It was called the “Dream Homes Program.” But for the Washington, D.C.-area residents who plunked down $55,000 for a chance to cut years off their housing payments, it turned out to be a nightmare — a $78 million scheme — in an area with one of the highest mortgage fraud rates in the country.
A federal court in Greenbelt, Md., dealt a 150-year sentence last week to Andrew Hamilton Williams Jr., the owner and founder of Metro Dream Homes, on charges including wire fraud and conspiracy to commit money laundering.
Williams, 61, of Hollywood, Fla., was convicted in November after he lured homeowners to luxury hotels and convinced them to take part in a purported mortgage payment program called the “Dream Homes Program.” For an initial $50,000 investment plus $5,000 for an administrative fee, he promised homeowners and homebuyers that their mortgage would be paid off within five to seven years.
The high-profile Metro Dream Homes case was prosecuted by the Maryland and Washington, D.C., Mortgage Fraud Task Forces, which includes federal, state and local law enforcement agencies. The 150-year sentence, issued by U.S. District Judge Roger W. Titus, is likely the toughest given for any mortgage fraud case in history and could be a sign of what’s to come for mortgage fraudsters.
Is mortgage fraud on the rise?
The Washington, D.C., region is currently ranked seventh in the nation for mortgage loan fraud, based on suspicious activity reports filed with the Financial Crimes Enforcement Network. According to the FinCEN’s 3rd Quarter 2011 Mortgage Loan Fraud Update, published in March 2012, mortgage loan fraud suspicious activity reports are up 20 percent nationwide, since the same reporting period in 2010.
In the report, FinCEN attributes this increase to “mortgage repurchase demands and special filings generated by several institutions.” If mortgage fraud is not on the rise and institutions and consumers are just doing a better job reporting it. it’s important to beware of possible scams if you’re in the market to sell, buy or refinance a home.
There are many different types of mortgage fraud. Alternative names for scams includes “churning” and “chunking,” “flipping” and “flopping,” and even “equity stripping.” These different types of fraud often take different forms as the housing market changes and regulating agencies become aware of how the scams work.
Offenders run the gamut
Mortgage fraud can be committed by investors, home buyers, Realtors and home sellers. According to an Annual Mortgage Fraud Risk Report released March 28 by Interthinx, a company that assesses mortgage fraud risk, fraud activity is closely associated with underwater borrowers and distressed/foreclosed properties.
Interthinx’s report ranks individual states based on the analysis of loan applications processed in 2011. The national average on the Mortgage Fraud Risk Index is 146; Washington, D.C., and Maryland, both of which have an index around 150, rank in the top 15 states. Nevada, at 245, is the riskiest state.
Fraudsters follow the distressed market because they prey on people who are desperate for help. A popular mortgage scam occurs when a person or business claims to be a “Government Loan Modification Specialist,” when in reality there is no such thing.
This type of fraud is also known as “Obama’s Refinance Scam,” according to StopScammingUs.com, a consumer awareness website set up by Office of the State’s Attorney for Prince George’s County’s Mortgage Foreclosure Fraud Division. In this type of mortgage fraud, scammers confuse their victim by exploiting the Obama administration’s alphabet soup of loan modification programs.
The loan modifications that fall under the administration’s Making Home Affordable program all have a unique acronym and separate set of guidelines, and can be facilitated by HUD-approved counseling agencies that offer to help distressed homeowners for free. These agencies receive government funding to provide services and act as a liaison between the distressed lenders and their mortgage holder.
Virginia Callis, executive director of Unity Economic Development Corporation (UEDC,) a HUD-approved counseling agency in Prince George’s County, has people coming through the door for help with loan modifications. Some have been previously duped in scams that cost them between $1,500 and $3,000.
“We have a hard enough time just keeping up with the modifications,” Callis said. “We move forward. We don’t deal with the past.”
Callis said the money for counseling is drying up and that they’ve recently had trouble paying the staff for their services. The UEDC offers a first-time homebuyer workshop, an eight-hour course for $60. Callis believes that it is the homeowner’s or homebuyer’s responsibility to become educated and make wise financial choices.
Region leader during mortgage meltdown
Prince George’s County was the hardest hit of any county in the Washington area during the subprime mortgage meltdown. The county currently has the highest foreclosure rate in Maryland with 27 percent, a total of 892 filings, according to recent data from RealtyTrac,
Real estate agent Lolita Ellis, who owns Prince George’s County-based Alluvion Realty, sees several sides of the housing market. She handles all types of sales but mostly deals now in “short sales” of homes nearing foreclosure. A short sale is a real estate transaction where a borrower, who is unable to pay their mortgage, is allowed by the lender to sell the home for less than what is owed on their mortgage.
Ellis said that upwards of 90 percent of all home sales in Prince George’s County are short sales. “It’s very rare when you have someone put their house on the market just because they are making a move,” Ellis said. “Even when they do that, it’s hard for them because they lost value in their property as well [due to] everything that’s going on around them.”
Housing inventory in foreclosure and homeowners with delinquent mortgages create an invisible inventory of homes that are not listed for sale. This inventory is referred to as “shadow inventory.” This shadow inventory is hard to quantify because there is a considerable amount of “churn” in this area of the market. Churn, in turn, refers to the houses and mortgages that are in the process of continually entering and exiting the process of foreclosure, which keeps home values low.
Since short sales have flooded the market, people seeking to capitalize on other people’s misfortunes have embraced short sale fraud.
Short sale fraud takes on two popular forms. There is fraud for housing, which is typically fraud that is originated by borrowers or homeowners trying to scam their way out of an upside-down mortgage or trying to unload negative equity in their home. This is done by short-selling their property to a close friend or relative who will allow them to remain in the home and be paid back the difference of the debt over time. This is considered an “arms length transaction” and is a violation of short sale terms in where the seller supposedly had a financial hardship and the bank agrees to accept a loss on the amount owed by the borrower, or homeowner.
The other popular version of short sale fraud is considered professional fraud, where a realty professional teams up with unscrupulous investors and sells the property at less than market value, without doing due diligence to get a fair market price for the home. The agent then makes a sell with a private buyer for a higher price and the investor and Realtor would split the difference at the cost of the bank and the new private buyer.
This type of transaction is called “back-to-back” closing. These closings on average bring 34 percent ($54,947) gain between sale prices, and one in six “suspicious” short sales were resold on the same day, according to Corelogic’s 2011 Short Sale Research Study.
April Richardson, former Prince George’s County mortgage fraud task force prosecutor, predicts that this type of fraud will become more prevalent as more and more pre-foreclosure homes go to the market to be sold as short sales. Another prediction that Richardson makes is that lenders will begin to incentivize loan negotiators to get short sales approved more quickly. This will help eliminate a backlog of properties, or shadow inventory, which drives down home prices.
“Whenever you incentivize people to do things, it just means that it’s going to open the door for more fraud,” Richardson said. Corelogic, a data analytics company, estimated losses related to risky short sales at $375 million in their 2011 Short Sale Research Study, published May 2011.