On reason why "official" home prices are often way above market clearing levels.
Slow housing market speeds up scam
Predatory buyers are borrowing more than what a house is worth, pocketing the difference, then foreclosing.
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By JEFF OSTROWSKI
Palm Beach Post Staff Writer
Sunday, October 28, 2007
Even after the South Florida housing market peaked in 2005, Johnson Cuffy knew how to score big profits in real estate.
First, the Broward County real estate investor found a Fort Lauderdale house for sale for $245,000. Then, inflated appraisal in hand, he convinced the lender that the home was worth $340,000.
Florida tops nation in mortgage fraud
Florida ranked No. 1 in mortgage fraud in 2006, according to a study by Mortgage Asset Research Institute LLC of Reston, Va. The rankings are based on the number of loans where lenders suspect or find fraud.
Ranking/State (2005 Rank)
1. Florida 4
2. California 8
3. Michigan 2
4. Georgia 1
5. Utah 7
6. New York 11
7. Illinois 3
8. Minnesota 10
9. Colorado 5
10. Nevada 14
Source: Mortgage Asset Research Institute LLC
Cuffy, a 29-year-old who works with his father and siblings at a family-run mortgage company, landed a loan for $340,000, paid the seller $245,000 and pocketed the $95,000 difference, state investigators say. Profits secured, Cuffy let the home go into foreclosure.
He was arrested in July after the seller alerted officials to the scheme.
An isolated case? Not by a long shot. Cuffy is one of the few to be caught, but the lucrative scam, known as "cash back at closing," became rampant in South Florida as the combination of a slowing housing market and easily available mortgages created an opportunity to fleece lenders.
No one knows how many times other scammers used this rip-off throughout South Florida, but investigators and real estate experts say the dubious deals have been common in the past two years.
"My phone has been ringing daily with people wanting to report suspicious real estate sales," said Detective Ted Padich of the Florida Department of Financial Services in West Palm Beach. "This is going on in every neighborhood in Palm Beach County."
The Mortgage Asset Research Institute of Reston, Va., backs that assertion. Florida has moved to the top of its list of fraud-riddled states, based on lenders' complaints. Losses from mortgage fraud hit a record $1 billion last year nationwide, according to the FBI, which lists Florida among the hot spots.
The mortgage swindles add a sinister story line to the flood of foreclosure filings that have followed the real estate bust. Although politicians, consumer advocates and the media often portray foreclosure as the inevitable collision of overreaching borrowers and overeager lenders, some defaults are caused by predatory borrowers rather than predatory lenders.
Buyers who see a chance to make a quick buck fuel the fraud. They typically work with appraisers, mortgage brokers and title agents to present phony documents to lenders, investigators say. For mortgage brokers, the paydays are generous: subprime lenders pay hefty fees to brokers who bring them business.
Although nothing is illegal about cash-back-at-closing deals in which all the details are disclosed to lenders, the arrangement veers into fraud when the sale is arranged to trick mortgage companies into lending far more than the house is worth.
The sellers typically are little more than innocent bystanders. Desperate to sell in a soft market, they receive strangely generous offers even as the imploding housing market has put most buyers in a bargain-hunting mode.
"Everybody walks away with their coin, and the bank is left holding the bag," said John Swope, the Florida Department of Financial Services detective who arrested Cuffy.
Anatomy of a swindle
The state's investigation of Cuffy offers a glimpse at how the scam works: Cuffy paid for an appraisal showing the inflated price. He recruited a "straw buyer," Kervyn Harris, whose name appeared on the deed and the mortgage. Then he arranged for Fremont Investment & Loan of California to lend Harris $340,000, according to police reports.
When the sale closed on Dec. 30, 2005, Cuffy walked away $95,000 richer. State investigators say Cuffy divided the proceeds among his father, Sylvester, 58; his sister, Lillia, 35, (the Cuffys run BlueKap Financial of Tamarac); and another man who provided Harris as the straw buyer.
Now in foreclosure, the small house sits in a down-at-the-heels neighborhood in Fort Lauderdale. A chain-link fence guards the front yard, and the for-sale sign screams, "BANK OWNED." The Florida Department of Financial Services' fraud division arrested Johnson, Sylvester and Lillia Cuffy in July and accused them of theft.
Johnson Cuffy didn't return calls seeking comment, but when he was arrested, he admitted to the scam, Swope said.
South Florida long has been a hot spot for mortgage fraud, and the chicanery comes in a variety of flavors, from borrowers fudging their income to qualify for a loan to massive scams using straw buyers to create phantom transactions. The latest brand of scam, the type that Cuffy and countless others have pulled off, combines a legitimate seller with a not-so-forthright buyer.
Stanley Foodman, a forensic accountant in Miami, calls the scheme the real estate world's version of the penny-stock pump and dump. The new book Protect Yourself from Real Estate and Mortgage Fraud dubs it "cash back at closing."
"As with most deals that seem too good to be true, cash-back-at-closing schemes are just another way of scamming someone - in this case the lender, who's fooled into making an under-collateralized loan," write authors Ralph Roberts and Rachel Dollar.
One homeowner who's trying to sell a house in Wellington's Black Diamond development says she has been contacted repeatedly by buyers looking to do cash-back-at-closing sales. Another seller in a development west of Lake Worth said he, too, was solicited by a buyer hoping to inflate the appraisal. Wary of being involved in a shady deal, both refused to do so.
Investigators say they typically don't target sellers in their investigations. Padich, the state detective, said he usually treats sellers as witnesses, not suspects.
Although there have been no Cuffy-like arrests in Palm Beach County in recent months, real estate agents say there is no shortage of eyebrow-raising transactions where a legitimate seller's house fetches more than the asking price.
Sellers be wary
One such sale came in the Black Diamond development last year. Steve and Gina Peters listed their spacious home at 10553 Galleria St. for $549,000 in 2006, as the market weakened. When the house didn't move, they dropped the price to $500,000. The couple finally accepted $490,000 for the house, according to the Multiple Listing Service.
But according to a deed filed with the county, the buyers, Natacha and Isaac Antoine, paid $585,000 in October 2006. They received loans for the full amount, according to mortgage records. In January, they resold the home in the gated community along State Road 7 for the same price to Anthony Champagne, who likewise took out first and second mortgages totaling $585,000. The property now is in foreclosure.
Reached by phone, Natacha Antoine referred questions to her husband. Isaac Antoine couldn't be reached for comment. Neither could Champagne.
Gina Peters said last week that the family had moved to Colorado when the offer came in for their house.
"We sold it from a long distance, so we didn't really have any contact with them," she said.
Peters said she had no reason to be suspicious about the deal.
The Peterses' real estate agent, Patrick Heagney of Realty Associates, acknowledged this month that the terms of the deal seemed odd. The seller agreed to assign the difference between the $490,000 purchase price and the $585,000 loan to the buyer, a $95,000 payday. But, Heagney said, so far as he knows, the arrangement was fully disclosed on the closing documents filed to the lender.
"I said, 'I don't know where you're getting the appraisals from,'" Heagney recalled. "But how can I tell my seller, 'You can't sell it'?"
Boomtime prices tell tale
Although mortgage scams often are associated with low-value properties in sketchy neighborhoods, Palm Beach County real estate agents say they're seeing dubious deals in shiny new developments such as Black Diamond, Olympia, Versailles and Nautica Isles.
And in spite of a housing market that has seen a shortage of buyers since late 2005, prices are being recorded at boomtime levels.
"A house is on the market for $450, and all of a sudden it sells for $525, and you're like, 'Huh? How did that happen?" said Eric Grainger, an agent at Keller Williams Realty.
Some examples, according to MLS documents and publicly recorded deeds:
In Black Diamond, a home listed for $479,000 in January sold for $575,000 in March.
Also in Black Diamond, a home listed for $489,900 sold for $580,000 in October 2006, even though the MLS reports the sale price as $479,900.
West of Lake Worth, a home listed for $645,000 last year sold in March 2007 for $699,900. In a phone interview, the seller credited a "bidding war."
For mortgage scammers, cash back at the closing table is just one potential payday. Mortgage experts say the big commissions that accompany risky loans can encourage questionable transactions. If a borrower with stellar credit uses a mortgage broker to take out a conventional loan, the lender pays the mortgage broker about 1 percent of the amount of the loan as an origination fee.
But if a borrower with poor credit uses a mortgage broker to arrange a subprime loan, the lender pays the mortgage broker much more: 5 percent, 8 percent, sometimes more. So a $600,000 loan could generate $30,000 or more in origination fees.
"The subprime mortgage fees can be as much as a third of the value of the home," Swope said. "It's ridiculous."
Now that the market for mortgage-backed securities has dried up and subprime mortgage lenders have been rocked with massive losses, the easy money that fueled the cash-back schemes has disappeared. But not before untold damage was done in the form of fraudulent loans.
The U.S. Attorney's Office for the Southern District of Florida announced a crackdown on mortgage fraud in September. It has indicted alleged scammers in Miami-Dade and Broward counties, and U.S. Attorney R. Alexander Acosta promised more charges in the coming months.
But investigators acknowledge that Johnson Cuffy remains the rare mortgage skimmer arrested. Mortgage fraud investigations move at a glacial pace, and Padich, the state fraud detective, admits many schemers get away with it because few cops have the time and expertise to find clues in phone-book-thick stacks of closing documents.
The irony is that a criminal who robs a bank with a gun can expect to be surrounded by a SWAT team in minutes. But, Padich said, a thief who robs a bank with a bogus appraisal and doctored closing documents can expect to get away with it.
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