The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Written Statemel1t ofR. Scott Palmer
Cl1ief, Mortgage Fraud Task Force and
Special Counsel
Office of the Attorney General
Tallahassee, Florida
To
The Financial Crisis Inquiry Commission
Miami, Florida
September 21,2010
On behalf of Attorney General Bill McCollum, I wish to extend our thanks to the
Commission for being invited here today to testify about the role of the Florida Attorney
General's Office in combating mortgage fraud. I am the chief of an internal task force formed by
the Attorney General in 2007 to use our resources as effectively as possible to deal with the
mortgage-fraud related matters within our jurisdiction.
Historically, the Attorney General of Florida has been given the authority to pursue fraud
civilly through Florida's Unfair and Deceptive Trade Practices Act (FUDTPA). FDUPTA allows
the Attorney General to seek damages, penalties, restitution, dissolution and other equitable
remedies on behalf of consumers. Since the late 1980's, the Office of Statewide Prosecution has
been housed within the Attorney General's office and has the authority to pursue multi-judicial
circuit criminal cases including those crimes that would be charged in the prosecution of
mortgage fraud cases.
Mortgage fraud, in its many incarnations, came most forcefully to the attention of the
Florida Attorney General's Office in the middle of2007. Our office maintains a consumer
hotline where consumer complaints are taken and referred to the various divisions within the
office. A noticeable increase in complaints involving mortgage foreclosure rescue operations as
well as an uptick in information received regarding questionable real estate deals began to
emerge in the summer of 2007 as the economy began to deteriorate. Complaints about predatory
lending practices also surfaced, with concerns about the mortgage lender Countrywide leading
the way. The information received concerning questionable real estate deals typically involved
properties that appeared to sell well beyond a fair market value, and the complaints about
Countrywide increasingly tended to center on the company's apparent failure to disclose pivotal
information concerning loan terms and borrower obligations under those terms.
2
In response to this disturbing trend, the Attorney General formed an internal mortgage
fraud task force to evaluate the situation and take appropriate action. The task force consisted of
several attorneys and investigators from the Antitrust and Economic Crimes Divisions. Because
resources were limited, mortgage fraud investigations had to be added to the normal
responsibilities of each participant. Members of the task force conducted a thorough analysis of
pending complaints, preliminarily investigated those that required additional review, and
evaluated and referred any promising cases, as appropriate, to either local prosecutorial or
investigative agencies or internally to members of the task force itself.
Many complaints centered on mortgage foreclosure rescue scams, a form of fraud
targeting vulnerable homeowners facing foreclosure and using their misfortune for pecuniary
gain. Initially, these schemes were often relatively complex:
Among the first cases prosecuted by the Attorney General's task force was a case
involving a company called National Foreclosure Management (NFM). NFM was representative
of the worst kind of affinity fraud. In the company's scheme, agents ofNFM, a mortgage
broker, preyed upon fellow Haitian countrymen in South Florida, identifying potential
foreclosures among the Haitian population, particularly those homes with significant amounts of
equity available. The agents then attended church functions and even family picnics to befriend
those whose mortgages were being foreclosed upon and offered them help to avoid foreclosure
and to fix their credit. The victims were taken to the mortgage company and asked to sign
paperwork without examining it. The paperwork transferred ownership of the property to a
straw buyer. Fraudulent mortgage applications were then prepared by the broker in the straw
buyer's name and mortgages loans were obtained in amounts up to the market value of the home.
Sometimes the original mortgages were paid off, sometimes they were not. The straw buyer was
3
often told that the occupant of the home was paying the mortgage payment in lieu of rent. While
NFM charged the victim rent, it pocketed it, and, not surprisingly, failed to pay the mortgage.
Eventually, the home fell into foreclosure, ajudgment was obtained against the straw buyer, and
the original homeowner was evicted. The original homeowner lost his home and equity and the
straw buyer's credit was ruined, while NFM absconded with the proceeds of the mortgage loan
and the accumulated rent. A schematic of how the scam worked follows:
souaTS DISlRfSSED
HOMEOWNERS AT
CHURCH & FAMilY
ASSUHES n-I[M FOR
ALMOST NOTHING HE
CAN REPAIR CREDIT AN 0
PICNICS
SAVE HOME
NEW MORTGAGES ARE
OBTAINED IN STRAW
BUYER'S NAME WITI-I
FRAUDULENT 10035
PAPERS TRANSFER
OWNERSHIP TO STRAW
BUYER
HAS THEM SIGN PAPERS
IN BLANK OR QUICKLY SO
CONTENTS CANNOT BE
STUDlfO
STRAW BUYER REaMS
FEE AND IS TOLD
FORMER HOMEOWNER IS
PAYING MORTGAGE IN
UEU OFRENT
NFM COllECTS RENT
FROM FORMER
HOMEOWNER
NFM KEEPS RENT AND
DOES NOT PAY
MORTGAGE
NFM KEEPS RENT AND
DIFF[R[Na BETWHN
ORIGINAL MORTGAGE
AND NEW MORTGAGE
HOUSE FAllS INTO
FORECLOSURE:
HOMEOWNER EVlrnD,
STRAWBUYER SUED
TELLS STRAW BUYER
FORMER HOMEOWNER
ISN'T PAYING RENT
MORTGAGE
BROKER/FORECLOSURE
RESCUE CONSULTANT
,
The Attorney General's Office pursued the case civilly, obtaining injunctions and
judgments against the perpetrators and referring the case for criminal prosecution.
Another complex mortgage foreclosure rescue scheme pursued by the Attorney General's
Office involved a company called the Florida Housing Council (FHC). In that case, once again,
homeowners, with equity in their homes, but facing foreclosure, were solicited with promises
4
that they could be rescued from foreclosure. Most of the homeowners were advised to stop all
communication with their mortgage company while FHC handled the negotiations that would
allow the homeowners to avoid foreclosure. This tactic immediately cut off access to possible
refinancing options. As part of the scheme, the distressed property was conveyed to a trust in
which FHC was a 50% beneficial owner and the homeowner a 50% beneficial owner. While
arrearages were typically paid off, the homeowner was assessed outrageous fees for FHC's
services and was required to rent the home back from the trust. In the meantime, a mutually
agreed upon value of the home was determined, one that was typically far below the actual
market value. The homeowner had the right to repurchase the home at the end of one year at its
fair market value, typically a much higher price than the mutually agreed upon value. The
homeowner also lost his homestead exemption as a result of the scheme, resulting in a higher tax
liability. A typical example of the form used to calculate the fees assessed in the scheme
follows:
5
et TRUSTTM
CALCULATION 1
Partnership Trust No 3606
Arrears - .Mort; 13 e s
Contin en.c - H/O As.sodation
Arrears - Ta:x -2004 + 2005
Centlngency - ort9age
Investsr RetaIner·
Trust setup ,see Details Below
Facilitation - 1 Year
Pa· mant Reduction irust-Admln. ~ Altorne !Trustee
trust- AHome COsts
...:....'~y",'"=,.
Mtg. r.t
Mtg.2nd
Taxes/Ins.
Maintenance
Pml Asslat
M,"!thly .Oue.
$0.00
$1,000'.00
$5,000,00
$1.250.00
$0.00
$4.200.00
S3.975.00
S5,07S.00
S3,QSOOO
$3,000.00
l,apO.OO
R2Q.22
nn.oo
$0.00
$0.00
$250.0:0
(lliQ.Qll)
$832,00.
Trust Setup Related
$29.250..00
Total
TruSISetl)p
Mutually Agreed to Value
TQlal t{~gjnnjng EneutT:lbrantes
Net g'qulty at "\lIrt
Contribu«on~-
,,~~;;;;&;
•
Contrlbutlon.a-Investor
Paralegal
$164,'000.00
E'ICM,'lno,
Total
$12.1 oOo.oe
$403060;00
$2:50.00
$160.00
~
$B.01B.-oO
~
29.ZIlQ.@
.f allree· &. ace
SO,OO <:ot....ct.
$0.00 Signa
SO.OO
Date:-:P¥ 6
.lM2
~2
2.QP 'Sociaf Securl
No ...
Page 1 of 1
o
EQuity Ir\ves.lmenl Cap.a' Mana{ll!lmenf. In¢. Copyrlghhtd Material. Do· No.1 Ra:ptOdUeo For An" Reuon.
All Ric.hls Rescrvad.
.
In this particular case the fees generated by FHC were:
Actual funds expended:
$6,000
Fees and contingencies:
$23,250
MAV
$164,000
Appraised Value
$250,000
6
Upon repurchase, FHC and other co-conspirators stood to collect: $23,250 + 50% of
($250,000 - $164,000 - $13,750) = $59,375 on a $6,000 investment or a gain of989%.
Suit was filed against FHC and other co-conspirators, shutting down its operation. Litigation is
currently pending.
Another, more traditional mortgage fraud scam is exemplified by a company known as
American Heritage Mortgage Group. OUf case against this company began when we received an
anonymous complaint about a realtor who seemed to be having uncommon success in a bad real
estate market.
The realtor sought out properties in distress. The homeowner was told that the realtor
had a client willing to pay the asking price for the property. The realtor then relisted the property
at a much higher price. An appraisal was obtained at the higher price, a straw buyer was
recruited, mOligage applications were falsified, bank statements were created to show fraudulent
deposits and 100% financing was obtained on the properties. The difference between the price
paid to the seller and the mortgage amount was siphoned off at closing to a corporation not
involved in the process and quickly funneled offshore. Sixty (60) homes in the Tampa
Bay/Orlando corridor were affected and 50 eventually went into foreclosure. A chart outlining
the scheme follows:
7
Azi~
Mohamme
$267,265
Mortgage Brokers
Fees Earned
American Heritage
Mortgage Group, Inc.
Security One Mortgage
Corporation
'-1
$165,250
~~-?
$133,958
Find Realtor Who Inflates Prices
Showalter
Commissions
Recruit Straw Buyers
(Paid for Use of Their
Good Credit Scores)
$148.346
st. Hillaire
Commissions
Norma lopez
Kenneth West
Kimberly Gleaton
Barry Bossert
TraVis Jones
Jeannette lugo
Usa Rangoo
Man,iram Bhim
Dennis Farr
Chad lee
Heather Showalter
Magdalene Williams
Beny Bedeau
Kurt Edwards
Todd Kittel
Robert McCauley
Lesley RUbio
Bradley J. Watson
Anthony Marino
Norma lopez
Falsify loan Applications
Falsify Verifications of Employment
Falsify Bank Statemems
American Heritage
Steve Groden
Commercial Capital
Marcus Habeeb
Allen Boyarsky
Stephen Mahadeo
Anthony Didonato
Aliz Mohammed
st
1 Capitlll Mortgage
Betha"n Schuldiner
Brad Groden
Steele Property
Investments. Inc.
Title Agencies Close
Fraudulent Deals
Banks
Obtain Mortgages
from Banks Based
on Falsified
Applications
American Brokers Conduit
Centric Mortgage
Colorado Corporation
EquiFirst Corporation
First Franklin
First Horizon
Finst Magnus
Fr_mont Investments
Siphoned Mortgage
Proceeds
r 6 Million
~Z~".
~~1~1,813
~I!!I.I!IJI
/
50
Homes Go into Foreclosure
8
Banks
Green Pt. Mortgage Funding
IndyMac Bank
National City Bank
New Century Mortgage
Nova Star Mortgage
Suntrust Mortgage
Terrace Mortgage Co.
Suit was filed under FDUPTA and judgments in excess of $2,400,000 have been obtained to
date. The case has been referred for criminal prosecution.
Over the last few years, the predominant mortgage fraud schemes have become less
complex. Mortgage foreclosure rescue companies no longer appear to engage in real estate trusts
and lease buybacks. They have typically moved to simpler scams in which they take sizable
upfront fees in exchange for promises to rescue homeowners from foreclosure, pocket the fees
and do absolutely nothing to help the distressed homeowners. The internal task force eventually
opened more than 80 of these cases involving varieties on this theme, shutting down operations
and attempting to obtain restitution for the victims. The most prominent of these cases involved
Lincoln Lending in Miami, a loose affiliation of attorneys and mortgage brokers that scammed
literally hundreds of homeowners out of substantial upfront fees. Our Office obtained an
injunction obtained against the company, shutting it down, and freezing its assets.
Many of the mortgages in need of modification to the height of the mortgage crisis
emanated from Countrywide Lending. Our office was among the first to open an investigation
into Countrywide's lending practices and found that Countrywide:
Did not follow its own underwriting standards.
Did not follow industry underwriting standards.
Placed borrowers into loans it knew they could not afford.
Failed to properly disclose loan terms.
Placed borrowers in inappropriate mortgages.
Compensated underwriters with bonuses for volume of mortgages approved.
9
Suit was filed by our office in 2008 and, soon after, a settlement was reached with
Countrywide's new owner, Bank of America. The settlement provided significant relief to
homeowners requiring modification of unconscionable mortgages and, earlier this year, nearly
2,700 Countrywide customers received nearly $17 million in payments to ameliorate some of the
harm caused by Countrywide's practices. Because of a federal preemption of state action against
federally chartered banks, the suit had to be filed the day before Bank of America took
ownership of Countrywide, otherwise our investigation would have be entirely thwarted.
While the Attorney General's civil prosecutions were progressing, the Office of
Statewide Prosecution was pursuing cases criminally. These cases included one in which a
contractor preyed upon individuals with hurricane damaged homes, obtaining home equity lines
of credit for repairs, obtaining the funds through a co-conspirator at Argent Mortgage, taking the
funds and not performing the repairs. The individuals were prosecuted under the Florida RICO
act but many homes were still foreclosed upon as a result of the scheme.
These cases and others demonstrate that Florida's statutes in this area suffer from several
shortcomings. First, in its civil prosecutions of mortgage fraud matters, this Office was unable to
pursue, in most cases, realtors and appraisers under FUOTPA because they were statutorily
excluded on the theory that regulatory agencies would take corrective action. Second, even
though the Attorney General has the power to investigate and file civil RICO actions, the
proceedings are basically in rem proceedings under the state RICO statute. Under current law,
the effect is that if the property in question has been dissipated prior to filing suit, a personal
money judgment cannot be obtained against the perpetrator who dissipated the assets and neither
can any substituted assets be seized, as is allowed under federal law.
10
In 2008, the Attorney General obtained statutory reform in the mortgage foreclosure
rescue scam area with the passage of Florida Statute § 501.1377, which made the acceptance of
any fees for mortgage modification presumptively an unfair and deceptive trade practice.
Additionally, the new law regulated lease buyback schemes by requiring written agreements
before an instrument transferring title can be given to homeowner to sign. A prominent notice is
now required on the cover page of a written agreement of the consumer's right to cancel and the
law requires that the purchaser verify the homeowner's ability to make the payments required to
repurchase the home. The law also establishes a rebuttable presumption that there is ability to
pay if expenses and debt do not exceed 60% of gross monthly income. It further requires that the
repurchase price cannot be unconscionable and creates a rebuttable presumption that the price is
unconscionable if it exceeds 25% to 30 % of actual costs incurred by equity purchaser.
Further, with the passage of the Safe Act, any person now modifying mortgages must be
a licensed mortgage broker and regulated by the Office of Financial Regulation (OFR). This law
has effectively put those companies without licenses out of business. The net effect of these
laws has been to virtually eliminate complaints, and hopefully scams, involving mortgage
foreclosure rescue.
In April, 2008, in response to some of the shortcomings of the statutory structure in
Florida, the Attorney General expanded the internal mortgage fraud task force into an
Interagency Mortgage Fraud Task Force, consisting of representatives from the Attorney
General's Office (including the Office of Statewide Prosecution), the Office of Financial
Regulation, the Florida Department of Law Enforcement, local law enforcement agencies, the
Department of Business and Professional Regulation, the Department of Financial Services'
Division of Insurance Fraud, and the Florida Bar. Among other things, task force members
11
triage incoming complaints and refer any promising leads to appropriate agencies for action.
Local offices around the state have developed their own interagency lines of communication.
Attomey General McCollum and the Mortgage Fraud Interagency Task Force have also
sponsored several Mortgage Crisis Forums around the state providing a one-stop shop for
distressed homeowners. Officials from each of the state agencies involved in the task force as
well as officials from HUD, local law enforcement and local judges give formal presentations
providing information on how state and local agencies can assist in addressing concems. Pro
bono legal assistance is also provided by local bar associations and representatives from the five
largest lenders in the state are brought together to provide direct face-to-face assistance to
homeowners seeking loan modifications. Hundreds of distressed homeowners have attended
each of these forums and most have walked away armed with the information they need to better
tackle the problems they face and many have been able to obtain the loan modifications they
needed to stay out of foreclosure.
Resources available for civil and criminal prosecution of mortgage fraud on the state
level are, unfortunately, very limited. There were weeks during the height of the mortgage crises
that as many as 5000 complaints conceming mortgage fraud were logged by our consumer
hotline. Even now, we continue to receive leads on mortgage-related fraud cases. For example,
in the Panhandle of Florida, one investigator has commented that you can throw a stone down
any beach road and if the real property transactions are analyzed, fraudulent activity can be
found. This, of course, is long after lessons about freewheeling lending practices and false
appraisals should have been leamed. IN 2009, we attempted to supplement the Attorney
General's resources by applying for a $6,000,000 BJA Edward Byrne Memorial Competitive
Grant to fund mortgage fraud activities but were unsuccessful in obtaining it. As a result, we
12
must continue to carefully select and pursue those cases where we can make the most impact or
the conduct is most egregious, and we must do our utmost to expand our resources to the utmost
by joining with the other agencies on the task force to reduce duplication of effort and ensure
efficient and effective investigation and prosecution wherever possible.
It is not the role of the Attorney General's Office to quantify the dollar loss from
mortgage fraud in Florida or to estimate its impact on the financial crisis. However, anecdotally,
it is clear from the frequency and gravity of complaints of which we are aware that fraudulent
activity in the mortgage fraud area continues to far exceed the state and federal resources
dedicated to addressing it. Based on my experience over the last three years, I can say, without
hesitation, that mortgage fraud was rampant at the height of the financial crisis and clearly
played a major role in precipitating the financial crisis. In the American Heritage Mortgage
Group case I mentioned earlier, it took just three not particularly sophisticated criminals to
organize a scheme that wreaked havoc on the lending system. These individuals obtained almost
$50,000,000 in fraudulent loans, made off with $6,000,000 in skimmed proceeds, and caused at
50 homes in a limited geographic area into foreclosure. All of these properties were financed at
amounts far exceeding their value, most went into foreclosure and are either still on the market
or sold for substantially less than the loan amount.
One example is a home in Windermere, Florida, that was purchased in 2005 at the fair
market value of $400,600 but then was sold to a straw buyer associated with the American
Heritage scheme in May 2006 for $820,000 and was fully financed. The home went into
foreclosure and finally sold in November of 2008 for $300,000. Another home in Longwood,
Florida, was sold to a straw buyer in May of 2006 for $773,000, was fully financed and later sold
13
after foreclosure for $319,000. The financial impact of transactions such as these was and
continues to be devastating.
Mortgage fraud, as a crime, is unique. In most instances, the "victims" of the crime are
often also perpetrators involved in the fraud. Those who are the victims of mortgage foreclosure
rescue schemes, for example, may well have committed serious felonies in misrepresenting to
lending institutions their available assets, income or occupation to obtain the mortgage that is in
distress. Lending institutions that suffered unfathomable losses were often guilty of predatory
lending practices and sometimes even encouraged the commission of felonies, beseeching
mortgage brokers to write mortgages through any means necessary so that they would have an
inventory of subprime loans to market to Wall Street. Mortgage brokers often encouraged
borrowers to misrepresent material information to induce lenders to lend to them, or, in some
instances, falsified the application themselves without the knowledge of the applicant. Some
brokers, knowing their compensation would be greater, improperly placed borrowers into
inappropriate subprime loans when the borrower qualified for a conventional loan. Lending
institutions often misrepresented the quality of mortgage portfolios marketed to Wall Street and
Wall Street and the rating agencies misrepresented the mortgage-backed securities to
institutional purchasers like the Florida Retirement System. The fraud was perpetrated over and
over again at every level of our financial system.
The recent dramatic increase in the criminal prosecution of mortgage fraud perpetrators at
all levels is commendable and necessary, and no category of perpetrator should be ignored.
Unfortunately, most of the economic damage is done and is irreversible. To characterize
mortgage fraud as simply a major contributor to our present economic crisis will probably be
proven to be a vast understatement. The best intentioned mortgage modification plan will not fix
14
the problems caused by schemes like American Heritage, where straw buyers with little or no
income purchased millions of dollars of distressed real estate and defaulted on the mortgages.
The time to eliminate mortgage fraud is before or while it is occurring through appropriate
regulation and well-funded investigative and prosecutorial resources.
Thank you for this opportunity to testify.
15
@FedFRASER