Prison for Real Estate Appraiser! Lila Rizk faces 3 years in prison and $46 Million in Restitution

February 4, 2010

Having been there (not proud of what I’m getting ready to say), but prison is no fun.  But, being ordered to pay $46 million in restitution – well…that’s a sentence that is impossible.

According to the US Attorney’s office, Lila Rizk, a former state-licensed real estate appraiser was sentenced to three years in federal prison and ordered to pay more than $46 million in restitution for her role in a massive mortgage fraud scheme that caused tens of millions of dollars in losses to federally insured banks.

Lila Rizk, 43, of Rancho Santa Margarita, received the three-year prison term after her conviction last summer on conspiracy, bank fraud and numerous loan fraud charges.

Rizk was sentenced by United States District Judge Dean D. Pregerson, who warned that other professional real estate appraisers should know that if they inflate appraisals and lie about the value of homes, “there is an overwhelming likelihood that they will be caught and go to prison.”

The evidence presented at Rizk’s trial last summer showed that she was part of a wide-ranging and sophisticated scheme that obtained inflated mortgage loans on homes in some of California’s most expensive neighborhoods, including Beverly Hills, Bel Air, Holmby Hills, Malibu, Carmel, Mill Valley, Pebble Beach and La Jolla. Members of the conspiracy sent false documentation, including bogus purchase contracts and appraisals, to the victim banks to deceive them into unwittingly funding mortgage loans that were hundreds of thousands of dollars more than the homes actually cost. Lehman Brothers Bank alone was deceived into funding more than 80 such inflated loans from 2000 into 2003, resulting in tens of millions of dollars in losses.

The evidence presented at trial showed that Rizk profited by collecting hundreds of thousands of dollars in fees for providing inflated appraisals in the scheme.

STOP – TAKE NOTE:  Crime doesn’t pay.  Rizk gained hundreds of thousands of dollars in fees – but now she’d ordered to pay $46 million in restitution.  OUCH!

Her appraisals typically valued the homes three times higher than what the homes really cost. In order to supposedly justify these inflated values, Rizk used “comps,” or comparable homes, that were far bigger, more luxurious, and in better neighborhoods than the homes she appraised. Once she had inflated a few dozen homes, she then used those homes as “comps” to supposedly justify inflated prices for homes later in the scheme.

Ten other real estate professionals have been convicted of federal charges related to the scheme. They are:

scheme leader Charles Elliott Fitzgerald, a developer formerly of Newbury Park and Beverly Hills, who previously was sentenced to 14 years in prison;

Mark Alan Abrams, of Los Angeles, a mortgage broker who along with Fitzgerald orchestrated the scheme, who is scheduled to be sentenced on April 12;

Nicole LaViolette, of Palm Springs, a loan processor, who is scheduled to be sentenced on June 14;

Jamieson Matykowski, of Laguna Niguel, who found houses for the scheme, is scheduled to be sentenced on March 29;

Timothy Holland, of Santa Ana, an escrow officer, who is scheduled to be sentenced on July 19;

Richard Maize, of Beverly Hills, a mortgage banker, who is scheduled to be sentenced on June 28;

Thomas R. Schiff, of Brentwood, a mortgage banker, who was previously sentenced to 6 months in prison;

L. Scott Robinson, of Dana Point, an appraiser, who is scheduled to be sentenced on April 2;

Kyle Grasso, formerly of Santa Monica, a real estate agent, who is scheduled to be sentenced on February 19; and

Joseph Babajian, of Los Angeles, a real estate agent, who is scheduled to be sentenced on February 22.

FINAL NOTE:  You have to know that those who are awaiting prison must be quaking in their boots…as the restitution factor precludes the practicality of any reasonable life following prison.

YOUR COMMENTS ARE WELCOME!

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President Obama and Those Fat Cats from Wall Street – 2009 Ethics a Year in Review (1 of 3)

January 1, 2010

Frankly I couldn’t believe what I heard on the news when President Obama, in an interview, called bankers into the White House to seek their help with the economy – having referred to them the day before as “Fat Cat” bankers.  Hum…the President of the United States resorting to labeling people in less than a professional manner.  Perhaps it is just his folksy style, but that type of approach seems much less than presidential.  But then I got to thinking…

Seems like in this administration there was some effort to curb the abuses that the banks have hurled at consumers when it came to credit cards.  That, for everyone but the banks, was hailed as “about time” legislation.  Ethically, the banks have played less than fair with consumers.  Personal example…my wife, who has spotless credit had a Bank of American card with a zero balance and substantial credit limit, received a letter from BofA increasing her interest rate to 22.9% from 8.9%.  She called asking why and was told it was a mistake, but one that could not be undone.  After expressing her deep dissatisfaction and then vowing (after she got off the phone not to ever use the card), she got a letter from Bank of America (just a week later) cutting her credit line by 75%.  Ethical actions by Bank of America – yea right.

According to Money Magazine senior writer – Donna Rosato – “Lawmakers gave issuers till February 2010 to fully comply with the new law. Meanwhile, issuers have rushed to raise interest rates, impose new fees and cut credit limits. The median rate on credit cards surged 13% to 23% from December 2008 to July 2009, according to a study by the Pew Charitable Trusts. Meanwhile, a bill to expedite the credit card reforms, the Credit Card Rate Freeze Act, has gone nowhere. When the new law kicks in in 2010, consumers will have more protection.”

Maybe the term “Fat Cat” Bankers was justified.

Ah…but there’s more.

Fortune Magazine states:

What Ken Lewis wanted, Ken Lewis got. During his eight-year tenure as Bank of America’s CEO, he embarked on a dizzying series of acquisitions to create the nation’s biggest financial services company.

But when his last two big buys — toxic-mortgage giant Countrywide and dead-on-its-feet bank Merrill Lynch — drew too much scrutiny from regulators and shareholders, Lewis packed up his golden parachute last October and bailed.

Maybe I should be a bit kinder in my blog.  Perhaps after squandering Bank of American funds on losing propositions, they needed the rate increase on credit cards.  Of course, that assumes that folks use those credit cards.  In our case, I think not.

BUT TO TOP IT OFF…

When the government, back in the Clinton administration, asked Fannie Mae and Freddie Mac to extend credit to many American who, otherwise, were not credit worthy – I have to ask the question – with rising deficits and massive government spending – why should anyone in the government call anyone names when the government is doing just what those Wall Street “Fat Cats” did – namely living above their means.  We have massive debt and seem to believe that living in debt is O.K.

Perhaps the ethical thing to do is say – NO to additional government debt and do what is being preached to the population – live within your means and act ethically and in a responsible manner.

WHAT DO YOU THINK?


Business Ethics be Damned…A Receipe for Disaster Led To This Banking Bailout Bandaid!

October 16, 2008

We ain’t seen nothing yet!  As a business ethics speaker, as I write those words I feel tension building in my shoulders and neck.  Stress for sure.  But unfortunately the worst is yet to come and for many, especially younger adults, it will be the first time you will have witnessed a severe financial correction.  This will not be a mild recession but a full blown catagory 4 storm, if you will.

Recessions:

Let’s first explore a little of the history of recessions.  A great article that is simple to read an understand was written not long ago which outlines the recessions in our past and the depth of their pain in months.  A portion of that article is reprinted here for reference:

The National Bureau of Economic Research, or NBER, is considered the official arbiter of recessions, but it doesn’t define a recessions by the school book measure of two or more consecutive quarters of economic contraction as measured by GDP. It states that “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

The last recession, so declares NBER, was from March 2001 through November 2001.   Now most of us remember that time but not because of a declared recession, but because of 9/11.  The tragedy of 9/11 was so focused that we forgot how the economy felt and where we were before then – assuming that all that happened economically was a direct result of the 9/11 incident.

Now, when a country is in a recession there is a cry from the population to get it over with an get back on the track to economic health.  That is, in essence, just what we attempted to do.  However, we got so caught up in HEALTH that we looked past practical sensible medicine and pushed too hard.

What We Did:

Just like a doctor has skill, training, and tools to help restore health, from an economic perspective so does the government along with the Federal Reserve.  So, Dr. Fed to the rescue.  Surely we could not and would not stay in this ’91 recession long.  Our pride was hurt along with our pocket books and we needed fast action.

#1 – in response to the 9/11 attacks our country went to war.  Now, within reason, up to that point there was a widespread concern about the national deficit.  However, that disappeared from the political scene, as we elected to go to war.  Do not assume I am against this action, I am looking at it, however, from an economic standpoint.  War changes perspectives and allows the government to increase spending and debt without much cry from the populous.   War increases productivity and we all witnessed many companies showing record profits.  Government spending changed dramatically – essentially an economic stimulus.

#2 – the Federal Reserve reached in its bag of goodies and began a systematic dramatic and unprecedented drop in interest rates.  Never in its history had the Fed dropped the interest rate to 1% – NEVER.  Over time it almost became “free” money.  Artificially low interest rates became a powerful economic stimulus.

#3 – not only does the Federal Reserve have the ability to set interest rates, but they also control the flow of money.  In other words, they control the printing press or just how much money is in circulation.  Another powerful tool to fight “recession” – access to money makes economic growth easier.  More money in circulation became an economic stimulus.

#4 – tax law change was also a factor that changed the face of our economic growth.  In the past when a person sold their home, they were taxed on the gain unless it was reinvested into something of equal or higher value.  In the mid nineties, that changed effectively eliminating tax on most home sale gains.  No taxes proved to be another economic stimulator.

How We Responded:

Now, while some would disagree – that is where the breech of ethics occurred. Let me us an example:  If you are a star baseball player and practice everyday – honing your skills and lifting weights, etc. in order to be your best, well that would be ethical.  Agree?  If, however, you do all of those things and take performance enhancing drugs, that would be unethical.  Agree?

How we responded was in a sense like doing all the right things, but too excess and assuming that there would be no consequence.  That assumption is unethical stupidity.

So we:

(1) took our eye off of living with a balanced budget, allowing the government to stimulate the economy through the war effort;

(2) we borrowed at a record pace (after all if there is free money wouldn’t you take it)?  We, as consumers, increased our credit card debt dramatically falling for most ever zero percent offer that was placed before us.  And, with that new found credit, we bought items that in the prior decade we might have postponed.  In fact, we believed that we didn’t have to pay the borrowed money back, all we had to do was “transfer balance” it.; and

(3) we used our homes as a credit card.  Up until then, there were reasonable rules in place for borrowing to buy a home.  But during that time, with lots of money in circulation and low rates, we were encouraged to borrow…borrow…borrow believing that our home was safe.

(4) now the straw that broke the camels back was unrealistic appreciation.  In many (not all) parts of the country we saw home prices skyrocket.  Heretofore, home prices increase at a steady 1% to 3% per year.  Our home was sacred.  Now, with double digit increases, homeowners and builders began to believe that with no taxes on the gain, there could not be a better investment.

Every choice has a consequence:

The example of the ball player up above ties into this perfectly.  If he/she had done the right things in moderation, they would have an outstanding career and perhaps make it in the baseball hall of fame.  But, once discovered for performance enhancing drugs, they would likely be banned from the sport or suffer some humiliating consequence that would cost them dearly.

That is just where we are today.  Ethically, the Fed knew better.  The economy needed to be stimulated only so much.  Those are sharp folks and I don’t believe for a minute that they could not have seen this coming.  Fairly enough, they did begin to raise rates several years ago, but by then the bubble was set to pop.  And pop it did!

Likewise, our financial institutions knew better.  You don’t make loans to people that you honestly know can’t repay them, just to turn a quick profit in order to meet analystists expectations on Wall Street.  That, to me, is unethical.  Nonetheless, it was done – DAILY!

Builders, gorged with profit, continued to build knowing that the supply was outstripping the demand based on any reasonable demographic study.  In one area in NC near Raleigh, on average 1.5 homes were sold per month, yet 6 new builders flocked to the area and began building multiple spec homes.  There were no buyers and today they sit on them – some having been on the market well over 600 days.  That is greed outstripping ethical sense.

What Now?

#1 – the government is scrambling to figure out what to do.  My prediction is the $700 Billion dollar bailout is more like $2 Trillion.  The US Government will use our money (wrong borrowed money) to buy up bad loans (doesn’t give me the warm and fuzzies inside) and they will buy equity interests into our banks.  To me that is historic – it appears almost like a nationalization of the banks -scarry…!

#2 – the Federal Reserve, will once again, lower interest rates in hopes that they will stimulate BORROWING so the economy will again move forward.  Sorry, but I don’t think we need more debt!

#3 – the housing market will see double digit declines in home prices.  What goes up must come down (at least to reasonable levels) and many home owners who bought at the top will find themselves foreclosed on and have ruined credit.

#4 – builders will go belly up and banks will be in the physical real estate business – something they no little about.

#5 – credit will freeze.  No longer will you see the “free money” ads from your credit card company.  In fact, when you pay your card off…they may reduce your credit limit – taking a more conservative approach.

#6 – Consumers faced with increased medical costs, gas costs and utility cost, will spend less and this Christmas buying season will be dismal.  Retailers will be forced out of business and the pain will be heard world wide.

#7 – many smaller banks will shut their doors with the FDIC taking them over; and

#8 – the market will go much lower than it is today.  There will be minor up turns, but the down will outweigh the up and we will see another loss of 20% before it is over.  As a result, we will be less wealthy as our retirement funds decrease.

Conclusion:

Every choice has a consequence.  We chose the route of performance enhancing programs to stimulate our economy (an unethical choice in my opinion) and today and for the near term we will face the consequences – painful as they may be.


President Bush: Government Bailout Necessary…!

September 24, 2008

…but as the President speaks and says that “our entire economy is in danger” – unless you pass my $700 billion bailout proposal – the question I ask is – is it really $700 billion or will it (in the end) be more like 3 Trillion?

According to CBS News: Speaking in dire terms, President Bush on Wednesday warned Americans and lawmakers reluctant to pass a historic financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed business and “a long and painful recession.”

Now by no stretch of the imagination am I making light of one of the most serious financial issues of our time, but I keep hearing Forrest Gump in my head saying, “Now I know I’m not a smart man, but…”  Well the “but” is when has a government financial projection ever been what they projected it will be – ever?

Bush is right in that we may not only be facing a recession but the possibility of a full fledged depression is not that unlikely.

He spoke just after inviting Democrat Sen. Barack Obama and Republican Sen. John McCain, one of whom will inherit the mess in four months, and key congressional leaders to an extraordinary White House meeting Thursday afternoon to hammer out a compromise.

“Without immediate action by Congress, American could slip into a financial panic and a distressing scenario would unfold,” Mr. Bush said in a prime-time address from the White House East Room that he hoped would help rescue his tough-sell bailout package.

The question remains – is the actions that are proposed too little too late.  Every presentation on ethics I make has one central theme – EVERY CHOICE HAS A CONSEQUENCE.  We, as a country, relished in the glow of a robust economy balanced on the back of an illusion.  We had leadership from both parties and substantial financial institutions who seemed to be more concerned about growing a false economy than taking the measures that all agree today would have made sounder financial sense.

As an example – today I had a conversation with a Realtor (as I am in the housing market as I write this).   He suggested that mortgage rates would never be lower and that after the bailout – the housing market pricing would stabilize hence home prices are at their bottom.  I must admit (while he may be right – guess there is always that possibility) I had to laugh.  Now, I don’t know about the interest rates, but this I believe – housing prices will continue to slide for two very clear reasons:

(1) the number of people who can qualify for a mortgage is shrinking even as we speak.  Fewer people are finding increases in their income and many should not have qualified in the first place – hence a smaller population of potential buyers.

(2) an over abundance of inventory.  Now I just sold my home in Texas within three days after it was listed for above asking price.  For that I am thankful to God and feel blessed.  But, as I moved to a different part of our country I found that it is a buyers market.  More homes than buyers makes that true.  The other part that I have found is builders and Realtors are having a difficult time adjusting their thinking about pricing – they still think it is worth what they thought it was.  Yet, I’ve seen homes on the market for now over 600 days with no purchase prospect in sight.

But – the realtor told me that we have to pass this “bailout” otherwise, we will face a disaster.  Afterall, he stated, “our economy is built on the ability to borrow against our house.  If you need to buy something new or put a kid through college – you use the equity in your home as a second mortgage to pay for it.  Otherwise, how else would you get the money?”  He made that statement and ask that question with sincerity.  What was amazing was – he could not conceive of another way to meet financial obligations.

Perhaps we have forgotten sound financial principles.  As a business ethics speaker, I admit I forgot those principles in my past and the price that I paid was significant.  We should pray that the bailout works – for the cost of failure will be much higher than most of us would care to dream.

QUESTION: Do you support the “bailout” and why?


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

September 24, 2008

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?