California Real Estate Fraud Report

Kyle Lagow is a hero and now, after suffering for his integrity, he’s about to be rewarded for it.

Lagow was formerly an appraiser for subprime mortgage lender Countrywide Financial. He had reported two areas where he was sure there was appraisal fraud:

First, LandSafe, Inc., a subsidiary of Bank of America, had been pressuring both in-house and independent contractor appraisers to inflate the values of properties, not only to ensure that sales closed, but to increase commissions for loan officers.

Second, Lagow was certain that homebuilder KB Home, which was in a joint venture with Bank of America, cherry-picked appraisers who would cooperate with inflating home values, also appraisal fraud.

Lagow emailed former Countrywide CEO Angelo Mozilo after his supervisors failed to address his concerns. Mozilo assigned Countrywide’s COO, Jack Schakett, and its chief compliance officer, Richard Wentz to look into the matter but they replied there was no basis for Lagow’s complaint after “investigating” it.

Six months after being fired in November 2008, Kyle Lagow heard about a False Claims lawsuit against KB Home being filed on behalf of home buyers by the Seattle-based law firm of Hagens Berman. He found out he had a whistleblower‘s case, filed his own lawsuit and later was interviewed by prosecutors in the U.S. Attorney’s Office in the Eastern District of New York. Investigators not only verified there had been appraisal fraud but also that Countrywide had had issues in its underwriting of FHA loans (loan which allow consumers to purchase a home with only 3.5% down-payment).

Lagow’s share of the settlement of the whistleblower case against Bank of America, which purchased Countrywide in 2008, is $14.5 million before taxes and legal fees. After being blacklisted as an appraiser and suffering severe financial repurcussions, he certainly deserves it.

Bank of America must pay $500 million to the Federal Housing Administration (that’s YOU, the taxpayer) as restitution and fund a loan modification program for Countrywide borrowers whose loan balances exceed the worth of their properties.

Read the original article on the Linesch Law Firm website.

Sherry Hunt, a 55-year old Missouri woman who joined CitiMortgage in 2004 as a vice-president in order to oversee its acquisition of loans underwritten by other banks, has struck gold for making honesty her first priority.

Hunt’s job was to audit the outside loans for fraud or other irregularities. In the mid-2000s, the hottest commodity was securitized mortgages and CitiMortgage, which was the sixth biggest lender at the time, was buying loans at breakneck speed. Before selling the mortgages to investors or vouching that they were eligible for government mortgage insurance, the loans had to be reviewed for complete signatures and documentation, the latter of which had to be verified. Citi’s guarantee to its investors was serious: it promised to pay on loans if the borrowers defaulted.

In March 2011, Hunt and another employee were ordered by Citi executive Jeffery Polkinghorne to lower the amount of loans they were classifying as defective – or else (bank fraud).  Hunt refused and sued Citigroup in Manhattan federal court under the federal Whistleblower’s Act. Her lawsuit, which accused the lender of violating U.S. home mortgage regulations, attracted the attention of the U.S. Justice Department, which joined the suit because Citigroup had accepted $45 billion in bailout (TARP) money from both the U.S. government and the Federal Reserve. Citigroup not only did not challenge her allegations, it did not defend itself in court and agreed to pay $158.3 million to settle the case. Of that amount, Sherry Hunt will receive $31 million.

Read the original article in Businessweek.

Two whistleblowers whose lawsuits against Bank of America played a role in the recent settlement agreement between the bank and the Attorneys General for the 50 states, have received settlements.

Appraiser Kyle Lagow’s complaint is said to have initiated the investigation by the U.S. Department of Justice into mortgage fraud at Countrywide Financial, which was purchased by Bank of America in 2008. Countrywide was one of many subprime lenders that were accused of pressuring appraisers to over-value properties (appraisal fraud) in order to inflate commissions and bonuses for its loan offices, management and executives (mortgage fraud). Lagow’s share of his claim, which was filed under the federal False Claims Act, is $14.5 million.

A second whistleblower, Gregory Mackler, has also reached an undisclosed settlement after challenging Bank of America’s management of the federal HAMP (Home Affordable Mortgage Program). Both men were represented by the Hagens Berman law firm.

Read the original article in Reuters and the Hagens Berman website.

The office of California Attorney General Kamala Harris has served subpoenas to Bank of America regarding the sale of mortgage-backed securities (MBS) to institutions done by Countrywide Financial, which BofA purchased in 2008.

California’s AG, which was in talks with the attorneys general of all 50 states to negotiate settlements with all the large banks (BofA, Wells Fargo, JP Morgan Chase, et. al.) with respect to the banks’ foreclosure practices, left those talks when Harris determined the settlement amounts were insufficient.

Harris’ pursuit of BofA could be costly to the banking giant: under California’s False Claims Act, defrauding the state via any of its institutional investors such as pension or other funds, could result in awards of three times the amount of the claim. If any employees of Bank of America step forward with solid evidence, they could be entitled to a percentage of those damages as a whistleblower.

Read the original article in the Los Angeles Times.

As if the major banking institutions didn’t already have enough problems, they’ve now been hit with a whistleblower lawsuit by two mortgage brokers in the Atlanta area for massive fraud against our nation’s veterans and the federal government.

The lawsuit, which was just unsealed by the federal Court in Atlanta, contains stunning accusations that the banks circumvented the “unallowable fees” portion of the Interest Rate Reduction Refinancing Loans program for veterans. This program helps current or retired veterans to refinance their homes at lower interest rates or to refinance at a shorter term than their current mortgages.

The banks are alleged to have shifted their normal fees from unallowable fees (attorney’s fees and settlement closing costs) to the “allowable fees” column, which would include credit reports, taxes and recording costs, often padding the latter with fees from the former. In one of the exhibits proffered by the plaintiffs, Wells Fargo reported a $950 title examination instead of the more customary fee ranging from $125 to $200.

The nexus for this lawsuit is that not only were more than 1 million of the refinanced loans with the alleged excessive and illegal fees charged to veterans, but that the Department of Veterans Affairs, which guaranteed the loans, will bear the losses of the homes which subsequently went into foreclosure.

The plaintiffs are Victor E. Bibby, the president and chief executive of U.S. Financial Services and Brian J. Donnelly, the firm’s vice-president of operations. They are represented by James E. Butler Jr.,  of Butler, Wooten and Fryhofer and Mary Louise Cohen, of Phillips and Cohen.

The banks targeted by the whistleblowers’ lawsuit are Wells Fargo, Bank of America (Countrywide Home Loans), J.P. Morgan Chase (Washington Mutual Bank) and Ally Bank (GMAC Mortgage), SunTrust Mortgage, CitiMortgage, PNC Bank (National City Mortgage), Mortgage Investors, First Tennessee Bank (First Horizon Home Loan), Irwin Mortgage and New Freedom Mortgage.

Read the original article in the Washington Post and National Mortgage News.

Dear Readers,

Below is a timely exerpt from my upcoming book on short sale fraud:

Bank of America, which acquired subprime lender Countrywide Financial Corp., has been ordered by the U.S. Department of Labor to reinstate a Countrywide internal investigator it had fired and to pay her $930,000. Eileen Foster had found “egregious fraud spread throughout the entire region” when she was auditing Boston-area branches, which resulted in the closing of most of those branches. An article in the Wall Street Journal reveals that the Department of Labor had concluded that Foster’s investigation found “forgery of loan documents, manipulation of borrowers’ assets and income, manipulation of the company’s automated underwriting system and destruction of valid documents.”

Several Bank of America employees said the whistleblowing Foster had been targeted and that the bank’s own investigators had a “profoundly biased view” against her.

iWatchNews, the publishing arm of the Center for Public Integrity, quotes Assistant Secretary of Labor David Michaels as saying “This employee showed great courage reporting potential fraud and standing up for the rights of other employees to do the same.”

Bank of America, which says it will appeal the order by Labor, said Foster, who filed for whistleblower protection under the 2002 Sarbanes-Oxley corporate reform act, had shown “inappropriate and unprofessional conduct with your staff and displaying poor judgment as a leader.”

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.

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.