foreclosure fraud

bloomberg markets may 2009

56

ForeclosureFlImFlam

Prosecutors say homeowners across the U.S. facing default are getting swindled by some of the same brokers who initially peddled subprime mortgages.By Edward roBinSon

In early 2008, Cheryl Ann Montero, a California mortgage broker, held a series of free seminars in the club-house of the Lone Tree Golf Course in Contra Costa County, a suburban area near San Francisco. The attend-ees, homeowners facing foreclosure, were desperate for a rescue from their woes. Using a PowerPoint pre-sentation, Montero delivered one.

She said her firm, Freedom Financial Solutions, could pressure lenders to stop foreclosures by chal-lenging the legality of loan agree-ments, according to court records. Her fee: $2,500 upfront and a $2,000 monthly payment to cover legal costs. Promoting her services

Clockwise from top, alejandrina maldonado, rosa conrado and Jesus martin Flores pleaded guilty to grand theft in a scheme to rip off homeowners facing foreclosure.

‘there’s just been an explosion of vulnerable homeowners and people preying on them,’ the arizona attorney general says.


58

on the Web site Craigslist, Montero, a blond-haired, blue-eyed woman who looked like a soccer mom, became known as a foreclosure escape art-ist. “All the real estate agents knew about her classes,” says Kay Trail, a realtor in Antioch. “She was one shrewd sister.”

She was also a ripping people off, says Ken McCormick, a prosecutor in the Contra Costa County District Attorney’s office. A player in a new confidence game exploiting soaring defaults, Montero didn’t have a team of attorneys to con-front lenders. Instead, her firm took a small own-ership stake in some of her clients’ houses and filed for bankruptcy, temporarily suspending fore-closure proceedings on those homes, according to an investigative report filed in court by prosecu-tors. In the end, she didn’t deliver lower mort-gages for the 10 homeowners who paid a total of $52,000 for her services, McCormick says.

Montero did have mounting financial woes of her own: In September, she filed for personal bankruptcy, according to court records. “She couldn’t make it in real estate anymore, so she just changed hats,” McCormick says. “But she was tak-ing money and doing nothing.”

he prosecutor charged Montero with 36 counts of grand theft and related charges in December. She pleaded not guilty and is free on $100,000 bail. Her lawyer, Cameron Bow-man of San Jose, didn’t return telephone calls for comment.

Rescue scams are springing up across the U.S., says California Deputy Attorney General Angela Rosenau, exacerbating a housing crisis in its third year. The predators are persuading troubled bor-rowers they can intervene with their lenders and negotiate lower payments on their mortgages, law enforcement officials say. Instead, the players, often out-of-work real estate professionals who peddled subprime mortgages during the boom, pocket hundreds of thousands of dollars in ad -vance fees and disappear or bleed their victims by charging monthly payments.

“There’s just been an explosion of vulnerable homeowners and people preying on them,” says Terry Goddard, the attorney general of Arizona, which recorded the third-highest rate of residen-tial foreclosures in 2008, after Florida and

Nevada. “People miss their payments, and they are about to be repossessed, and someone walks in the door and says, ‘I’m here to help.’ You just can’t underestimate the power of desperation.”

The swindlers are thriving largely because the lenders and Wall Street banks that inflated the housing bubble by originating and securitizing subprime loans have been slow to help homeown-ers as those mortgages blew up. The State Foreclo-sure Prevention Working Group, a coalition of 37 attorneys general and banking supervisors, found in a study released in September that lenders were not providing mortgage relief for 8 out of 10 delin-quent subprime borrowers last year. “Many vic-tims have made attempts to work with lenders, and they’ve been frustrated,” Rosenau says. “That’s why these scams are so successful.”

President Barack Obama is trying to coax banks to rewrite mortgages with a $75 billion plan begun in March that could reach 4 million borrowers. The administration is encouraging lenders to slash interest rates so mortgage payments amount to 38 percent of a borrower’s monthly gross in-come. If the lender reduces payments further, to 31 percent of income, the government will pick up half of the losses.

Obama’s plan faces a major hurdle: Mortgage service companies often can’t reduce home loans because they’ve been packaged and sold to inves-tors who expect a steady stream of income. Coun-trywide Financial Corp., acquired by Bank of America Corp. in 2008 as the housing market was collapsing, sold almost all of the loans it originated p

re

vio

us

pa

ge

co

ur

te

sy

off

ice

of

th

e c

ali

for

nia

at

tor

ne

y g

en

er

al,

ia

n w

hit

e (

top

)

angela rosenau, a california prosecutor, says rescue scams are proliferating.

t

59may 2009 bloomberg markets

ico

nw

er

k

5. Homeowner’s $7,000 in checks is deposited

in defendant’s bank account.

2. Homeowner receives a flier promoting

a fictitious foreclosure prevention program and a toll-free phone number.

3. Homeowner calls the number on the flier,

giving loan and personal information.

1. Defendants obtain from public property

records the name, address and loan amount of a home owner in default.

4. The defendants send homeowner a fake

agreement with lower monthly payments.

rescue schemeProsecutors say Foreclosure Prevention Services fleeced homeowners by posing as a mortgage rescue program, as follows.

to investors and services them for fees, says Scott Kurzan, head of mortgage investor relations at the lender. In many instances, Countrywide is barred by contracts from changing loan terms without investor approval, he says. “Investors want to make sure their rights don’t get trampled,” says Kurzan, who is based in Calabasas, California.

If incentives don’t compel lenders to reduce mortgages, Obama supports giving bankruptcy judges a stick. The House of Representatives has approved the so-called cram-down measure that allows bankruptcy courts to lower the balance due on mortgages on primary residences, a privilege now granted to landlords with multiple dwellings. The measure moved to the Senate in March. “If the mortgage industry knows a judge can wipe out the principal, then lenders will become more involved in reducing mortgages,” says Kathleen Day, a spokeswoman for the Center for Respon-sible Lending, a Durham, North Carolina–based consumer advocacy group.

Money managers who specialize in mortgage-backed securities say that allowing courts to alter mortgages will scare away investors and drive up the costs of home loans. “How can I tell my clients they should come back into the market if the gov-ernment rewrites mortgages after the fact?” Sajjad Naqvi, a senior vice president at TCW Group Inc., said at the annual conference in Las Vegas in Feb-ruary for the American Securitization Forum, a trade group. “Cram-downs could cripple the securitization industry.”

Republican lawmakers say the measure amounts to an unfair bailout for consumers who made reckless bets during the housing bubble. “Under this plan, those who bought more house than they could afford would keep the big house but escape the responsibility of paying for it,” says Rep. Tom Price of Georgia, chairman of the Republican Study Committee, a policy group.

As the debate swirls in Washington, self-styled mortgage rescue specialists are flooding home-owners from Florida to California with offers of salvation. “They’ve jumped into the vacuum,” says Joseph Gentili, an assistant attorney general in Florida’s economic crimes unit. In Florida, which recorded more than 500,000 foreclosures last year, communities stretching from the golf-course subdivisions of the Gulf Coast to the Miami sub-urbs are festooned with placards and flyers pro-moting mortgage rescues. Gentili’s 20-person team is pursuing 40 investigations.

In a lawsuit filed in October, the Attorney Gen-eral’s Office accused a Fort Lauderdale company

called Outreach Housing of bilking more than 600 homeowners out of $2 million. In January, Blair Wright, Outreach’s president, filed a motion to dismiss the lawsuit in circuit court in Broward County. The following month, the Florida Office of Financial Regulation shut down the company. Wright didn’t return calls for comment.

The California Department of Real Estate is fielding so many complaints from homeowners that Commissioner Jeff Davi has directed his entire, 160-strong enforcement staff of attorneys, investigators and auditors to probe more than 250 foreclosure rescue companies serving thousands of clients. From February to mid-March, the department ordered 27 firms to shut down for violating regulations.

The Federal Bureau of Investigation formed a team in December to investigate foreclosure res-cue cases. “A number of them previously worked in subprime mortgage companies,” says Travis Yarbrough, the supervisory special agent leading the unit in Washington. “Some of these perpetra-tors have gotten very creative at separating home-owners from their money.”

The schemes run the gamut, from small-scale players targeting a single community to elaborate conspiracies sweeping entire states. Cheryl Monte-ro started Freedom Financial Solutions in Decem-ber 2007, according to the investigative report. Her office was a few blocks from a Tiffany’s jewelry store in Walnut Creek, a San Francisco suburb where four-bedroom homes fetched $1 million at the height of the housing boom. Montero ran a three-person operation in which she told homeowners that she could find technical violations committed by lenders in loan contracts, the report says.

Montero blundered during one of her seminars by dropping the name of an attorney who she claimed was working with her, the report says. One of Montero’s clients called the lawyer, who had never heard of Montero, and he in turn complained to the authorities. “That’s what gave us a heads up,” says McCormick, the prosecutor.

Juan Jose Perez, 47, a Mexican immigrant who started a foreclosure rescue firm in the garage of his San Bernardino County house in 2005, hatched a more ambitious scheme, prosecutors say. Perez’s Foreclosure Prevention Services masqueraded as a lender to rip off hundreds of struggling home-owners throughout California for as much as $1.2 million, according to an affidavit filed in Superior Court in October by investigators with the Cali-fornia Attorney General’s Office. Perez, who’s been charged with grand theft and conspiracy, has

Source: Court records

6. Homeowner loses house as defendants

empty bank account and disappear.


60

returned to Mexico, and a warrant has been issued for his arrest, prosecutors say. He couldn’t be reached for comment.

To find his victims, Perez and his team allegedly combed through public property records available on the Internet for default notices, which disclose the names, addresses and loan amounts for delin-quent homeowners. Last August, one of his work-ers pulled such a notice for a house owned by Jose Serrano in Soledad, California, a farm town about a two-hour drive south of San Francisco, prosecu-tors say. That month, Serrano received a manila envelope in the mail marked “Final Notice” in large black letters. It reported how much Serrano owed in back payments and said he was running out of time to reinstate his mortgage. “You may qualify for special consideration through a program designed to save your property,” the letter stated. “Call us immediately.”

Three months earlier, Serrano, 45, a dump-truck driver at a limestone quarry, says he had

stopped paying the mortgage on his $569,000 house. Under the terms of his adjustable-rate mortgage, Serrano’s monthly payment shot to $2,500 from $1,618 after his initial teaser interest rate of 1 percent jumped to 8 percent. At the same time, the slowing economy forced the quarry to cut his hours, leaving him with only $2,250 in take-home monthly pay from $3,200 when he worked full-time. Unable to support his wife and six daughters, aged 8 to 22, Serrano tried in vain to persuade his lender, Aurora Loan Services LLC, a subsidiary of now bankrupt Lehman Brothers Holdings Inc., to change his mortgage so he could continue paying $1,618 a month. “They always said the same thing: ‘Hey, you signed it,’” Serrano says. “So the last time I talked to them, I said, ‘I’m not going to pay anymore.”’ Aurora spokeswoman Deborah Munies declined to comment.

A soft-spoken man who likes to roast pork shoulder on his backyard grill, Serrano is proud of the six-bedroom tract home he bought with a 30 percent down payment of $169,000 in 2005. “I put in all this tile,” he says, pointing to the dining room floor. Serrano was relieved when he received the notice about the foreclosure prevention pro-gram last August. “I was going to lose all the money I’d invested in the house, and this made me hopeful, so I called,” Serrano says, shaking his head at the memory.

Serrano says he talked with a woman who iden-tified herself as Lily. In fluent Spanish, she told Serrano her organization would negotiate a lower mortgage with his lender if he qualified for a fore-closure program. The woman had Serrano fax over his loan agreement, pay stubs and other personal financial information.

In early September, a man identifying himself as Benae called and said he was with Aurora. Serrano says the man told him he’d qualified for the pro-gram and his mortgage had been reduced. Serrano would have to pay a $3,750 penalty and then could resume making $1,618 monthly payments. Days later, Foreclosure Prevention Services sent Serra-no the clincher: a four-page “Extension and Modi-fication Agreement” on what looked like Aurora letterhead. The agreement, which prosecutors say

ma

rk

ha

m jo

hn

so

n

to find his victims, Perez and his workers allegedly combed through property records available on the Internet for default notices, which disclosed the names, addresses and loan amounts of delinquent borrowers.

Jose Serrano, with his family, faces a foreclosure on his california home.

b


62

with relatives in Mexico, abandon the house and rent an apartment. That would mean walking away from $200,000 in equity built on 25 years of toil, first in the tomato fields of the Salinas Valley and then behind the wheel of a truck. “I feel like I’m about to lose everything,” Serrano says.

On Oct. 24, Rosenau, the deputy attorney gen-eral, busted Perez and seven members of his alleged ring. Three of Perez’s co-defendants are charged with grand theft, money laundering and conspiracy, and two others are charged with money laundering and conspiracy. Rosa Conrado, Jesus Martin Flores and Alejandrina Maldonado pleaded guilty to grand theft in January and are cooperating with prosecutors. Lawyers for Con-rado and Maldonado declined to comment, and Flores’s attorney didn’t return a call.

Even as Rosenau seeks help from the U.S. Department of Justice to extradite Perez from Mexico, she fears the case is a harbinger of even larger swindles to come. “This is a volume busi-ness, and right now there’s a lot of homeowners who feel like they have no options,” says Rosenau,

47, a former U.S. Army major who helped lead a logistics unit in the Persian Gulf War in 1991.

Foreclosure rescues aren’t just being pushed by criminals; a new industry operating on the edge of legality is mushrooming in states with soaring default, says Gentili, the Florida prosecu-tor. A crop of new companies are using Web sites, toll-free numbers and commercials on late-night TV to ply homeowners with promises.

ernadette Perry, a former mortgage broker, and Dean Shafer, a marketing executive, co-founded Loss Mitigation Services Inc. in Orange County, California, in February 2008 to assist distressed homeowners in avoiding foreclosure. As a broker, Perry sold Alt-A

mortgages, which are marketed to borrowers with decent credit scores yet shaky proof of income. As the imploding housing market vaporized her com-missions in late 2007, Perry and Shafer decided to try mortgage rescues.

Shafer, now chief executive officer of Loss Miti-gation Services, created a mailer informing hun-dreds of homeowners they might be eligible for a loan modification that could reduce their princi-pal or interest rate. “We were thinking it’s game over, but we gave it one last shot and sent this out and it lit the phone up,” says Shafer, a youthful-looking 48-year-old who parts his hair in the mid-dle and quaffs protein shakes.

Today, Loss Mitigation Services buys property data collected by First American Corp., a Santa Ana, California–based loan data provider. Shafer sifts through the data to produce leads for his tele-marketers and direct mail. “We expertly present your scenario in a way that optimizes your loan modification outcome,” reads a brochure mailed

convinced his home was saved, serrano removed a frayed card from his wallet depicting christ on the cross and kissed it. He then signed the document and sent a cashier’s check to ‘Payment Processing center.’

was fake, even had a toll-free number for “custom-er care inquiries.” Convinced his home was saved, the truck driver removed a frayed card from his wallet depicting Christ on the cross and kissed it in gratitude. Then he signed the document and sent a cashier’s check to “Payment Processing Center.”

To further the illusion homeowners were deal-ing with their own lenders, Perez allegedly in-structed his workers to open more than a dozen bank accounts at branches of Wachovia Corp., Washington Mutual Inc. and Bank of America using fictitious names like “Resolution Depart-ment” and “Payment Processing Center,” accord-ing to the affidavit. In December, Sandy Birch, an investigator with the California Attorney Gener-al’s Office, found Serrano’s checks in a Wachovia account opened by one of Perez’s workers and informed the homeowner that he had been fleeced of almost $7,000.

Now, with almost $20,000 in back payments hanging over his head, Serrano is again negotiat-ing with Aurora for a modification. If he isn’t approved, he may have to send his family to live

U.S. HOME FORECLOSUREFILINGS, IN MILLIONS

Sources: Bloomberg, RealtyTrac

FILESIZENOTES

foreclose315p4.8 x 15p6New size

Empty HousesForeclosures showno signs of abating.

3.2

2.2

1.3

’06 ’07 ’08

63may 2009 bloomberg markets

ian

wh

ite

I

Housing Development Corp. in Northern Califor-nia, says she’s seen Countrywide reject most appeals for lower mortgage payments from bor-rowers who aren’t part of the settlement. In Janu-ary, Countrywide held a workshop at a church in Antioch, California, to consider applications for mortgage relief. More than 200 anxious home-owners lined up outside the church on a wind-swept night, clutching accordion files stuffed with loan documents.

nside, Charun and other counselors seated at two long tables helped homeowners pre-pare their applications before they saw the Countrywide representatives. Charun says the few borrowers who have won relief from Countrywide received 90- or 120-day for-

bearances, which saddled them with even larger monthly payments after the suspension ended and often led to a second default. “This is just PR,” Charun says, gesturing at the line of borrowers waiting to see the red-shirted Countrywide reps.

Jumana Bauwens, a Countrywide spokeswoman, says the company rewrote 230,000 mortgages in 2008, including loans reduced under the settlement

to a borrower. “That’s why you do not want to do this yourself because you could present your information in a way that kills your modification.”

About 80 “mitigators” stationed in cubicles at the company’s office near Disneyland field about 500 calls per day from potential clients. Since November, the company has charged $3,600 in advance and says it will refund $2,105 if the lender rejects the application. The company’s spokesman, Tony Knight of Sitrick & Co. in Los Angeles, pro-vided five letters from former clients praising their services. Perry, 51, who supervises the mitigators, says she resents insinuations that foreclosure res-cue is a rip-off. “We’re the good guys,” she says.

Last May, Loss Mitigation Services sent a letter to one homeowner facing foreclosure, Bobby Tur-ley of Livermore, California, that said, “Your loan modification was approved. The fee for your loan modification is $5,500,” according to a copy of the letter provided by Turley. The homeowner says he paid the fee in May 2008, yet his lender, Washington Mutual, hasn’t modified his loan. In the letter, Loss Mitigation Services said, “We have a proven track record with a 97% success rate.” Shafer says this statement is untrue and the company no longer uses it in marketing literature. “We made mistakes in the beginning,” he says. “I will admit that.”

Shafer says his firm isn’t complying with state rules that direct mortgage modification companies to set aside 75 percent of upfront fees until the process is complete. Shafer says obeying the rule would deplete his working capital and cripple the company. “I’m all for rules and regulations, but they have to be for the good of the masses,” he says.

Commissioner Davi says compliance isn’t negotiable and the rules are designed to protect consumers. “We can’t have these people taking homeowners’ last dollars,” he says. Regulators haven’t accused Loss Mitigation Services of any wrongdoing.

Bank of America, which became the No. 1 home loan maker in the U.S. after buying Countrywide, last year agreed to modify $8.7 billion in subprime and adjustable-rate loans for 400,000 borrowers to settle predatory-lending lawsuits. California and 10 other states had filed the lawsuits against Countrywide. The attorneys general alleged that Countrywide, which saw more than a quarter of its subprime portfolio default in 2008, had unlaw-fully pushed borrowers into unsustainable adjust-able-rate mortgages to fuel its securitization business. Bank of America didn’t admit or deny any wrongdoing as part of the settlement.

Ffely Charun, a counselor at the Community

dean Shafer, ceo of loss mitigation services, says the firm made some mistakes in the beginning.


64

with the states. “We are taking rewriting mortgages seriously,” she says.

Obama’s housing plan may spur lenders to set aside their resistance to adjusting more mort gages, says Tom Holler, the lead organizer at One LA-IAF, a nonprofit community group in Los Angeles. Un-der the plan, lenders must determine how much it would cost to reduce a mortgage to a level a home-owner can afford versus foreclosing and auctioning the dwelling in a bearish housing market. If shutter-ing the house produces a steeper loss, then the lender may reduce the interest rate on the loan instead, as long as modification isn’t barred by investors who are holding the note. With the gov-ernment subsidizing part of the loss from lowering mortgage payments, Holler says, lenders and mort-gage holders alike should be more inclined to par-ticipate in the plan. Bauwens of Countrywide says the lender is studying the government program and declined to comment further on it.

Mark Zandi, chief economist at Moody’s Econo-my.com, is concerned that the plan’s reliance on lowering interest rates won’t pack enough punch to make millions of subprime and Alt-A mortgages more affordable. Zandi says it may be necessary for Obama to introduce a follow-up plan to slash the principal on such mortgages to reflect the present

value of residences. In the fourth quarter of 2008, more than 8.3 million U.S. mortgage holders were under water—their homes were worth less than their mortgages—and another 2.2 million borrow-ers will sink if prices fall another 5 percent, accord-ing to First American. Unless those mortgages are rebalanced, homeowners may continue to walk away from their homes and the foreclosure spiral will strengthen, Zandi says.

Con artists are only too happy to exploit the tur-moil. As Angela Rosenau and her fellow prosecutors watch their caseloads rise, they say what started as a cottage industry will become a large criminal racket if foreclosures aren’t reduced—aggravating a hous-ing crisis that shows no signs of abating. ≤

edward robinson is a senior writer at Bloomberg News in San Francisco. [email protected]

the federal reserve estimates the proportion of disposable personal income in the u.s. that goes to required payments on outstanding mortgages and consumer debt. type DspB-totl <index> gp <go> to graph the central bank’s u.s. finan-cial obligations household Debt service ratio, which climbed to a high of 14.4 percent in 2006 from a low of 11 percent in 1994. type DspBmort <index> gp <go> to chart mortgage payments as a percentage of disposable income. to graph foreclosures in the u.s., type homfclos <index> gp <go>.

for a menu of mortgage application volume data from the mortgage Bankers association, a washington-based trade group, type allX mBav <go>. for headlines of news stories related to negative equity, in which the value of bor-rowers’ houses drops below the balance of their mortgages, type stni negeQuity <go>. for mortgage-related news, type ni mor <go>.

type mcal <go> for the structured finance calendar function, which lets you track issuance trends. you can use the structured finance notes (sfns) function for a selected mortgage-backed security to find basic information such as its servicer. type ace 2006-fm2 a1 <mtge> sfns <go> for information on an mBs issued by ace securities corp. in

2006, for example. type clp <go> to use the collateral performance function to display monthly statistics on delinquencies and cumulative losses from the mortgages underlying the mBs, as shown below. type 2 <go> to display data such as pay histories and current amounts for the indi-vidual mortgages.

type DQrp <go> to use the Delinquency report function to rank mBss by the performance of their collateral loans.Jon aSMUndSSon

tracking mortgage Data

To write a letter to the editor, send an e-mail to [email protected] or type mag <go>.

economist mark Zandi is concerned that President obama’s housing plan, which relies on lowering interest rates, won’t pack enough punch to make millions of subprime and alt-a mortgages more affordable.

foreclosure fraud

Documents