FBI coming for crooked brokers
April, 01, 2008
Bona fide real estate companies may soon find themselves entangled in massive mortgage fraud cases as more FBI arrests of corrupt brokers are expected in the next few months, if not sooner.
Last year, the FBI launched 1,210 mortgage fraud cases — up threefold from the 436 cases launched in 2003. (The FBI only investigates mortgage fraud that is worth $500,000 or more.) And for the past six months, the FBI has been working with other federal, state and local agencies to further expand its sting. In interviews with The Real Deal, FBI officials said that more arrests will be announced soon and that crooked brokers working for legitimate real estate companies are next on the list.
Crime networks from Eurasia and the Middle East are running the biggest scams, said John F. Campanella, the FBI's supervisory special agent in New York.
"These are loosely knit crime groups, and everybody disappears in the woodwork, including the straw buyer and his counterfeit W-2 forms and worthless pay stubs," Campanella said.
But no matter how tight the crime networks are, they can't succeed without help from legitimate real estate firms.
"We arrest the street brokers at the first opportunity. But the street brokers have to go to legitimate, licensed brokers to submit documents to the banks. They process deals that they know are fraudulent: They want a cut of the deal, and that's where we have opportunity," Campanella said.
"The documents presented by the banks at closings can help us see where the money went," he added. "That's how we've arrested straw buyers and street buyers."
High up in a boardroom at 26 Federal Plaza, a group of FBI agents and officials laid out the mortgage scams in specific detail for a Real Deal reporter.
The FBI employees are part of a mortgage fraud working group that also includes members of the U.S. Secret Service, Housing and Urban Development, the New York State Banking Department, the New York State Department of Investigation, U.S. attorney offices and Veterans Affairs.
"It grows each month. We are pooling our resources," said special agent Kathleen M. Diskin.
About 90 percent of the mortgage fraud scams in the tri-state area occur in Queens and Brooklyn, mainly because that's where most of New York's single-family home units are, officials said.
As the price of homes skyrocketed by the middle of this decade, so too did the number of scams. According to the 2007 U.S. Foreclosure Market Report from RealtyTrac, which tracks foreclosure properties, there were 2.2 million foreclosure filings, default notices, auction sale notices and bank repossessions reported nationwide on 1.285 million properties last year.
That's up a whopping 75 percent from 2006.
The report also shows that more than 1 percent of all U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006.
The rise in mortgage defaults associated with subprime mortgage lending has created a group of desperate homeowners who are so close to losing their homes that they become perfect targets for mortgage fraud criminal networks.
Yet as big banks and mortgage companies lose significant money in the frauds, they begin to reach out to law enforcement with leads strong enough to launch investigations. It's then up to the prosecutor's office to decide how big a priority mortgage fraud should be, FBI officials said. Civil litigation, officials said, is highly unlikely because the people scammed out of their homes are left with nothing. They have no money for shelter, let alone for lawyers to sue the scammers.
The homeless ex-homeowners have also possibly already been duped by lawyers paid for by the scammers.
Even if those lawyers aren't in on the scam, they are paid a quick buck (usually $750) for their services, don't ask questions and don't take the time to learn what the homeowners are signing away, let alone explain the content of the papers to the homeowners themselves. While the lawyers are often unethical, it has thus far been difficult to prosecute them, as greedy incompetence does not automatically equate with criminal intent to defraud homeowner clients, said the FBI field agent.
The lawyers even have the audacity to blame their clients. The agent said lawyers give excuses like, "My clients didn't ask questions. I was in a rush that day."
"They can deny knowledge of the fraud itself," the agent said.
Law enforcement officals also noted that lenders need to do a better job of verifying potential homebuyers' identities as well as credit ratings and conduct their own property value appraisals instead of depending on potentially criminally inflated prices.
In another type of scam, ethnic crime networks buy and sell the same homes to each other, raising the price per home each time in intricate pyramid schemes. Homes valued at $300,000 in 2004 are flipped more than five times so that their end price, when the scheme is busted out, is $800,000, investigators said.
"And the straw buyer," said an FBI field agent, "pockets profit every step of the way."