In a letter to the Los Angeles Times, the FBI is defending its response to the wave of mortgage fraud, and rejecting the suggestion it could have done more to prevent the current mortgage crisis. The letter is in response to a Times story this week headlined "FBI saw threat of mortgage crisis," which reported that a top FBI official had warned in 2004 of widening loan fraud.
The FBI letter follows. Dear Editor:
Your 8/25 story on the mortgage crisis ("FBI saw threat of mortgage crisis", L.A. Times, August 25th 2008) implied that if the FBI had made more arrests for mortgage fraud, the crisis could have been averted. To even suggest that is a cry for a lesson in both civics and basic economics.
The story's premise was built around a 2004 quote from an FBI official who said he was confident the FBI could prevent fraud from becoming a massive problem. In context, Assistant Director Chris Swecker meant he believed the FBI could stay focused on mortgage fraud to prevent fraud from becoming the major driver that would cause a collapse of credit in the housing market. We believe by a good measure, the Bureau did that.
The FBI's Criminal Division has arrested 1000 suspects and targeted 180 criminal enterprises since 2004. We targeted those lenders and buyers involved in multiple frauds or cases where the profits went to drug crews, gangs or organized crime. More investigations are ongoing. But the FBI is a law enforcement and intelligence agency, we are not banking regulators.
In the end, most economists have attributed the crisis to very aggressive lending practices and too little risk management throughout the financial services industry. As far as mortgage fraud was concerned the FBI had the right intelligence and provided the right warnings to the industry but fraud alone does not appear to be the straw that broke the mortgage camel's back.
In the boom and bust of the mortgage business, to suggest that making more arrests would have averted the mortgage crisis is to confuse the root cause with the side-effects. It is not a fair or realistic assessment.
Kenneth Kaiser
Assistant Director
Criminal Investigative Division
Federal Bureau of Investigation
--Peter Viles
Photo Credit: FBI director Robert Mueller, via A.P.
 An FBI official recognized the gathering mortgage crisis as far back as 2004, and predicted confidently that the FBI could prevent the problem from growing as costly as the S&L crisis, the Los Angeles Times reports Monday.
From The Times: "Long before the mortgage crisis began rocking Main Street and Wall
Street, a top FBI official made a chilling, if little-noticed,
prediction: The booming mortgage business, fueled by low interest rates
and soaring home values, was starting to attract shady operators and
billions in losses were possible.
More: "'It has the potential to be an epidemic,' Chris Swecker, the FBI
official in charge of criminal investigations, told reporters in
September 2004. But, he added reassuringly, the FBI was on the case. 'We think we can prevent a problem that could have as much impact as
the S&L crisis,' he said.
The Times report, by Richard B. Schmitt, calls the FBI's response to the mortgage crisis "tepid," pointing out that roughly half of the FBI's mortgage fraud investigations involve losses of less than $1 million. Schmitt also reports that in 2007, when the mortgage implosion was front-page news, the number of FBI agents assigned to investigating mortgage fraud "shrank to around 100. By comparison, the FBI had about 1,000 agents
deployed on banking fraud during the S&L bust of the 1980s and
'90s, said Anthony Adamski, who oversaw financial crime investigations
for the FBI at the time."
-- Peter Viles
Your thoughts? Comments? E-mail story tips to Peter Viles.
Photo: FBI Director Robert Mueller; Credit: Getty Images.
Lender woes continue to mount.
Richard Schmitt reports today that a federal grand jury in L.A. has started probing three fallen hometown lenders and their subprime loan activities.
Subpoenas have been issued in recent weeks and months to Countrywide Financial Corp., which is now part of Bank of America, New Century Financial Corp., which is under Bankruptcy Court protection and IndyMac Bank, which was seized by federal regulators two weeks ago.
The question seems to be whether fraud and other crimes contributed to the national mortgage debacle. But several sources quoted by Schmitt suggest that the complexity of building cases against the companies may be very difficult for the feds to make. "What they may find is a lot of incredibly sloppy practices that are not necessarily criminal," says Bert Ely, a Virginia-based banking consultant.
A Business section feature on Newport Beach-based Downey Savings & Loan sets up the thrift's dismal news today of another quarterly loss and a growing number of bad loans on its books. The results sent the CEO and board chairman packing.
Some lenders seem to be dealing with their builder clients as they are their home-loan customers. The Times' Peter Hong talks to some local builders who say that banks are making it difficult for them to work out their  faltering loans, which could lead to defaults and bankruptcies. Many builders will go under, [Barratt American president Mick] Pattinson said, because "banks aren't supporting businesses that supported them for decades."
Maybe the building industry will need its own congressional rescue similar to the one the White House has now agreed not to veto. The House housing rescue bill approved yesterday would stave off foreclosure for hundreds of thousands of homeowners.
-- Annette Haddad
Photo credit: Mark Boster / Los Angeles Times
Questions? Comments? Email annette.haddad@latimes.com
 Responding to reports of the FBI's "crackdown" on mortgage fraud -- 144 cases nationwide in recent months -- readers here were unimpressed. Bill commented, "Heck, I could find 144 cases within a 10-minute walk of my house."
Laker adds, "Funny, you don't need FBI investigators spending months researching ... just check sales of houses in 2006, 2007 that got foreclosed within 12 months."
In the spirit of public service, a couple of readers have pointed out a pattern they believe might indicate mortgage fraud.
I'll go slowly: Readers of this blog believe a tell-tale sign of mortgage fraud is when a house sells at what appears to be a wildly inflated price. Then the house goes into foreclosure, or comes back on the market rather quickly, at a much lower price. These would be hints that the high sales price may have been fraudulent, creating a nice windfall of profit for the seller and the "buyer" (who had no intention of paying for the house) to split when they walk away from said house. A ding to the "buyer's" credit score, but a nice windfall.
Here's an example:
House sells in October 2004 for $800,000.
Same house sells again in August 2006 for $1.8 million.
House now for sale, listed at $1.1 millon.
Or:
House sells in February 2007 for $510,000.
House goes into foreclosure and is listed for sale at $279,000.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
A few updates on "Operation Malicious Mortgage,"
the Department of Justice name for today's announcement of various recent mortgage fraud prosecutions.
The DoJ's press release, which you can read here, says the initiative involves 144 cases and 406 defendants across the country. Many of the indictments have been previously announced, including four in Southern California. More on the California cases at the bottom of this post.
From the DoJ: "Operation Malicious Mortgage addresses primarily three types of mortgage fraud schemes: lending fraud,
foreclosure rescue scams and mortgage-related bankruptcy schemes.
Lending fraud frequently involves multiple loan transactions in which
industry professionals construct mortgage transactions based on gross
fraudulent misrepresentations about the borrower’s financial status,
such as overstating the borrower’s income or assets, using false or
fictitious employment records or inflating property values."
You can read complete L.A. Times coverage here.
Analysis: These appear to be a collection of smallish and unrelated prosecutions, but if you bundle them together and give them a name, you can portray them as part of a "crackdown," or, as the Department of Justice likes to say, a "takedown."
Relatedly: What is with the need to make every effort into an "Operation"? Operation Malicious Mortgage? A recent California fraud prosecution was called "Operation Homewrecker." I'm quite certain the readers of this blog can do much better in the "Operation Name that Operation" game. Please send your nominations via the comment button.
You can find a summary of recent Southern California mortgage fraud cases below.
Read more More on 'Operation Malicious Mortgage' »
From CNN this morning: "Hundreds of people have been arrested for alleged mortgage fraud as part of an investigation by the FBI and Justice Department that began March 1, government officials told CNN Thursday."
More: "Losses in the fraud cases total about $1 billion, one official said, adding that at least 300 were arrested.... Most of the arrests came Wednesday, federal law enforcement officials said, in cities including Miami, Houston, San Antonio, Baltimore, Chicago and others. The suspects are thought to have been involved mostly in small-scale schemes."
Analysis/Bloviation: I'm always suspicious of these government dog-and-pony shows, which invariably involve a press conference and a specially named task force (Operation Malicious Mortgage ... Operation Sub-Prime Thunder ... Operation Get the Bad Guys, whatever). These roundups are clearly planned and executed with the hope of commanding extensive media coverage. I'm not particularly interested in the pronouncements from Washington today; I'm more curious to see what kind of cases the government is bringing here in Los Angeles.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
 Yesterday's post about the possible loss of $6 trillion in housing wealth brought me a small flood of e-mail. One of the most provocative notes came from an old friend in suburban Phoenix who poses the question: How much of that $6-trillion bubble was created by outright fraud?
He writes, "I haven't seen articles surrounding the common fraudulent scheme where mortgage brokers worked with a home appraiser to overvalue homes, then direct owner to sell home to a pre-identified buyer at hundreds of thousands over market value with large kick-back from seller to buyer at closing.
"This happened with great frequency in my former neighborhood just north of Phoenix. In fact, three homes out of six homes on my former street are in foreclosure due to this scheme. An example: I sold my house in Dec. of 06 for $815K (legitimate sale and value at the time at height of price boom). Five months later the same house sold for $1.2 million. The people who bought it from me sold it to an "investor" at the $1.2MM price.
"We bought from builder in '03 for $493K then sold in Dec. '06 for $815K. My buyers never moved in but did remove expensive window coverings, outside landscaping fountain and custom-made iron entrance gate then did the kick-back sale scheme for $1.2MM. Their buyer never moved in either.
"The house is now in foreclosure but was recently listed (while in foreclosure) for $534K. It is now set to go to auction. What I wonder is, do the banks who hold the mortgages know the last buyer received the kick-back? Are they going after the money and prosecuting? This happened all over our community. The buyers would never even move in to the properties. They've been sitting empty for a year and a half with no landscaping and other maintenance being done on these upscale, gated golf community homes. Much of the sky-high valuations in the Phoenix and Scottsdale areas were an illusion as this scheme was rampant."
"What angers me most is that innocent buyers in the neighborhood would have been shown these phony sales as 'comparables' by their Realtor and may have overpaid for a home in a legitimate sale but have now lost a great deal of value as these 'comps' weren't real. I would imagine it took place in California and Nevada as well."
Fascinating note -- and frustrating, too. I've seen no evidence that prosecutors are going after this kind of fraud in any meaningful, systematic way.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Burbank Airport Sunset, submitted to Your Scene at latimes.com by dragonfly68.
 News item: California prosecutors have finally brought what they consider to be a major case alleging mortgage fraud.
From the L.A. Times tonight: "California authorities said today they cracked a mortgage fraud ring that allegedly victimized thousands of Californians, some of them elderly and some who lost their homes."
More: " 'As the mortgage crisis worsens, a growing number of fly-by-night companies are employing utterly brazen tactics to push homeowners into illegal and unconscionable loans,' Atty. Gen. Jerry Brown [pictured] said."
The companies accused in the crackdown are not exactly household names and were operated by a single family in Tarzana. The companies named include Lifetime Financial, Nations Mortgage, Greenleaf Lending, Virtual Escrow, Olympic Escrow and Direct Credit Solutions.
John Gittelsohn, writing on the Mortgage Insider blog at the OC Register, reports that this appears to be Brown's first attempt at prosecuting mortgage fraud since he took office. "As the birthplace of America’s subprime lending boom and bust, you’d expect California’s Attorney General to be a national leader in policing the mortgage industry," Gittelsohn writes, pointing out that AGs in New York and Ohio have been at the forefront of investigating mortgage abuses. He asks, "So what’s taken Brown so long?"
Good question, John.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Getty Images
This one comes from Chicago -- a long way from L.A. Land -- but it is one of those stories you can't make up. It's too bizarre.
Here's the headline from the Chicago Tribune: "How fraud led to this property changing hands 3 times as son of owner sat dead inside."
"The new buyers of a rundown graystone on the South Side showed up Jan. 9 to look at the house they won at a foreclosure auction. They took the plywood off the front door and went inside to make sure the utilities had been shut off. Then they called the police.
"Sitting upright in the corner of a bedroom off the kitchen was a human skeleton in a red tracksuit. Next to him lay a dead dog. Neighbors told police the corpse was almost certainly Randy Johnson, a middle-age man who lived alone in the North Kenwood house.
"The cause of Johnson's death has not yet been determined, but it is just one of the mysteries about 4578 S. Oakenwald Ave. Somehow, Johnson's house was transferred three times to new owners without anyone noticing he was inside. It's a story involving forged deeds, a corrupt title company and a South Side family that has been under investigation for mortgage fraud."
Wild, wild stuff.
Hat tip: pseudo100, via e-mail
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Good morning. Real estate fraud in Beverly Hills? The U.S. Attorney says so. From this morning's L.A. Times:
"Two high-profile Beverly Hills real estate agents and two licensed appraisers were indicted Thursday on charges of joining in a sophisticated scheme that lenders said cost them more than $40 million in fraudulent loans for homes in some of Southern California's most expensive neighborhoods."
More: "Joseph Babajian and Kyle Grasso, agents with Prudential California Realty, along with appraisers Lila Rizk of Trabuco Canyon and Scott Robinson of Dana Point, were each indicted on multiple counts of conspiracy, bank fraud and loan fraud. They face several years in prison if convicted, said Assistant U.S. Atty. Jeremy Matz. Babajian and Grasso are also charged with money laundering."
The case dates from sales made in 2000 to 2003. Babajian and Grasso were listing agents on the $22-million home David Beckham bought earlier this year.
Comments? Thoughts?
 Good morning. On the fraud front, interesting story in today's L.A. Times by Christine Hanley about one of the more brazen real estate scams you'll see:
The scam, run by former Cal State Fullertion baseball star Salvatore "Sam" Favata, at Orange-based National Consumer Mortgage, worked like this: The company persuaded clients to refinance their homes and then use the cash, and other assets, to invest back into another arm of the company, promising investment returns of 30% to 60% a year. Surprise: little of the money was invested.
An SEC investigation revealed that Favata was paying earlier investors with funds from new investors in what is known as a Ponzi scheme; Favata stole an estimated $32 million from more than 200 investors.
Favata, who pleaded guilty to fraud, was sentenced Monday to five years in prison. Maybe his good buddy Steve Garvey -- who was in the courtroom Monday offering moral support -- will visit him.
Photo Credit: www.collegegear.com
 It's Mortgage Fraud Week Here at L.A. Land, and we have a wild one for you today. It involves possible obstruction of justice at a major home builder under investigation by the FBI.
From the Atlanta Journal-Constitution: "Atlanta-based Beazer Homes USA said it fired its chief accounting officer, Michael T. Rand, for attempting to destroy documents. The home builder, facing federal probes into its mortgage practices, disclosed the move in a filing with the Securities and Exchange Commission.
More: "'Michael T. Rand has been terminated for cause . . . due to violations of the company's ethics policy stemming from attempts to destroy documents in violation of the company's document retention policy,' Beazer said in the SEC filing."
Wall Street Reaction: "This raises red flags regarding the content of the documents in question, in our view," Michael Rehaut, an analyst at J.P. Morgan Securities.
Backstory: Beazer said it was "fully cooperating" with an FBI investigation that it steered North Carolina home buyers into mortgages they could not afford.
Comments? Thoughts?
Photo Credit: Reuters
Real Estate Fraud Week continues here at L.A. Land. Tonight, an update on that alleged real estate investment scheme that has resulted in a big mess of foreclosures in Riverside and Temecula, and a bunch of lawsuits: The brokers who arranged the investments have agreed to forfeit their real estate licenses:
From the Press-Enterprise: "Stonewood Consulting Inc. and its broker, Hendrix Moreno Montecastro, will forfeit their real estate licenses rather than contest a wide range of violations filed against them by the California Department of Real Estate, according to an agreement filed with the department.... Among the accusations the department filed late last month against Stonewood and Montecastro was that they used inflated appraisals and took commissions ranging from $74,000 to $115,000 for each house they bought for investors."
Very large commissions, no?
Read the original post here.
To refresh: The alleged victims say the scheme preyed on older, middle-class investors who overpaid for more than 100 "investment properties" in Riverside and Temecula, believing the extra cash was being wisely invested on their behalf, only to see the cash disappear.
Click here to see a very elaborate website run by the alleged victims.
 Good Morning. Mortgage fraud in California is surging, and we now rank second in the nation in fraud. So says a new report prepared for the Mortgage Bankers Assn.
"California’s reported fraud had been quite low in the past few years, and some industry experts have suggested that its problems were masked by high real estate appreciation. The recent slowdown in its housing market may explain California’s return to high ranking in this year’s report," says the report, prepared by the Mortgage Asset Research Institute.
The report notes a nationwide surge of 30% in fraud activity from 2005 to 2006, and contains this warning: "The current unsettled state of the subprime segment of the industry does not bode well for fraud in the coming year."
The report says California ranks second to Florida in fraud, according to an index that adjusts for the size of each state's mortgage industry. California has been climbing the fraud rankings -- it ranked 30th in 2002, 23rd in 2003, 19th in 2004, 8th in 2005, then 2nd in 2006.
Broken record department: Is there a prosecutor in California who is aggressively bringing fraud cases? We'd be happy to spotlight such a person, if such a person in fact exists.
Photo Credit: Reuters
 We'll warn you in advance, this one is big, messy and may not fit the legal definition of fraud. As the illustration at right indicates, law enforcement has been investigating it for months, and no one's been charged.
What are we talking about? An alleged scheme that preyed on older, middle-class investors who overpaid for more than 100 "investment properties" in Riverside and Temecula, believing the extra cash was being wisely invested on their behalf, only to see the cash disappear. Click here to see a very elaborate website run by the alleged victims.
Now houses are piling up in forelcosure and so are the lawsuits. Reporter Chris Bagley at the North County Times has been all over this story: "Nurses and other middle-class investors bought more than 100 Murrieta-area houses in 2004 and 2005 through Stonewood Consulting Inc., a Murrieta mortgage brokerage that the California Department of Real Estate is now seeking to bar from the industry."
More: "The first of those houses fell into the foreclosure process last fall, and the owners began filing lawsuits in January. Stonewood clients often paid far more for their houses than did buyers of comparable houses nearby and, according to numerous neighbors and real estate agents who followed the purchases, $50,000 to $120,000 more than the original asking prices -- a pattern that raised eyebrows in the slackening market."
Investors now allege Stonewood, and a bunch of other companies, courted them with religious come-ons, pressured them to sign incomplete loan applications that were later falsified, arranged for inflated appraisals, and then pocketed millions of dollars from excess mortgage payouts. An attorney for Stonewood calls those allegations "just plain untrue."
Law enforcement's take? The Riverside County district attorney's office has been investigating for months but says it's a complicated case.
Your thoughts? Comments?
Illustration Credit: Core Clients Against Fraud
 It is Real Estate Fraud Week at L.A. Land -- send your stories to lalandblog@yahoo.com. This one came to us from a friend of a friend, and it involves a brazen scam we'll call "Let's Rent Out That Abandoned House."
Jessica bought a 1,400-square-foot Spanish fixer in Wilshire Vista in November and hasn't moved in because she's still working on architectural drawings and permits. Result: empty house, unmowed lawn.
Jessica, meantime is at her parent's in Rancho Mirage on a Saturday night, searching Craig's List for a new rental and sees a house for rent that she can afford -- coincidentally, it's in the same neighborhood as her fixer.
"It's two bedrooms, one bath, and then I see the address and it's MY ADDRESS!" she tells L.A. Land. "I'm totally shocked! I told my parents, 'I just saw my house on Craig's List! I click on it and it describes my house to a T.There's no contact information, but it says there's going to be an open house on Sunday!"
Continue reading below to find out what happened. Trust us, it's wild.
Read more It's Real Estate Fraud Week at L.A. Land: Chapter 2 -- Why Is My House on Craig's List? »
 Good morning. We noticed our in-box was filling up with fascinating (to us, at least) stories about real estate fraud. So we made an executive decision: This is Real Estate Fraud Week at L.A. Land.
First out of the box, a good one. Kate, the voice behind the quirky, Valley-based blog "May 5 & Everything After," writes about an agent who was determined to give her $40,000 cash back at closing -- even though she didn't want it!
Read the whole thing here, it's worth your time. Kate describes her conversation with an agent about a house in Sherman Oaks -- a house Kate feels is worth about $725,000.
"Me: You want me to write an offer for $800k, and take back about $40k, so I am giving the seller only $760k.
Agent: Yes! Yes!
Me: But I pay 5% commission on that higher sales price?
Agent: Well... yes but you are getting cash back for your closing costs and improvements...
Me: Again, I am paying 5% commission on $800k instead of $760k, and my property tax basis will be $800k instead of $760k?
Agent: Well, the property tax is only 1.25%
Me: Every year."
So what did Kate finally tell the agent? "Trust me, I know how it works: You get a bigger commission and you get to delay the inevitable price crash in your little pocket neighborhood. The sales data for the area will reflect artificially high prices so honest people with decent incomes and good credit scores who used to be able to afford the area no longer can. And what do I get? A $40k loan that I don't want or need. As a bonus, I will not only pay interest on this wholly unnecessary $40k loan but I will pay an additional $2,000 sales commission to you and my agent up front because that $40k is being treated like purchase money. But that's not all! No! I will also have to pay an additional $500 in property taxes every year I own the house because the records will reflect an artifically high purchase price."
You go, Kate.
Send us your stories of fraud, shady deals and unethical behavior. E-mail story tips to lalandblog@yahoo.com
Photo Credit: May 5 & Everything After
 News item: The New York Times reports new websites are fueling the rampant mortgage fraud that has caused a huge spike in loan defaults.
Aside: Items like this make us feel old. We remember the good old days, about two years ago, when you had to actually know some real criminals to engage in a fraud scheme.
The Times: "The sites, for example, offer better credit scores by hitching customers to a stranger’s credit card, or providing them pay stubs from a bogus company. One has even offered a well-stocked bank account to rent for a month or two."
More: "'There is a whole underground world — an online cottage industry — that has grown up that allows anyone to commit mortgage fraud,' said Constance Wilson, executive vice president at the financial fraud detection firm Interthinx."
Another aside: Stories like this convince us that technology has enabled entire new categories of financial crime, and that law enforcement is slow to catch on, and slow to catch up. (Otherwise, we'd be writing about indictments, not flourishing scams, right?).
One more aside: Is there a prosecutor in California who is interested in tracking down mortgage fraud? I know Jerry Brown is upset about high gas prices. I know Rocky Delgadillo is upset about Paris Hilton and is cracking down on cat hoarding. Anybody upset about mortgage fraud?
Your thoughts?
Photo Credit: "Protect Yourself from Real Estate and Mortgage Fraud," by Ralph R. Roberts, available on Amazon.com.
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In a letter to the Los Angeles Times, the FBI is defending its response to the wave of mortgage fraud, and rejecting the suggestion it could have done more to prevent the current mortgage crisis. The letter is in response to a Times story this week headlined "FBI saw threat of mortgage crisis," which reported that a top FBI official had warned in 2004 of widening loan fraud.
