Real estate fraud rises in US
A cooling market exposes scams that cost the industry at least $606 million last year.
On Monday, a dejected Matt Cox stepped into federal court in Atlanta in handcuffs. His bogus real estate empire from Tampa, Fla., to Nashville, Tenn., lay in shambles.
Mr. Cox, a college-educated artist with a penchant for plastic surgery, is charged with bank and wire fraud for bilking as much as $25 million from banks in several schemes, including stealing the identities of homeless people and securing mortgages based on inflated appraisals, then walking away without paying a cent.
He is emblematic of the little-known shady side of the real estate business. When the market was booming and with reputations at stake as they marketed mortgage portfolios, huge lenders were loathe to publicize the fraud, especially since a rising market often erased their losses. But as the market cools and losses mount, lenders are becoming more open – and are taking more steps to detect fraud, analysts say. These moves are allowing prosecutors from Orange County, Calif., to DeKalb County, Ga., to expose hundreds of schemes that have wrecked individuals' credit scores, dotted neighborhoods with foreclosures, and left banks – as well as taxpayers – holding the bag for hundreds of millions of lost dollars.
"Boom periods provide very, very fertile territory for abuses and those abuses become very clear when the psychology of the market changes," says James Hughes, a policy analyst at Rutgers University.
Real estate fraud has now firmly emerged on the FBI's radar as the country's fastest-growing white collar crime – all, in essence, polite forms of bank robbery. Industry losses ran to at least $606 million last year, it says. And the Treasury Department's suspicious-activity reports are up 35 percent this year. The Internal Revenue Service's criminal case numbers in mortgage fraud have been doubling every two years through the first half of this decade.
If the downturn continues past 2007, experts say the implications for the economy could be dire."Real estate fraud is going to make the S&L crash look like two cars in the parking lot that bumped into each other at five miles an hour," predicts Ralph Roberts, the author of "Flipping Houses for Dummies," in Warren, Mich.
Georgia is a major hot spot of mortgage fraud, where metro Atlanta has become known as the mortgage fraud capital of the US, according to rankings by Fannie Mae.
Here in Atlanta, as elsewhere, the problem has many causes. New automated lending procedures, aimed at eliminating discrimination, has made it easier for fraudulent applications to slip through. The decline of local banking in favor of nationalized mortgage syndicates also contributes to fraud, as does the recent move toward sub-prime, high-interest loans. Opportunity for both large and small scams by a coterie of real estate professionals, combined with secretive and decentralized lending structures, means the system is ripe for abuse, experts say. And the drive to get a piece of the pie clouds the judgment of even law-abiding citizens, prosecutors say.
"Everyone forgets what their mama told them: 'If you have to lie to get it, you're probably breaking the law,' " says Barbara Nelan, an assistant US Attorney in Atlanta.
For example, authorities extradited a California real estate developer from Samoa on Tuesday to face charges that he and four accomplices bilked banks of over $50 million. The indictment says the developer purchased tony homes in upscale Bel Air and Pebble Beach, recruited buyers to take out inflated mortgages based on phony appraisals, and then "flipped" the homes for up to triple their actual value.
In Conway, Ark., two women were found guilty Monday of falsifying lending documents to make buyers appear more qualified than they were in order to sell them mobile homes. In Denver, criminals coming out of prison were pulling real estate scams they learned behind bars.
In over 80 percent of the cases, scammers are helped by an insider, the FBI says. One of them was Jerome Mayne, a former loan officer who spent time in prison before becoming a motivational speaker in Eden Prairie, Minn. "The buyer they sent me was completely full of holes, fake everything, and I knew darn well that these guys were slippery enough to try to pull it off," says Mr. Mayne. A bottle of expensive booze and $500 cash helped grease the wheels, he admits.
Unraveling such gangs takes time and expertise, which has become the focus of law enforcement and industry professionals across the country. Working in their favor, at least, are solid paper trails.
"Usually when we complete an investigation, we end up with a spectrum of actors, from closing attorneys to brokers to appraisers, organizers, recruiters, and straw buyers," says Ms. Nelan. "It's fairly sophisticated, and it takes a lot of people to do it."
One of the toughest things for prosecutors is sorting out who's guilty. One group of recent perpetrators turned out to be clueless senior citizens in Alabama, who OK'd ploys to inflate their income in order to "invest" in real estate, says Linda Finley, a civil attorney who prosecutes such fraud cases in Atlanta. "It's gotten to the point where it's really hard to figure out who the actual victims are."
Critics say what's needed is a national lenders' clearinghouse and more federal regulation. Still, law enforcement can have a quick impact. Indictments against developer Philip Hill, who's charged with using up to 22 associates to do hundreds of fake deals in and around Atlanta, have alone caused the metro area to go from having four of the top 10 "fraud zones" in the country to two, according to Fannie Mae. His trial is scheduled to begin Jan. 9.