inc., accusing them of concealing information from investors about the firm’s losses in the real estate market while taking home lucrative bonuses.

The investment pool, which represents public agencies that invested in Lehman, lost more than $150 million when Lehman Brothers went bankrupt. They are suing the executives and the firm’s auditor, Ernst & Young, alleging fraud, negligent misrepresentation and violations of California law and the federal Securities Act.

According to Supervisor Mark Church:

“The theory here is the top management fraudulently represented that the company was financially strong at a time when they were about to declare bankruptcy. What makes this case so outrageous is all the while, they were siphoning off millions of dollars for their personal benefit, leaving good-faith investors holding the bag. It hurts our schoolchildren, our transit projects, and other essential services that we provide.”

Lehman Brothers was also in the news as the source of tens of millions of dollars lent to the Beverly Hills real estate fraud, appraisal fraud and mortgage fraud ring, whose accused members include Mark Alan Abrams, Charles Elliott Fitzgerald, Joseph Babajian and Kyle Grasso. Read earlier articles in the California Real Estate Fraud Report and another in Mortgage Law Central.

Read the Full Article in the San Jose Mercury News.

James B. Duncan and Hendrix Montecastro were two of three principals of a number of companies, two of which, Pacific Wealth Managment and Stonewood Consulting, Inc., are accused by the Securities and Exchange Commission (SEC) of defraud almost 100 investors out of more than $11 million, forcing many of them into foreclosure. Now Dundan’s father and Montecastro’s mother-in-law have been arrested on charges of making false statements on loan applications - mortgage fraud and loan fraud.

Real estate lawsuits filed by the investors accused Pacific Wealth and its affiliates and companies of committing loan fraud by falsifying loan applications. Appraisal fraud was an integral part of the conspiracy by making the properties to be purchased look to be worth more than they were.

As with many other real estate fraud schemes reported in the California Real Estate Fraud Report, Washington Mutual, aka WaMu, was the willing lender. WaMu is itself under investigation by several attorneys general for pressuring appraisers at eAppraiseIT, to inflate appraisals of properties with subprime loans in order to increase profits.

Read the Full Article in the Press Enterprise.

The troubles that resulted in WaMu being acquired for $1.9 billion by JPMorgan Chase seem to be 100% of its own making. They are being investigated by Andrew Cuomo, Attorney General for the State of New York, for pressuring appraisers at e-AppraiseIT to increase the value of properties so that their profits on subprime loans could be higher. Other attorneys general are investigating WaMu in their respective states.

WaMu and some of its executive officers are also the subject of civil lawsuits, one of which was filled by Chad Johnson, a partner at Bernstein, Litowitz Berger & Grossmann, on behalf of the Ontario Teachers’ Pension Plan board, a large shareholder. Says Johnson: “(CEO) Kerry Killinger pocketed tens of millions of dollars from WaMu, while investors were left with worthless stock.” With WaMu gone, he added, “it is all the more important that Killinger and his co-defendants are held accountable.”

Keysha Cooper, one of WaMu’s senior mortgage underwriters, describes a work environment in which approving loans, no matter how risky or dubious, was her job. To paraphrase the old Chiller films of the 1950s: “Volume was the order of the day”. This included strong-arming underwriters to “re-structure” loan applications until the numbers worked. Loan officers with high sales volume were rewarded with Hawaiian vacations, whereas those that balked, such as Ms. Cooper, found themselves being written-up and, in her case, being put on probation before ultimately being fired. One of the loans she ad objected to defaulted immediately; the borrower never made a single payment.

Read the Full Article in the New York Times.

Although many jilted investors have cheered at the recent arrests of the mother-and-son leaders of the bankrupt Paso Robles-based Estate Financial, they are only one group of a growing number of investors in the Central Coast who have had troubles with mortgage and lending firms.

Besides Estate Financial, other hard money lenders who are biting the dust are:

- Atascadero-based Hurst Financial, which had at least $86 million in investments last year, has had its license revoked by the California Department of Corporations and has been accused of fraud in September in filings by the Department of Real Estate. Hurst Financial has been the subject of several posts in the California Real Estate Fraud Report.

- Real Property Lenders of Paso Robles had its license revoked by the Department of Corporations in May. It had about $55 million in loans as of 2007,

- 21st Century Mortgage, also of Paso Robles, closed down abruptly about a year ago with no notice to its investors. Other firms eventually bought most of the loans.

Estate Financial is still the king of fraud allegations at the time of this writing. Their $170-million in loans were frozen and put under court control after the state revoked its license to sell real estate investments. On October 16, Estate Financial’s President, Karen Guth, and her son Joshua Yaguda were arrested at their Paso Robles ranch by investigators from the SLO County District Attorney’s Office.

Read the Full Article in the San Luis Obispo New Times.

James Hurst Miller, President of Hurst Financial, along with his daughter Courtney Brard, have surrendered their real estate licenses rather than fight allegations of fraud against their investors.

The California Department of Real Estate has advised investors that their only recourse to getting their money back is to file a civil suit against Atascadero-based Hurst Financial or obtain a criminal restitution order from a judge.

Read the Full Article on KSBY Action News.

At a legal forum held for real estate agents by the Silicon Valley Association of Realtors / Los Altos/Mountain View District, real estate attorneys cautioned agents and discussed issues ranging from ethics, disclosure and liquidated damages.

Attorney Stan Smith noted that the number of litigation cases is rising and that agents need to adhere to best practices. “When markets are good, we’re busy. When markets are bad, we’re really busy,” he said.

I have quoted directly from the Article in the Los Altos Crier for the benefit both of real estate professionals and consumers:

• Attribute and disclaim. Attribute where you get your information. If you didn’t verify the information, say so and cite the source of your information.

• Document, document, document. Once in litigation, people make up stories, so make sure you document everything, even telephone conversations. E-mail works best for this and is easy to confirm.

• Disclose, disclose, disclose. There is no harm in over-disclosing.

• Intentional failure to disclose is fraud.

• Keep files as long as possible.

• Be careful and knowledgeable about REO (real-estate-owned) properties. An REO is a property that goes back to the mortgage company after an unsuccessful foreclosure auction.

Mirroring the $700 billion bail-out of failed AIG and possibly WaMu proposed by the Bush Administration, now Marin County taxpayers are on the hook for $2.5 million loan to prop up a low-income housing program reflective of the incompetent and even fraudulent lending practices that are drowning the United States in a red ink deficit.

But if taxpayers are having to bail-out the low-income, subsidized housing program overseen by the Marin Housing Authority, who owns the homes in question - taxpayers or the lenders?

Read the Full Article in the Marin Independent Journal.

Two days after his license was revoked by the California Department of Real Estate (DRE), broker and developer Scott Webb was found dead in a motel in the Fresno area.

Webb and his business partner Tom O’Meara of Carmel, developers of the failed Running Horse golf club project in southwest Fresno, did not challenge accusations brought to the DRE that they had defrauded 10 investors, including some Monterey Peninsula residents, of about $6 million in Running Horse, a high-profile project that billionaire developer Donald Trump once showed interest in purchasing.

Read the Full Article in the Monterey Herald.

Tom Hastert, the attorney and owner of Loan Sense, the Grass Valley mortgage company being investigated for real estate fraud, has now been suspended from practicing law by the State Bar of California due to failure to pay child support.

Haster and Loan Sense are being sued by a number of individuals, including some who are elderly, who are alleging that their homes went into foreclosure due to the firm’s lending practices.

Read the Full Article in The Union.com by Laura Brown.