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FBI Investigating Massive Mortgage Fraud Case In Spokane

FBI Investigating Massive Mortgage Fraud Case In Spokane$25,000,000+ In Property Value Vanished In Alleged Fraud

August 29, 2001

Realty Times

The FBI is investigating a massive fraud case in which an unnamed Spokane, Wash., mortgage brokerage firm and its two principle owners allegedly used inflated appraisals and fake documents to induce at least one funding lender to make more than $25 million in mortgages that turned out to be practically worthless.

In one instance documented by the Washington Department of Financial Institutions, a property that sold for $40,000 was appraised at $74,000 just a month later and resold for $73,500.

More than a year after that, the same property was sold at foreclosure to the lender for $64,000, a loss of almost $10,000. But when the lender was finally able to sell the house six months later, it fetched just $16,000, resulting in a total loss of more than $58,000.

“The buyers and sellers of these properties were the victims, but this particular lender took a really big hit,” said Enforcement Supervisor Chuck Cross. “The same type of thing was repeated dozens of times over.”

Although one wholesale lender appears to have been the main target, the case involves multiple lenders, according to Cross. And while it is centered mainly in Spokane, a town of 300,000 in the western part of the state, it “may bleed over” to Idaho and possibly even Oregon, he says.

The alleged fraud was uncovered by state authorities when numerous complaints were filed with the Attorney General’s office and the Department of Licensing by individual buyers. Grievances also were filed against the originator by real estate professionals and businesses affected by the company’s practices.

Also under investigation to determine the extent of their role in the scheme are a real estate agent, a realty broker and a pair of appraisers.

State authorities believe that more than 1,000 fraudulent appraisals may have been used in 1999 alone. Of the 73 properties reviewed by investigators, 66 have been in foreclosure.

“Our investigation confirms that the company appears to have violated the Mortgage Brokers Practices Act by engaging in business practices apparently designed to skim the equity on properties and to mislead borrowers, sellers and lenders,” the examiner’s report says.

The company allegedly used two different variations of the same scheme.

In one version, the real estate agent referred a buyer to the broker, which directed the agent to write a “new purchase agreement” that exceeded the list price of the property. The difference in the two prices was then written up as a second mortgage and given to the unsuspecting seller in place of a cash proceeds from the transaction.

But in a document that was not disclosed to the lender or the seller, the second mortgage was discounted to $1 or forgiven altogether. Consequently, sellers never received any payments.

In the other variation, the seller was sometimes part of the scheme. But those who were not were promised the buyer had good credit and that the mortgage company would monitor the transaction and report any problems.

In both instances, the buyers were poor credit risks who were not likely to have qualified for mortgages without fraudulent assistance.

The illusory second mortgages were created to hide the inflated price of the properties from unsuspecting wholesale lenders. In one case, the “owner” allegedly forgave a total of $83,400 to four different buyers, but none of this information was given to the lender who purchased the loans.

In other instances, downpayments were not disclosed on the final settlement sheets or were paid outside of closing. And in yet other cases, cash that was allegedly paid by the borrowers actually came from money loaned to them by the loan broker.Copyright © 2001 Realty Times. All Rights Reserved.           

Lew Sichelman has been covering real estate from his home base in the Nation’s Capital for more than 30 years. He writes a weekly consumer column that is distributed to newspapers throughout the country by United Media. He also is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.

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