Balloon Flip Scam Targeted Hispanics

The Mortgage Access Center owner Donald Stone charged in $1.5 mil case

October 5, 2004

By PATRICK CROWLEY

Federal authorities called it “fraud.”

And now the two face decades in prison and millions of dollars in fines.

“They called it ‘creative financing’ but we call it fraud,” Patrick Meehan, U.S. Attorney for the Eastern District of Pennsylvania in Philadelphia, said in a statement.

Mortgage broker Donald Stone, 56, was charged in U.S. District Court with 10 counts of wire fraud and aiding and abetting and four counts of filing false tax returns. He faces up to 62 years prison and a $2.9 million fine.

Stone’s alleged accomplice, real estate agent Patrick Balf, 51, has also been charged in U.S. District Court with 10 counts of wire fraud and aiding and abetting, one count of tax evasion and four counts of filing false income tax returns. He faces as much as 59 years in jail and fines of $2.7 million.

“Many people lost their homes because of this scheme and many more are struggling to keep up with expensive mortgages they just can’t afford,” Meehan said. “Schemes like this often trigger an increase in foreclosures which can destabilize and eventually implode a community.”

According to Meehan and court documents, the alleged scam worked like this.

Balf, who operated a firm called The Real Estate Center, would target subprime borrowers, many of whom were Hispanic. After finding homes for them he referred most of the buyers to Stone, whose company was The Mortgage Access Center.

Authorities said so close were the two that their businesses were in the same building in Allentown.

Balf and Stone are accused of submitting falsified documents — including W2 tax forms, loan documents and appraisals — to mortgage lending companies “to make it appear that the buyers met underwriting criteria set by those companies,” Meehan said.

“The defendants and others falsified documents listing the employment history of buyers, verifying the income of buyers and detailing the amount and origin of cash used to purchase the houses,” he said.

The defendants “structured the transaction(s) to make it falsely appear that the buyer met the criteria required by the mortgage lending company,” prosecutors said in court documents. “Mortgage lending companies relied on this false information in their decisions to approve and provide mortgage loans to the buyers.”

Court records show how the alleged scam was operated.

A family purchased a house for $67,000 only four months after the house had been purchased for $26,000. The 15-year mortgage loan had a rate of 13.013% and a balloon payment of $46,233.97 at the end of the loan.

Another family paid $65,000 for a house two months after it had sold for just $26,000. The rate on that 15-year loan was 12.467% with an end-of-term balloon payment of $41,562.73.

Many buyers were unaware they owed a balloon payment, prosecutors said.

“Balf misrepresented that buyers brought significant amounts of cash to the real estate closings to pay for their house, which allowed the mortgage lending company to provide a lower loan amount relative to the value of the mortgaged property,” prosecutors allege.

Balf did so by using what prosecutors described as “circle checks.”

Circle checks involve passing money back and forth between the seller’s side and buyer’s side to “conceal from the mortgage (lender) the actual source of the money,” court records show.

“These cases are about protecting our neighborhoods,” Meehan said.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com