October 29, 2012 6:58 pm
US housing: After the gold rush
Critics say authorities are pursuing petty crooks but going easy on Wall Street when it comes to mortgage fraud
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A half-built housing estate in Las Vegas: the city proved an ideal target for low-level fraudsters who inflated the property market artificially
In May 2006 Michael Perry, a retired US Army sergeant, applied for a $421,000 mortgage to buy a newly built four-bedroom stucco house in Henderson, Nevada, a fast-growing suburb 20 miles southeast of Las Vegas’s glittering gambling strip.
He filled out paperwork assuring Oak Street Mortgage of his income, employment, and intention to live at 2802 Kinknockie Way. In bubble-era Nevada, simply stating this information allowed him to qualify for a mortgage without putting money down.
Soon, he fell behind on his mortgage payments. Banks took the houses, reselling them for far below the original price. Last December Mr Perry pleaded guilty to one count of conspiracy to commit mail, bank and wire fraud for his role in a $3.4m mortgage fraud scheme in which he and others acted as “straw buyers” – that is, they falsified loan applications to qualify for mortgages on houses they intended to “flip” at a profit.
He is one of more than 2,100 estate agents, mortgage brokers and others arrested nationwide on mortgage fraud charges. In Nevada alone, more than 200 people have been arrested in connection with such fraud since 2008.
Such straw-buyer schemes are described by one attorney as having “typified much of what has been wrong in the mortgage industry”.
However, they also typify the types of criminal cases the US Department of Justice and the Federal Bureau of Investigation have pursued in the four years following the worst financial crisis since the Depression.
Critics say that prosecutors have gone after easy targets – low-level fraudsters – while going easy on Wall Street executives whose banks packaged billions of dollars worth of toxic mortgage securities.
An investigation into Wall Street practices “wasn’t prioritised as a significant enough thing for the DoJ to take a flyer [on] by committing significant resources to looking in these cases,” says Neil Barofsky, a former federal prosecutor who was the special inspector general for the troubled asset relief programme.
He adds that the mortgage fraud cases are not unimportant but “they don’t make the slightest bit of difference from general deterrence of the type of unethical and illegal behaviour that is apparent on Wall Street”.
Prosecutors at the DoJ say they have tried to bring criminal cases against big US banks for their role in the housing bubble but proving criminal intent has been difficult. The DoJ opened separate criminal investigations into mortgage practices at Goldman Sachs, Washington Mutual and Countrywide. But it closed those cases without filing criminal charges.
“The securitisation cases at the corporate level are challenging because the things that are so disheartening and contributed to the financial crisis are not activities that violated criminal law,” says Lanny Breuer, US assistant attorney-general for the criminal division. “There were lawyers involved on both sides of transactions ... That doesn’t mean that we like those transactions or that we condone them, but criminal law is not the way to resolve them.”
Instead, the DoJ has filed lawsuits against several banks, with the latest – a $1bn civil case against Bank of America for allegedly selling defective loans to Fannie Mae and Freddie Mac – filed last week.
Civil cases by the Securities and Exchange Commission and the DoJ have already collected billions of dollars in fines from US banks, securities firms and mortgage lenders through settlements for allegedly misleading investors over mortgage-related products.
Mr Breuer says the DoJ’s record on combating mortgage fraud is “very good”, adding that thousands of cases had been brought – including the straw-buyer cases. Committing these crimes required a booming property market, easy mortgage-lending standards, an estate agent to locate homes, and straw buyers with good credit. The straw buyers were usually in on the scheme, or recruited by others who promised to pay them.
After filling out the applications – including false claims that they intended to live at the property, a requirement for a no-deposit mortgage – the estate agent or others involved would then buy the property, flip it and pocket the profit.
Banks used the now-infamous “stated income” or “no doc” loans, where lenders did not confirm the borrower’s employment or income. The scheme worked as long as the houses were sold before mortgage payments came due. But when the housing market cooled, the straw buyers were left with the mortgage and bad credit; they often ended up bankrupt. The banks were left holding the houses.
The schemes played out across the US in the bubble years. Eleven people were charged with allegedly targeting oceanfront properties in New Jersey and Florida in a $15m scheme. More than 30 people were charged in a fraud scheme involving a gated community, known as the Versailles, in southern Florida. One mortgage broker, after learning about the federal investigation, allegedly hired a gunman and lured a straw buyer to a wood. Despite being shot many times, the straw buyer survived.
But Nevada was ground zero. Las Vegas, then the fastest-growing city in the US and a housing gold rush, was ideal for straw-buying schemes. “The market was hot but underneath, it was being fuelled by a lot of fraud,” says Scott Hunter, a supervisory special agent with the FBI in Las Vegas. “These straw buyers artificially inflated the housing market causing a lot of legitimate buyers to jump into the market and pay more than really what they should pay.”
“They used these houses as ATM tellers,” Mr Hunter adds. “You can make large sums of money with a few false documents.”
In late 2007, after hearing complaints from residents and a steep increase in foreclosures, Mr Hunter teamed up with the US attorney’s office in Las Vegas and state authorities to create a mortgage fraud taskforce. The FBI set up a hotline and tips poured in.
“We started to realise we had a significant problem on our hands,” says Mr Hunter.
He needed more agents, and in early 2008 appealed directly to Robert Mueller, director of the FBI, during a conference call. It worked.
Mr Hunter shifted agents from his corporate fraud unit into mortgages so they could “surge”. The Las Vegas FBI dedicated 20 agents to work on mortgage fraud, when earlier there had only been one, Mr Hunter says. Nationally, the FBI raised the number of agents investigating mortgage fraud from 120 in 2007 to 325 in 2011.
The DoJ also assigned prosecutors to mortgage fraud. Within weeks a handful were sent from Washington to Las Vegas, where they spent months hunkered down with FBI agents reviewing loan files as thick as telephone directories, tracking down straw buyers and interviewing witnesses, according to people involved.
In June 2010 the DoJ held a press conference to announce the arrest of 1,215 defendants allegedly involved in $2.3bn worth of mortgage fraud.
. . .
One of the cases that developed from this operation involved Mr Perry and the houses on Kinknockie Way.
He and his wife owned a few rental properties but by spring 2006 they had grown tired of being landlords. His wife had just had twins, and they were looking for a change. Mr Perry spoke to his next-door neighbour, Hugo Patrick Coutelin, about going into business together, according to court filings.
Mr Coutelin had moved to Las Vegas a few months earlier from Bakersfield, California, where he had made money by legally flipping foreclosed properties. Their plan was to buy houses from distressed homeowners, refurbish them and sell them for a quick profit. Mr Coutelin recruited Jeff Thomas, who ran a scooter-rental business on the Las Vegas Strip.
Together, the men formed CPT Real Estate Investments and raised $250,000 from investors, according to court filings.
Prosecutors allege that Linda Marie Kot, an estate agent, instructed CPT to shift its strategy: they should buy as many houses as possible by submitting false loan applications, thereby leveraging their funds. Ms Kot’s alleged role was to find the homes, mortgage brokers and escrow agents.
Within weeks, Ms Kot identified the properties in Henderson, including Kinknockie Way.
Mr Perry filled out the applications on the three houses. Mr Thomas supplied his information for one unit, while Mr Coutelin used his name to obtain a mortgage on a fifth home on Kinknockie Way as well as two others, according to court records. They went through different lenders so their multiple purchases would not be detected.
With the properties now on their credit reports, they needed new borrowers to qualify for loans and began recruiting other straw buyers, prosecutors alleged.
They offered prospective new buyers a flat fee of $10,000 to use their name and credit history. Ms Kot was alleged to have paid off the credit card debt for one straw buyer to shore up her credit score. She was also alleged to have temporarily moved money from her personal banking account into the straw buyers’ accounts to give the false impression that they had assets.
Ms Kot’s lawyer says the CPT partners “kept her in the dark” about the phoney loan applications and that she acted at the instruction of brokers. She lent money to the buyers, he says, because she is a “charitable person”.
Prosecutors allege that, all told, they acquired 16 homes. After five months, the housing market was beginning to soften and they were unable to unload the houses.
Mr Perry and Mr Coutelin pleaded guilty and testified against Ms Kot at trial. They were each sentenced to 15 months in prison. Mr Thomas was sentenced to probation. Ms Kot, who was convicted in May, will be sentenced next month.
The arrests of 200 people in Las Vegas have not placated the community, however. Kevin Savage, a loan officer with Evergreen Home Loans, says he lays the blame “at the feet” of Countrywide, which at its height was the largest mortgage lender in the US and is the target of a DoJ civil lawsuit.
Mr Savage alleges that Countrywide underwrote loans it should not have, feeding the securitisation machine. Bank of America, which owns Countrywide, denies this.
William Brown, Ms Kot’s attorney, said: “The only people who are getting handcuffs put on them are the low hanging fruit. It’s the individual buyers, it’s the individual real estate agents, occasionally the individual mortgage broker. But it comes to a dead stop when you follow that money trail to the lenders.
They’re going after lenders civilly and they’re putting individual citizens in prison. The injustice of that is stinging.”
. . .
Last year the FBI began moving resources back into corporate fraud, agency officials say, and downgraded the taskforce. Mr Hunter says the authorities have systems today that better position them to stay on top of mortgage fraud than in 2007. Banks are also increasingly flagging suspicious loan applicants to the government.
Back on Kinknockie Way, the effects of the Las Vegas boom and bust are still playing out.
Michael Hill, an electrician who worked on construction projects for casinos, put down $70,000 and borrowed the rest to buy a $300,000-plus four-bedroom home at 2833 Kinknockie Way. About a third of the houses were empty in 2006 when he moved in, he recalls, but he was unaware that several homes were involved in a fraud.
The downturn slowed new construction and Mr Hill was forced to find work at the airport. By July 2011 he had lost that job and gone on unemployment benefit. His wife, who had stayed at home to raise their three children, took a job as a server at Hooters Casino Hotel. Mr Hill took up the parenting duties.
The debt on the house grew and they could no longer make their monthly payments. The bank took control of the house and it sold this month for $252,100.
As he emptied some final items from his home into his car last month, he said he hoped to qualify for the government’s “cash for keys” programme, which gives distressed homeowners cash to move out.
For now, though, Mr Hill and his family are moving to Indian Springs, a small town 50 miles northwest of Las Vegas. They will live in a trailer.
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