Last year, an Orange County man was rejected for a personal loan at his credit union. To his surprise, his credit report had been red-flagged because he was six months behind on mortgage payments on a $660,000 home in Oceanside.
That was news to him. He had never bought a house in Oceanside.
So he contacted police, who uncovered that his identity had been stolen to make the purchase in October 2006.
Now the home on Overlook Drive is in foreclosure. The real estate agent involved in the deal, Robert Hugh Decker, is in custody in San Diego. Prosecutors allege that Decker's company was paid nearly $37,000 in commissions and that he was collecting $1,800 per month in rent from tenants.
The charges against Decker highlight the seamy side to the mortgage meltdown. Industry experts say the same lax lending standards that lured home buyers to stretch beyond their means created a fertile petri dish for real estate fraud.
Law enforcement officials say a host of real estate shenanigans sprouted during the housing boom. The most prevalent – and least likely to be prosecuted – involved fudging income on loan applications. Other buyers fibbed about whether they would occupy the home or rent it.
Some schemes were more complicated and nefarious. They often involved inflated appraisals, zero-down financing and grossly false information on loan documents. In these scams, the idea was not to own the property long-term but instead to siphon off as much money as possible from commissions, rental income or undisclosed cash kickbacks before letting the home fall into foreclosure.
“Many people just assume these foreclosures are part of the subprime meltdown,” said Todd Lackner, a real estate appraiser in San Diego. “This is not true. These properties were purchased with the intention of being foreclosed on.”
More of these cases are coming to light as the foreclosure crisis deepens. Last month, federal prosecutors charged six people from a downtown San Diego mortgage and real estate firm with wire fraud as part of a nationwide crackdown on bogus real estate transactions.
The probe, called Operation Malicious Mortgage, resulted in more than 400 indictments nationwide. The Justice Department and FBI estimate losses from the schemes at more than $1billion.
In Oceanside, Decker is one of a handful of people charged by state prosecutors in connection with the Overlook Drive property and two additional home purchases. The four other people, all of whom have pleaded guilty, include notaries, a mortgage broker and an Orange County chiropractor who provided the personal information of two patients whose identities were stolen, said San Diego Deputy District Attorney Stephen Robinson, who is prosecuting the case.
The investigation is continuing, and at least two additional foreclosure homes may be involved, authorities said.
Decker's attorney, Charles Guthrie, said that his client is innocent and that those who pleaded guilty are pointing fingers to escape tougher treatment.
“Mr. Decker is an honest man,” Guthrie said. “He wants to go to trial . . . We're looking for specifics. We want to see what they say Mr. Decker did.”
Who gets hurt by mortgage fraud? Lenders, of course, often lose money when they foreclose on a house. Identity-theft victims can spend months or years trying to repair their credit scores.
But there's also a wider impact. Real estate experts say that suspicious deals helped inflate property values during the boom and that the foreclosures are fueling a faster fall in values in today's market.
One example occurred in Mission Hills. In October 2005, a roughly 1,400-square-foot home was listed for $1 million. It didn't sell. In early April 2006, it was relisted for $989,000. A month later, the price was raised to $1.3 million.
It went into escrow for $1.25 million two days after the price increase. The buyer purchased it with zero-down financing, according to deed records.
The lender foreclosed on the home in October. The bank resold it in April. The price: $640,000.
Lackner, the real estate appraiser, has unearthed about 1,500 such unusual sales in San Diego County. He began researching questionable real estate deals about a year ago after stumbling across some suspect, high-priced purchases.
“As an appraiser, I'm asked if properties in Mission Hills have decreased 50 percent in value like this one,” Lackner said. “My answer is no. This property was never worth $1.25 million.”
In San Diego County, home prices have tumbled 26.5 percent since their peak in November 2005, according to La Jolla-based DataQuick, a real estate research firm.
Buyers who lied about income or occupancy on loan applications also are contributing to the price plunge, said lawyer Ann Fulmer, a vice president with Atlanta-based Interthinx, which provides fraud-detection services to lenders. Today's tougher lending standards make it harder to fudge information when trying to refinance these loans, so the buyers are walking away in many cases, she said.
During the end of the housing boom – from 2006 to early 2007 – the climate was particularly sunny for these questionable transactions. No-documentation loans and stated-income “liar” loans were plentiful.
One scheme used during the boom years was cash back in which the buyer gets a kickback from the seller after the loan closes. Cash back is not illegal if everyone, including lenders, knows it's happening.
Cash-back schemes sometimes involve “straw buyers” – witting or unwitting accomplices whose names are used to purchase a home. If straw buyers know what's going on, they often get a fee.
In March 2006, Shamika Copenhagen purchased a $1.5 million home in Eastlake using zero-down financing, federal prosecutors said. Creative Financial Services of San Diego arranged the loan. The application claimed Copenhagen made $337,000 a year working for U.S. Mergers, a company prosecutors say “does not exist as a functioning entity.”
When the sale was completed, the lender paid Creative Financial $38,000 in commissions for arranging the loan.
The seller, however, also wrote a $200,000 check to Said Betech of Creative Financial, prosecutors said. The purpose of the $200,000 was not disclosed on any documents associated with the transaction, said Assistant U.S. Attorney Christopher Alexander, who is prosecuting Betech and several others in the case.
A couple of weeks later, one of Betech's colleagues at Creative Financial wrote a $15,000 check to Copenhagen, prosecutors say.
The lender foreclosed on the 3,800-square-foot house in March 2007. It sold a year later for $700,000.
Betech's lawyer could not be reached for comment; Copenhagen is not among those charged.
Federal prosecutors examined 21 suspicious home sales linked to Creative Financial. So far, 18 have been taken back by lenders or are in the process of foreclosure.
More arrests could be coming, police said. One case under investigation involves five condos in San Diego – three downtown, one in La Jolla and another in Rancho Santa Fe – that were purchased between May and October 2006 in the name of a Pennsylvania man for more than $3 million combined.
The unwitting buyer is a mechanic who lives in a manufactured home, police said. All of the condos have been foreclosed, and San Diego police have a suspect. The San Diego Union-Tribune is not using names because the investigation is continuing.
This sordid side of the housing meltdown is increasingly getting the attention of policymakers and law enforcement. A recent report by the Mortgage Bankers Association ranked California fourth nationally for incidents of mortgage fraud – behind Florida, Nevada and Michigan.
In part because the loans are big, losses related to real estate fraud amount to $6 billion a year, according to a study by BasePoint Analytics, a Carlsbad company that makes mortgage-fraud-detection software for lenders and investors in mortgage-backed securities.
“Looking back to 2004 when we got into it, it was seen as a pretty small problem” by the mortgage industry, said Frank McKenna, chief fraud strategist with BasePoint. “But at $6 billion a year, you're looking at something that's three times the size of credit card fraud.”
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