Credit Crisis – Subprime Mortgage Collapse – New York Times Article Shows That Choices Made Ten Years Ago Haunt Us Today! Comments by Mortgage Fraud Speaker Chuck Gallagher

Every day there is more news about the sagging economy.  Banks being considered for nationalization.  Companies contracting and downsizing.  Workers being laid off.  It’s hard to find the bright spots as there seems to be no light at the end of the tunnel.

But – every choice has a consequence – and the consequences we are living in today had a beginning with choices that were once made in good faith.  The more I research the more I find that is isn’t the banks who are totally at fault or greedy wall street tycoons.  Rather, the problem started with government pressure or direction.  Encouragement by our own federal government, coupled with shareholder profit pressure, created the momentum that has now turned into disaster. 

The following is an article written by Steven A. Holmes for the New York Times on September 30, 1999. (copyright New York Times 1999)  A portion of the article is reprinted here:

In a move that could help home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is not generally not good enough to qualify for conventional loans.  Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nations biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stockholders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called supprime borrowers.  These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

“Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s Chairman and Chief Executive Officer.  “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been regulated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy.  But at least one study indicates that at least 18 percent of the loans in the subprime market went to black borrowers, compared to 5 percent of loans in the conventional market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose difficulties during flush economic times.  But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

“From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute.  “If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The whole article can be seen here.

Almost ten years ago, writer, Steven A. Holmes reported on what was the infancy of what would bring the US to its economic knees some ten years later.  The clarity of his comments are a haunting reminder simple reality checks and what many would now say is common sense business.

QUICK OVERVIEW:

• Politicians wanted the purse strings loosened so that more people could get what they wanted  – even though they couldn’t afford it.  Hum that seems to me to be bad economics but good politics.  Get more people what they want so they will vote for you.  After all, with term limits, most folks won’t be in power when the crisis hits.
• Shareholders – of Fannie Mae – push for higher and higher returns.  Gordon Gecko – “Greed is good” – yea right!  I have been a Sr. VP in a public company and know what that shareholder pressure is like.  But here’s a reality check:  the tide comes in and the tide goes out.  It is unrealistic to assume that there will always be growth.  If companies were run for the long haul, then some of the dumb decisions that are made would be avoided.  It is terribly frustrating to see what kind of decisions are made just to make the earnings work for the current quarter.
• Banks and investment firms wanted Fannie Mae’s expansion – why?  Obvious – another line of profitable business (at least for the short term).  I wonder today if those who were so quick to jump on the bandwagon would have done so – if they knew then what they know now.

Were the choices made then ethical?  As a business ethics speaker, I’m interested in your opinions.

WHAT DO YOU THINK?

John A. Yanchek Pleads GUILTY to $82.8 Million Mortgage Loan Fraud Scheme – Fraud Prevention Expert Chuck Gallagher Comments

Every choice has a consequence.  As a business ethics and fraud prevention speaker, I state that during every presentation.  Regardless of who you are or what station you may hold in life – you cannot avoid the consequences of your actions or choices.  Sure, you may avoid the consequences for a time, but in the end we must always face the consequences of our choices.

On February 4th, 2009 – John A. Yanchek – a licensed Florida attorney pled guilty to conspiracy, making false statements in connection with bank loans, and money laundering.  The consequence – Yanchek could face up to 45 years in federal prison (although his sentence will likely be much less). 

According to the US Attorney’s news release:

YANCHEK entered into a conspiracy to make false statements to federally-insured banks in connection with applications for commercial  loans to fund the purchase of vacant land in the Sarasota/Manatee area for development.  The object of the conspiracy was to obtain a loan from a bank in an amount that was sufficient to allow the conspirators to purchase the property without contributing any equity of their own and to receive excess loan proceeds for their personal use and benefit.  To influence the lending decision of the various banks, YANCHEK, acting in his legal capacity as the closing attorney, made false statements regarding the financial resources of the borrower, the amount and source of equity contributed by the borrower, compliance with the seller’s obligation to provide marketable title to the property, and distribution of the loan proceeds.

The question now is not one of guilt.  Yancheck has made it clear that he is guilty.  Rather the question is one of motivation.  Why would a licensed attorney risk his license, livelyhood and freedom?

An article written in the HearldTribune.com (linked here) states the following:

Between January 2005 and March 2006, Husani, whose business dealings are being scrutinized by the FBI, completed seven real estate transactions in Manatee and Sarasota counties, buying land for a total of $43 million, reselling it to partners for $117 million and helping them obtain $84 million in bank loans, according to records filed with county courts.

Yanchek, by contrast, bought seven houses for $3.45 million since 2001. He then resold them to companies or trusts he controls for $5.55 million and got $4.46 million in loans from three different banks.

In his most expensive transaction, Yanchek bought a house at 101 Seagull Lane on Bird Key from Christopher and Courtney Campbell for $1.16 million on Dec. 4, 2002.

He then sold the house the same day to 101 of Sarasota Inc., a company he controls, for $2.15 million and got a $1.25 million mortgage from First State Bank.

As a side note – Husani fled the country in 2006.

From external appearances, Yancheck figured out how to defraud banks by watching too many episodes of “Flip That House.”  Frankly, however, the three components of a fraud are (1) need; (2) opportunity and (3) rationalization.  While I can’t address the orginial “need” motivation, I suspect that over time “need” became money.  From the perspective of a fraudster – once one gets the taste for money it becomes nearly impossible to divorce oneself from that need.  In Yanchek’s case the “opportunity” component was found in the license and position of trust that he had.  There is a fundamental understanding that an attorney is a trusted advisor and ethically should abide by the law.  Somehow here that point seems to be missed.

Where from here?  Well, Yancheck will be sentenced and considering the financial magnitude, I suspect that he will receive 5 years or more as an active prison sentence.

IF YOU KNOW JOHN A. YANCHECK – and would have any insight into his motivation, feel free to contact me as I am interested in what would motivate such behavior.

YOUR COMMENTS ARE WELCOME!

Twenty Million Dollar Mortgage Fraud Scheme – Osmond Decoteau Indicted Faces Prison – Business Ethics Speaker Chuck Gallagher Comments…

Well over a year ago, I along with others were writing profusely about mortgage fraud and the severe lack of business ethics that seemed rampant in the industry. It almost seemed like “money for nothing” and the house was free. Now, as we approach the time for our general election, things could not be worse. There is no doubt that this will be a disaster for the GOP when the election results come in.

October 23, 2008, an indictment was handed down in Brooklyn federal court charging OSMOND DECOTEAU with wire fraud for masterminding a scheme to defraud mortgage lenders and banks of more than $20 million in connection with the sale of several properties located in Brooklyn and Florida.

According to the indictment: DECOTEAU recruited straw purchasers for properties located in Brooklyn and Florida, and ensured that their mortgage applications would be approved by lenders by fraudulently misrepresenting the purchasers’ financial condition. Subsequently, at the closings on these properties, DECOTEAU presented phony payoff letters which indicated that three companies he controlled were the loan servicers for the properties. The closing attorneys then issued payoff checks to the DECOTEAU-controlled entities, instead of the actual loan servicers for the holders of the pre-existing mortgages. To conceal the fraud, DECOTEAU caused monthly payments to be made on the underlying mortgages so that those mortgages would not be declared delinquent. As a result of the defendant’s scheme, between April 2005 and January 2007, multiple fraudulent closings occurred resulting in a fraud exceeding $20 million, and each of the properties is now encumbered by two first-lien mortgages.

Mortgage Fraud has been rampant. It will take years for the majority of the crimes to be uncovered. No doubt Decoteau, if found guilty, is just one of thousands who will prosecuted for taking advantage of a system without substantial controls.

“In May of this year we announced the formation of a task force comprised of federal, state, and local law-enforcement agents and investigators to address the burgeoning problem of mortgage fraud,” stated United States Attorney Campbell. “This prosecution is one example of the results of that cooperative initiative, which includes the investigation and prosecution of mortgage fraud that has harmed investors, lenders, and homeowners across the country.” FBI Assistant Director-in-Charge Mershon stated, “Combating mortgage fraud is a priority because mortgage lending and the housing market have a significant overall effect on the nation’s economy. The FBI is committed to investigating and prosecuting criminals who exploit vulnerabilities and devise new methods or schemes to defraud.”

As a business ethics and white collar crime speaker, I understand first hand the effects of the choices we make. I served time in federal prison for poor choices I made 25 years ago and the consequences still follow to this day. If it takes three components to create a fraud: (1) need; (2) opportunity and (3) rationalization…then Decoteau had plenty of opportunity considering the lax state of oversight when it came to mortgages in the past five to eight years.

If you know Decoteau…perhaps you’ll comment on his motivation.

Your comments are welcome…

Lawyer – Ted Russell Schwartz Murray – Guilty! White Collar Crime Speaker Chuck Gallagher Comments

As the time of decision grew near, the only thing that Ted Russell Schwartz Murray could likely have wished for is another storm.

The trial which began on Sept. 8, 2008, was interrupted by Hurricane Ike, and concluded with the return of the guilty verdicts yesterday.  A Houston federal jury has convicted Ted Russell Schwartz Murray, a lawyer licensed in Texas and Florida, of conspiracy to commit mail fraud and securities fraud in connection with the operation of Money Mortgage Corporation of America, a subsidiary of Premiere Holdings, LP, a real estate investment program.  Murray was also convicted Murray of making a False Statement on Tax Returns for the years 1999 and 2000.

Murray and co-defendants David Isaac Lapin and Jeffrey Carl Wigginton, Sr. were all charged by indictment in August, 2006. Lapin and Wigginton pleaded guilty in August 2008 to the conspiracy to commit mail fraud and securities fraud for their roles in the scheme and are pending sentencing in Nov. 2008.  Murray was charged separately in a second indictment with the tax offenses.

Every choice has a consequence.  As a business ethics and white collar crime speaker I have seen over and over the consequences of greed motivated actions.  For a fraud to exist three things exit: (1) need; (2) opportunity and (3) rationalization.  The verdict was guilty.  The question is what was the motivation of Murray and his co-conspirators.

According to the US Attorney’s news release:

During trial, the United States presented its evidence proving that between 1996 and 2001, Murray, 57, conspired to commit mail fraud and securities fraud in the promotion and marketing of the Premiere 72 or “P72″ mortgage investment program. Murray testified at trial and denied he had made false representations to investors when the program was promoted with promises of (1) 12% interest; (2) 1st liens on real estate; (3) 72 hour liquidity; and (4) 70% loan to value ratio. However, the evidence proved that so-called interest payments were actually set aside from a portion of the investor’s principle and returned to them as interest; many loans were not secured by 1st liens on real estate; and many loans were not based on a 70% loan to value ratio. Lapin, a co-conspirator in the scheme, testified that he and his co-defendants failed to disclose to investors the fact that loans on certain projects were actually in default at the time the funds of new investors were placed in these loans. An expert witness, qualified in forensic accounting, testified that the Premiere 72 program was conducted like a Ponzi scheme, where the money from new investors is used to pay earlier investors.

Mortgage Crisis – no wonder.  With practically free money and a country that seemed to believe that real estate had no ceiling, the opportunity was right the perpetration of such a fraud.  Likewise, in the current economic climate with fear leading the way, others will rise to fill the void.

While admitting that the above material facts were not disclosed to investors, Murray blamed his partners claiming Lapin had failed to live up to his fiduciary duties and both Lapin and Wigginton failed to disclose to investors that Premiere Holdings charged fees ranging from 15 -25% from investor funds. Murray denied any responsibility to disclose any material facts to investors.

With sentencing following in March 2009 the failure to accept personal accountability will no doubt play a role in the length of sentence.

Over 500 people invested in the fraudulent mortgage investment program promoted by Murray and his co-conspirators.  During the five year period the scheme operated, Premier Holdings, LP, Murray and his co-conspirators generated more than $200 million in gross receipts. Premier Holdings, LP, filed for bankruptcy in Oct. 2001 at which time the company had more than $160 million of investor funds tied up in the fraudulent scheme.  Murray filed for personal bankruptcy a short time thereafter.

The jury found Murray guilty of all 20 counts submitted to the jury arising from the scheme to defraud investors including the conspiracy charge, 14 counts of mail fraud, and four counts of securities fraud. The conspiracy conviction and each of the convictions for mail fraud carry a maximum statutory penalty of five years imprisonment. The securities fraud counts of conviction each carry a maximum penalty  of  10 years imprisonment.  Each count also carries a maximum fine of $250,000.

In addition to the scheme to defraud, Murray was also charged and convicted in a separate case with two counts of making a false statement on his tax returns based upon evidence which proved that Murray disguised personal expenses as business expenses and deducted a portion of those expenses on his tax returns, including a $29,000 Rolex watch, payments to casinos, a series of payments totaling over $5 million for return of principal to investors, payments for a $1 million ownership interest in the building where Premiere held its offices at 11451 Katy Freeway, and gifts to family members.  Murray faces a maximum of three years imprisonment and a $250,000 fine on each of two counts of conviction.

Considering where we are today – economically – I would not be surprised to see that the sentence would err on the heavy side.  For those who read this – if you know Murray perhaps you could give some clue as to what motivated his behavior.  Obviously, Murray was educated and hence would know the difference between right and wrong, between ethical behavior and unethical behavior.

Comments are welcome

Business Ethics Alive in Small Banks – Strong Ethics Equal Healthy Banks

It’s easy to become cynical when all you hear in the media is bad news.  But not all news is bad.  In a recent CNN article there was some refreshing comments from small, but healthy, banks.  They were making loans and, for the most part, it was business as usual.

Here are some comments from the article:

Conservative lending practices seem to be a common denominator among banks that have remained strong and stable during the current banking crisis, and those banks are still making loans.

Peoples Bank President Todd McKee, left, chats with customer Tommy McVay on Friday in Lubbock, Texas.

The failures of behemoths such as Washington Mutual and IndyMac have drawn media attention, but not all big banks are in trouble — and smaller banks are not immune.

For sometime, as a business ethics speaker, I have said that the underlying problem related to the economic crisis we’re facing today has been founded in a lack of business ethics.  For those comments I have been the brunt of criticism.  But, if ETHICS is choosing good from bad with a moral obligation and duty…then I submit that what is reported in the CNN report supports my position.

“Our underwriting standards have tightened a little bit,” said Ronald Heaton, president of the Cedar City, Utah, bank. “… Our standards haven’t changed drastically, and we’re still loaning … but we’re watching our underwriting standards closely so that people are able to repay their loans.”

Mortgages that didn’t require borrowers to prove their income or make a down payment got many lenders into trouble, but his bank never offered those: “Didn’t make sense,” he said.

Some would-be borrowers “wanted us to do everything, and we said, ‘We don’t do everything. We have standards,’ ” Heaton added.

Nonbank mortgage lenders were able to generate substandard mortgages because they were not adequately regulated by the federal government, Heaton said.

Now those bad loans have come home to roost, the nonbank lenders are out of the game, and State Bank of Southern Utah’s mortgage business is picking up, Heaton said.

Folks…that’s just plain ole good ethics.  Heaton (whom I’ve never spoken to or met) is 100% accurate.  If you have standards (founded by sound business ethics) you won’t find yourself in major financial trouble.  I contend that lending practices, that were not founded with sound ethical principles, are in large part the root cause of why we are where we are today.

Another part of the CNN report states:

In Texas, the state Department of Banking says state-chartered institutions wisely stayed out of the subprime game.

“That’s not what we do. We’re not in the subprime market whatsoever,” said Todd McKee, president of Peoples Bank in Lubbock. “Lending here is the same as it’s always been.”

The way it’s always been is up close and personal. McKee said his bank’s customers prefer to do business with tellers face-to-face rather than through the drive-up window.

“I’m president of the bank, and I sit right by the front door, so I wave at every single soul that walks in the bank. Everybody has access to me,” he said. “My partner [Larry Allen] is the CEO. … He sits at the other door. So we know everybody that comes in the door.

May sound “hokey” but that is banking the way it was meant to be.  I recall my first loan when I was 18 years old (I’m now 51) was made – not by a credit score – (funny I don’t think they existed then), but rather the loan was made on character and the fact that the bank president trusted me to repay (and knew where my mama was if I didn’t).  I paid the loan back and was proud to do business with them.

This last comment from the article states it best – “You can look at credit all day, you can look at collateral, but if they can’t make that payment, there’s no sense in making that loan. And we’ve always done that. We’re all supposed to do that.”  That is business ethics!

Business Ethics – Fraud Awareness: There Is Definitely A Link!

My how times change.  Just a few short years ago the economy could do no wrong.  People commented about the large movement in the housing market “caused” by the Baby Boomers.  Baby Boomers were buying second homes, downsizing, and making room for the next wave of new home buyers – or so we thought.  But hind sight is 20/20.

Perhaps less of that was true that what we thought.  Looking back there were many artificial factors in play that were, in my opinion, a clear violation of what most people would say are sound business ethics.  As a business ethics speaker, I know as I consult with companies frequently who want to know how to get out of some of the messes that have been created.

No where is this more evident than in the mortgage and banking industries.  And let me be clear – WHERE THERE IS A BREACH OF BUSINESS ETHICS – THERE IS FRAUD.  When companies turn their back on maintaining a strong ethical foundation for themselves and their employees, they run the very real risk of exposing themselves to fraud.  And, no one that I know of wants to be on the back end of a very messy fraud investigation.

As an example, the Dallas Independent School District has been dragged through the mud with all that has taken place – FBI investigations for fraud and all.  Now the DISD is not a bad organization, in fact, it does good work and should be proud of its place in the community.  But, with lax controls and an environment that did not fully promote ethical behavior, it was clear that when temptation was presented the obvious outcome would be fraud.

Now the question is – what does the Dallas Independent School District have to do with mortgages and banking?  NOTHING!  Rather, it serves only as an easy example of how an otherwise good organization can be featured in a negative light – and that is because of the choices they made.

The larger question is – with the economy where it is today, which banking institutions will survive and which will implode under the weight of the poor choices made during what appeared to be more “healthy” times?  There wil be bank failures as this “recession” and, yes I called it a recession picks up steam.  We are no where close to the end with more unpleasant news to come.

WHAT NOW?

Frankly, that is the question that the business community should be asking!  It has been said over and over, only the strong will survive.

When there is an economic downturn there will be FRAUD.  Make no mistake that is a given.  There are three elements involved in most frauds: (1) need; (2) opportunity and (3) rationalization.  When the economy goes south…there is NEED!  That is the first step and if ever there has been a time when NEED is growing – it is NOW!

Here where the ethics equation comes into play.  NEED alone does not create fraud – it is just one component.  If the opportunity is eliminated then the fraud cannot happen.  That’s where a commitment to ethics and fraud awareness come into play.  As a business ethics speaker and fraud prevention consultant, I (and certainly I am not the only one) help businesses understand how to create a culture that supports “doing the right and ethical thing” – I call it MOTIVATIONAL ETHICS; and, looks carefully at methods to eliminate opportunity.  If the business promotes ethics and reduces opportunity there will a strong chance that it will survive and become stronger – even during poor economic times.

MORTGAGE FRAUD TWISTS:

CNN did a great article on several new twists in the ever changing mortgage fraud arean.  Bank and financial instititutions be aware.  The mortgage industry is in a state of disarray and as such there is definitly a NEED (one of the components of fraud).

Here are the three that CNN reported:

(1) under-appraising property values:

These schemes involve short sales, which come up when a struggling homeowner is “underwater,” or owes more on his mortgage than the home is worth.

When done legitimately, the owner sells the home for the lower market value, and the lender agrees to accept just that amount and forgive the difference.

When illegitimate, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices – well below true market values.

If busy bankers don’t check the appraisal closely, they may agree to sales of homes that should be worth $200,000, for $150,000 or even less.

The buyers – in cahoots with the owner – then flip them for a big profit.

Over the past four months I have seen, through my consulting work, a tremendous increase in “short-sale” interest – and that is something that many financial institutions are ill prepared to deal with.  It is new to them and an area ripe for fraud.

(2)  Liar Loans:

“Liar loans are now fully documented – but with really good fraudulent documents,” according to the CNN article.

In one case investigated by Interthinx, a New York man buying an investment property in Georgia provided documents that showed double his actual salary.

Advanced information technology and photocopying equipment have gotten so accurate that very convincing papers, including income statements, savings accounts and tax returns can be produced on demand.

Scams that misrepresent income or employment are still the most common type of fraud.

(3)  Buy and bail:

Example: You’re underwater on your mortgage and want a new, cheaper home down the block. You could just bail on the existing home, but no lender would give you a mortgage for the new one.  So you tell the bank you plan to rent out the current home – even though you have no intention of doing so.

“This is a very difficult scam to pin down,” said Jennifer Butts, a spokeswoman for MARI, because the rental agreements that borrowers proffer may not be scrutinized by lenders.

The Federal Home Administration announced in late September that it hoped to head off many buy-and-bails by no longer insuring mortgages if the homeowners had existing loans – unless they could show enough income to pay off both loans simultaneously.

Now, just because a home is rented does not mean a scam is taking place.  For example, my wife and I just sold a home in Dallas, TX and moved to Raleigh.  It is a “buyers” market there, so rather than make a hasty decision, we elected to rent a home.  Turns out that the landlord bought another home and was unable to easily sell the one we rented.  This is an example of a legitimate transaction.  However, the action by the FHA may add undue stress on an otherwise tight market – just in an effort to eliminate opportunity (the second part of the fraud equation).

WHERE FROM HERE?

(1)  Honestly evaluate you and/or your company’s commitment to ethics.  Everyone says they beleive but the real question is – what have you done to set the right tone?  By that question, I don’t mean what have you done to comply with the law, but is there a tone of ethics in the company?

(2)  Have you or the company done anything within the past year to raise ethics awareness or fraud awareness?  Seminars, workshops, team meetings, on-line awareness programs – to name a few – are visible symbols of a company’s commitment to a foundation of solid business ethics.

(3)  Has an evaluation been done to consider what opportunities for fraud may exist and more importantly – how to eliminate or reduce them?

Now is the time for businesses who want to survive to take action.  Failure could be catastrophic as the “perfect storm” is rising for business fraud and ethics failures.  One thing is true…YOU DON’T WANT TO BE IN THE HEADLINES ON CNN TOMORROW FOR AN ETHICS FAILURE!

Mortgage FRAUD – 12 Indicted in Houston, TX – FBI Hard At Work…

“Those who seek to take advantage of the American Dream of home ownership and those who prey upon others in these dire economic times will most certainly be held accountable,” United States Attorney Don DeGabrielle stated in his news release announcing the indictments.

Anthony Wayne Hawkins, 48, Brandon Alonzo Crenshaw, 27, Nehemiah Jamal Douglas, 28, Babette Jammer, 47, and David Vasser, 59, were indicted for their alleged involvement in a mail and wire fraud conspiracy which resulted in the defendants and their co-conspirators fraudulently obtaining more than $17 million in loan proceeds. The defendants and their co-conspirators are accused of recruiting individuals to purchase residential properties with the intent to deceive mortgage lenders concerning the borrower’s ability and incentive to repay the loans. Falsified documents were prepared and provided to the mortgage lenders, according to the indictment, to support loan applications.

No wonder we are facing the most significant financial crisis our nation (perhaps the world) has seen since the great depression. Daily announcement are being made about the indictment or conviction related to similar schemes.

“The FBI remains committed to continuing its efforts to vigorously address mortgage fraud and ensure that the strength and integrity of the nation’s financial sector are sustained,” Bland said. “Moreover, it is imperative that those who engage in this pernicious crime, and thereby undermine the economic vitality of our communities, are held fully accountable for their actions.”

“Mortgage fraud, like all financial crimes, threatens the overall health of our financial institutions and erodes the integrity of our tax system,” Clarke said. “Additionally, these types of crimes drive buyers into foreclosure, leave lenders burdened with bad loans and neighborhoods with abandoned and deteriorating properties. IRS Criminal Investigation is committed to working with its law enforcement partners to pursue individuals who commit these types of crimes.”

Question:

Other than premeditated blatant theft, how could those indicted become associated with such an outright fraud? More importantly, did any of them think that there was a chance of getting by with such a fraud. As a white collar crime and business ethics speaker, I understand that every choice has a consequence. It’s easy to see how someone could make a simple mistake that compounds and becomes a fraud with terrible consequences, but this seems noting more than blatant theft.

Perhaps I am missing something here. If you know these people and have any insight your comments are welcome.

Mortgage Fraud – John Andreas Tsiaoushis Pleads Guilty!

Easy money – quick loans – anyone can qualify. It seemed that those words were the mantra for early in this decade. Now, it appears they are coming back to haunt us. With the sub-prime crisis and the economy in the tank, it is no surprise that law enforcement is uncovering, at a rapid rate, mortgage fraud.

John Andreas Tsiaoushis, 40, of Alexandria, Virginia, pled guilty to two-counts of mail fraud affecting a financial institution and giving false testimony at a hearing in the United States Bankruptcy Court.

Tsiaoushis faces a maximum penalty of 30 years in prison, 5 years supervised release, and a fine of approximately $7,600,000 when he is sentenced on July 18, 2008. As part of the guilty plea, Tsiaoushis agreed to the entry of a Restitution Order. The government estimates the amount of restitution due to be approximately $3,841,189.48.

Tsiaoushis admitted to operating a mortgage fraud scheme between approximately December 2004 and November 2007. According to court documents, Tsiaoushis fraudulently attempted to obtain an estimated $4,353,600 and successfully obtained an estimated $3,677,000 through the scheme. Court documents also indicate that, while the mortgage fraud was ongoing, Tsiaoushis engaged in a check kite scheme through which he obtained an estimated additional $163,500 by overdrawing his accounts with several Virginia banks.

To carry out the mortgage fraud, Tsiaoushis transferred or refinanced two Virginia residential properties, one located in Vienna, Virginia, and one located in Alexandria, Virginia, on six occasions. In applying for loans, he provided the would-be lenders with false documentation, such as false loan-payoff statements purporting to be from current mortgagees, and false Certificates and Affidavits of Satisfaction purporting to be from prior mortgagees. He then arranged for the loan proceeds to be misdirected to himself by causing the title companies closing the loans to send checks for the proceeds, which were ostensibly to be used to pay off pre-existing mortgages on the properties, to false addresses. In reality, the addresses were commercial mail drop boxes that had been opened by friends, associates, and family members. Tsiaoushis diverted much of the money to businesses in which he had ownership interests.

Tsiaoushis, who had filed for bankruptcy with the United States Bankruptcy Court for the Eastern District of Virginia in October 2005, also admitted to giving false testimony in a hearing before that court about selling one of the residential properties involved in the mortgage fraud scheme.

Khalil Salim Arbid, an associate and former driver for Tsiaoushis, was sentenced on April 4, 2008 by United States District Judge James C. Cacheris to 16 months in prison, 3 years supervised release, and ordered to pay $650,613.61 in restitution for his role in the scheme.

Every choice has a consequence is a comment I make in most presentations. As a white collar crime and mortgage fraud speaker, I speak from first hand experience about the truth about consequences. Reality is – no one escapes the consequences of their choices. While Tsiaoushis may have enjoyed the money for a time and avoided the consequences – they did not avoid the consequences all together. Prison is no fun and Tsiaoushis is facing several years plus substantial restitution for this conviction. Likely he will serve time and that will prove to be a dramatic change from his prior activities. You do reap what you sow.

White Collar Crime Speaker – Chuck Gallagher – signing off…

FBI Mortgage Fraud Investigation – Too Little Too Late? Is This Smoke and Mirrors or the Real Thing?

For some time I have been writing and speaking about white collar crime, business ethics and the issue of mortgage fraud.  Then we have the issues that have surfaced over the past several weeks culminating with the President’s address tonight.  A major recession (I’d call it a depression) is facing us if we don’t do something now.

Now just may be too late.  Many individuals and firms have either gone under or become the target of a massive FBI investigation into mortgage fraud over the past several years.  But at the heart of this entire mess is the government and their failure to provide oversight and accountability.  It seemed that a robust economy balanced on the back of home ownership was more important than practical long term ethical decisions that fall on the backs of our elected officials.  (And for anyone who feels that I am leaning one way or the other politically – I feel there is plenty of blame for all elected officials).

Now we find in published reports that the FBI is expanding it’s investigation of major institutions whose names have been at the heart of the meltdown we are today witnessing.

According to CNN:

The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG – and their executives – as part of a broad look into possible mortgage fraud, sources with knowledge of the investigation told CNN Tuesday.

Two officials with knowledge of the FBI investigation into the mortgage crisis said “the investigation is all very preliminary”. They said there is a lot of anger and people want someone held accountable.

Officials are looking into whether any criminal activity occurred, but the Bureau said the investigation will take some time. They said the investigation is in the preliminary stages, and so far it is a broad look at the companies involved.

“From what I’ve seen so far, I really don’t believe we’re going to find widespread fraud,” according to one of the officials. They said they have to go where evidence and facts lead. Just because an investigation has been opened doesn’t mean there will be charges.

Trust me – there will not be charges.  The FBI investigation (done by well meaning people) is just a political smoke screen so that those who want accountability will feel that something is being done.  Frankly, nothing substantive will be done to hold those most accountable for this financial failure responsible.

As reported in my prior blog entries, FBI Director Robert Mueller told Congress that 1,400 individual real estate lenders, brokers and appraisers are now under investigation in addition to two dozen corporations.  What is of most interest is that the focus is on small time fish and a big sea of corruption.

Greenspan told Congress sometime in the recent past that something must be done with Freddie Mac and Fannie Mae or we would face a meltdown and grave financial crisis.  His prediction has come true.  What’s sad is that our politicians from both sides of the isle did not have the fortitude to step up and do the right thing.  Rather, they buried their head in the sand and now find that they are drowning in a sea of financial misfortune.

ENRON’s leaders were held criminally liable for their financial misdeeds.  This collapse makes the ENRON mess pale in comparison.  Yet, since government backed Freddie Mac and Fannie Mae are at the heart of the problem – both backing poor loans and selling them to the market – there will be nothing criminal to come from this.  The government doesn’t have the will or courage to regulate itself – nor the ethical wisdom to do what is right.

Cynical – well not really.  Practical – yes.  This $700 billion dollar plan will in the end cost $3 TRILLION…just wait and see.  Meanwhile, there is a long winter ahead and the chill we will feel won’t just be the weather.

QUESTION:  Do you believe the FBI will find anyone in any major institution recently names held criminally liable?

Aryeh Schottenstein and Shawn A. Griffin Plead Guilty! And the Ohio Mortgage Fraud Guilty Pleas Keep on Coming…

As a mortgage fraud speaker, I observe what’s taking place in the mortgage fraud arena, but I have to say, the legal eagles in Ohio are working the mortgage fraud angles hard…

Two more Columbus-area people indicted as part of a mortgage fraud scheme that secured more than $7 million in mortgage loans pleaded guilty in United States District Court. Aryeh Schottenstein, age 34, of Columbus, pleaded guilty to one count of conspiracy to commit wire fraud and one count of money laundering, and Shawn A. Griffin, age 38, also of Columbus, pleaded guilty to two counts of conspiracy to commit wire fraud and one count of money laundering.

Schottenstein and Griffin were indicted along with Donald F. Green, Jeffrey Lieberman and George “Terry” Jordan for a mortgage fraud scheme in central Ohio in 2003 and 2004. COMMENT: It seems that at the height of easy money for mortgages – mortgage fraud was rising as well. See what these folks did below as their crime is becoming a common pattern.

According to statements of facts filed with Schottenstein’s and Griffin’s pleas, Schottenstein and Lieberman owned a company called Parkview Bank. One of Parkview’s business purposes was to locate financing for real estate investors seeking to buy and renovate houses in Columbus. Parkview needed a source for the financing for this venture. In 2003, Schottenstein and Lieberman met with the managing partners for Stillwater Asset Backed Fund to convince them to provide the funding. They were successful.

Parkview and Stillwater entered into an agreement whereby Stillwater would provide the funding for Parkview’s deals. Rather than abide by the agreement and locate legitimate investors, Schottenstein used Griffin to recruit straw-buyers to pose as real estate investors. Using straw-buyers was quicker and easier than locating legitimate real estate investors thereby making it easier to generate more loan origination fees. The straw-buyers were told by Griffin they did not need to renovate the houses or make monthly interest payments. Griffin assured them he would take care of all the details.

COMMENT: Two things stand out – (1) impatience with legitimate business became the foundation of the fraud; and (2) the “straw buyers” were motivated by quick money in order to participate in the scam.

Griffin also recruited straw buyers in 2002 and 2003 for Jeff Pearson, now deceased. Pearson bought dozens of low-income distressed houses in Columbus for amounts at or near their fair market value. The houses were in need of renovation. Very little if any renovation was done to the houses. The houses were sold to Griffin’s straw-buyers for two to three times the amounts Pearson had paid only a few weeks or months earlier. Despite having good credit, the straw-buyers usually had little income. At the closing on the straw-buyers’ purchases of the houses, the title companies issued large checks payable to Pearson as proceeds from the sales.

Green pleaded guilty on April 11. Lieberman and Jordan pleaded guilty on April 24. All are free pending sentencing. Judge Marbley will set a date for sentencing. Conspiracy to commit wire fraud is punishable by up to five years in prison and the money laundering charges carry a maximum sentence of ten years in prison.

According to the Columbus Dispatch a scheme that investigators say bilked millions from banks, lenders and investors was so involved that there were too many fraudulent home purchases to list in the 36-page federal indictment.

Those indicted originally were:

Donald F. Green, 48, of Columbus, real-estate investor

Shawn A. Griffin, 37, of Cleveland, real-estate investor

Aryeh M. Schottenstein, 33, of Oak Park, Mich., real-estate investor

Jeffrey M. Lieberman, 56, of Bexley, real-estate investor

George T. “Terry” Jordan, 50, of Canal Winchester, real-estate agent

Dwayne L. Carter, 37, of Columbus, loan officer

Jonathan L. Boyd, 38, of Columbus, loan officer

Kenyatta Johnson, 37, of Michigan, loan officer

James Darneil Gaither, 37, appraiser

Every choice has a consequence. As a white collar crime and mortgage fraud speaker, I speak from first hand experience about the truth about consequences. Reality is – no one escapes the consequences of their choices. While Schottenstein and Griffin may have enjoyed the money for a time and avoided the consequences – they did not avoid the consequences all together. Prison is no fun and both are facing several years plus substantial restitution for this conviction. Likely they will serve time and that will prove to be a dramatic change from their prior activities. You do reap what you sow.

If you were a victim…please share your experience so other may benefit.

Mortgage Fraud Speaker – Chuck Gallagher – signing off…