"Subprime Swindlers Reconnect to Homeowners in Foreclosure Scams
By Edward Robinson
March 27 (Bloomberg) -- In early 2008, Cheryl Ann Montero, a California mortgage broker, held a series of free seminars in the clubhouse of the Lone Tree Golf Course in Contra Costa County, a suburban area near San Francisco. The attendees, homeowners facing foreclosure, were desperate for a rescue from their woes. Using a PowerPoint presentation, Montero delivered one.
She said her firm, Freedom Financial Solutions, could pressure lenders to stop foreclosures by challenging the legality of loan agreements, according to court records. Her fee: $2,500 upfront and a $2,000 monthly payment to cover legal costs. Promoting her services on the Web site Craigslist, Montero, a blond-haired, blue-eyed woman who looked like a soccer mom, became known as a foreclosure escape artist.
“All the real estate agents knew about her classes,” says Kay Trail, a realtor in Antioch. “She was one shrewd sister.”
She was also ripping people off, says Ken McCormick, a prosecutor in the Contra Costa County District Attorney’s office. A player in a new confidence game exploiting soaring defaults, Montero didn’t have a team of attorneys to confront lenders. Instead, her firm took a small ownership stake in some of her clients’ houses and filed for bankruptcy, temporarily suspending foreclosure proceedings on those homes, according to an investigative report filed in court by prosecutors.
In the end, she didn’t deliver lower mortgages for the 10 homeowners who paid a total of $52,000 for her services, McCormick says. Montero did have mounting financial woes of her own: In September, she filed for personal bankruptcy, according to court records.
Bleed Their Victims
“She couldn’t make it in real estate anymore, so she just changed hats,” McCormick says. “But she was taking money and doing nothing.”
The prosecutor charged Montero with 36 counts of grand theft and related charges in December. She pleaded not guilty and is free on $100,000 bail. Her lawyer, Cameron Bowman of San Jose, didn’t return telephone calls for comment.
Rescue scams are springing up across the U.S., says California Deputy Attorney General Angela Rosenau, exacerbating a housing crisis in its third year. The predators are persuading troubled borrowers they can intervene with their lenders and negotiate lower payments on their mortgages, law enforcement officials say. Instead, the players, often out-of-work real estate professionals who peddled subprime mortgages during the boom, pocket hundreds of thousands of dollars in advance fees and disappear or bleed their victims by charging monthly payments.
Slow to Help
“There’s just been an explosion of vulnerable homeowners and people preying on them,” says Terry Goddard, the attorney general of Arizona, which recorded the third-highest rate of residential foreclosures in 2008, after Florida and Nevada. “People miss their payments, and they are about to be repossessed, and someone walks in the door and says, ‘I’m here to help.’ You just can’t underestimate the power of desperation.”
The swindlers are thriving largely because the lenders and Wall Street banks that inflated the housing bubble by originating and securitizing subprime loans have been slow to help homeowners as those mortgages blow up. The State Foreclosure Prevention Working Group, a coalition of 37 attorneys general and banking supervisors, found in a study released in September that lenders were not providing mortgage relief for 8 out of 10 delinquent subprime borrowers last year.
“Many victims have made attempts to work with lenders, and they’ve been frustrated,” Rosenau says. “That’s why these scams are so successful.”
Major Hurdle
President Barack Obama is trying to coax banks to rewrite mortgages with a $75 billion plan begun in March that could reach 4 million borrowers. The administration is encouraging lenders to slash interest rates so mortgage payments amount to 38 percent of a borrower’s monthly gross income. If the lender reduces payments further, to 31 percent of income, the government will pick up half of the losses.
Obama’s plan faces a major hurdle: Mortgage service companies often can’t reduce home loans because they’ve been packaged and sold to investors who expect a steady stream of income. Countrywide Financial Corp., acquired by Bank of America Corp. in 2008 as the housing market was collapsing, sold almost all of the loans it originated to investors and services them for fees, says Scott Kurzan, head of mortgage investor relations at the lender.
In many instances, Countrywide is barred by contracts from changing loan terms without investor approval, he says.
“Investors want to make sure their rights don’t get trampled,” says Kurzan, who is based in Calabasas, California.
‘Wipe Out the Principal’
If incentives don’t compel lenders to reduce mortgages, Obama supports giving bankruptcy judges a stick. The House of Representatives has approved the so-called cram-down measure that allows bankruptcy courts to lower the balance due on mortgages on primary residences, a privilege now granted to landlords with multiple dwellings. The measure moved to the Senate in March.
“If the mortgage industry knows a judge can wipe out the principal, then lenders will become more involved in reducing mortgages,” says Kathleen Day, a spokeswoman for the Center for Responsible Lending, a Durham, North Carolina-based consumer advocacy group.
Money managers who specialize in mortgage-backed securities say that allowing courts to alter mortgages will scare away investors and drive up the costs of home loans.
Offers of Salvation
“How can I tell my clients they should come back into the market if the government rewrites mortgages after the fact?” Sajjad Naqvi, a senior vice president at TCW Group Inc., said at the annual conference in Las Vegas in February for the American Securitization Forum, a trade group. “Cram-downs could cripple the securitization industry.”
Republican lawmakers say the measure amounts to an unfair bailout for consumers who made reckless bets during the housing bubble.
“Under this plan, those who bought more house than they could afford would keep the big house but escape the responsibility of paying for it,” says Rep. Tom Price of Georgia, chairman of the Republican Study Committee, a policy group.
As the debate swirls in Washington, self-styled mortgage rescue specialists are flooding homeowners from Florida to California with offers of salvation.
27 Firms Shut Down
“They’ve jumped into the vacuum,” says Joseph Gentili, an assistant attorney general in Florida’s economic crimes unit. In Florida, which recorded more than 500,000 foreclosures last year, communities stretching from the golf-course subdivisions of the Gulf Coast to the Miami suburbs are festooned with placards and flyers promoting mortgage rescues. Gentili’s 20- person team is pursuing 40 investigations.
In a lawsuit filed in October, the Attorney General’s Office accused a Fort Lauderdale company called Outreach Housing of bilking more than 600 homeowners out of $2 million. In January, Blair Wright, Outreach’s president, filed a motion to dismiss the lawsuit in circuit court in Broward County. The following month, the Florida Office of Financial Regulation shut down the company. Wright didn’t return calls for comment.
The California Department of Real Estate is fielding so many complaints from homeowners that Commissioner Jeff Davi has directed his entire, 160-strong enforcement staff of attorneys, investigators and auditors to probe more than 250 foreclosure rescue companies serving thousands of clients. From February to mid-March, the department ordered 27 firms to shut down for violating regulations.
The Federal Bureau of Investigation formed a team in December to investigate foreclosure rescue cases.
Elaborate Conspiracies
“A number of them previously worked in subprime mortgage companies,” says Travis Yarbrough, the supervisory special agent leading the unit in Washington. “Some of these perpetrators have gotten very creative at separating homeowners from their money.”
The schemes run the gamut, from small-scale players targeting a single community to elaborate conspiracies sweeping entire states. Cheryl Montero started Freedom Financial Solutions in December 2007, according to the investigative report. Her office was a few blocks from a Tiffany’s jewelry store in Walnut Creek, a San Francisco suburb where four-bedroom homes fetched $1 million at the height of the housing boom. Montero ran a three-person operation in which she told homeowners that she could find technical violations committed by lenders in loan contracts, the report says.
Foreclosure Prevention Services
Montero blundered during one of her seminars by dropping the name of an attorney who she claimed was working with her, the report says. One of Montero’s clients called the lawyer, who had never heard of Montero, and he in turn complained to the authorities.
“That’s what gave us a heads up,” says McCormick, the prosecutor.
Juan Jose Perez, 47, a Mexican immigrant who started a foreclosure rescue firm in the garage of his San Bernardino County house in 2005, hatched a more ambitious scheme, prosecutors say. Perez’s Foreclosure Prevention Services masqueraded as a lender to rip off hundreds of struggling homeowners throughout California for as much as $1.2 million, according to an affidavit filed in Superior Court in October by investigators with the California Attorney General’s Office. Perez, who’s been charged with grand theft and conspiracy, has returned to Mexico, and a warrant has been issued for his arrest, prosecutors say. He couldn’t be reached for comment.
‘Call Us Immediately’
To find his victims, Perez and his team allegedly combed through public property records available on the Internet for default notices, which disclose the names, addresses and loan amounts for delinquent homeowners. Last August, one of his workers pulled such a notice for a house owned by Jose Serrano in Soledad, California, a farm town about a two-hour drive south of San Francisco, prosecutors say.
That month, Serrano received a manila envelope in the mail marked “Final Notice” in large black letters. It reported how much Serrano owed in back payments and said he was running out of time to reinstate his mortgage.
“You may qualify for special consideration through a program designed to save your property,” the letter stated. “Call us immediately.”
Mortgage Payments Soar
Three months earlier, Serrano, 45, a dump-truck driver at a limestone quarry, says he had stopped paying the mortgage on his $569,000 house. Under the terms of his adjustable-rate mortgage, Serrano’s monthly payment shot to $2,500 from $1,618 after his initial teaser interest rate of 1 percent jumped to 8 percent. At the same time, the slowing economy forced the quarry to cut his hours, leaving him with only $2,250 in take-home monthly pay from $3,200 when he worked full-time.
Unable to support his wife and six daughters, aged 8 to 22, Serrano tried in vain to persuade his lender, Aurora Loan Services LLC, a subsidiary of now bankrupt Lehman Brothers Holdings Inc., to change his mortgage so he could continue paying $1,618 a month.
“They always said the same thing: ‘Hey, you signed it,’” Serrano says. “So the last time I talked to them, I said, ‘I’m not going to pay anymore.’” Aurora spokeswoman Deborah Munies declined to comment.
A soft-spoken man who likes to roast pork shoulder on his backyard grill, Serrano is proud of the six-bedroom tract home he bought with a 30 percent down payment of $169,000 in 2005.
Fake Documents
“I put in all this tile,” he says, pointing to the dining room floor. Serrano was relieved when he received the notice about the foreclosure prevention program last August. “I was going to lose all the money I’d invested in the house, and this made me hopeful, so I called,” Serrano says, shaking his head at the memory.
Serrano says he talked with a woman who identified herself as Lily. In fluent Spanish, she told Serrano her organization would negotiate a lower mortgage with his lender if he qualified for a foreclosure program. The woman had Serrano fax over his loan agreement, pay stubs and other personal financial information.
In early September, a man identifying himself as Benae called and said he was with Aurora. Serrano says the man told him he’d qualified for the program and his mortgage had been reduced. Serrano would have to pay a $3,750 penalty and then could resume making $1,618 monthly payments. Days later, Foreclosure Prevention Services sent Serrano the clincher: a four-page “Extension and Modification Agreement” on what looked like Aurora letterhead. The agreement, which prosecutors say was fake, even had a toll-free number for “customer care inquiries.”
Walking Away
Convinced his home was saved, the truck driver removed a frayed card from his wallet depicting Christ on the cross and kissed it in gratitude. Then he signed the document and sent a cashier’s check to “Payment Processing Center.”
To further the illusion homeowners were dealing with their own lenders, Perez allegedly instructed his workers to open more than a dozen bank accounts at branches of Wachovia Corp., Washington Mutual Inc. and Bank of America using fictitious names like “Resolution Department” and “Payment Processing Center,” according to the affidavit.
In December, Sandy Birch, an investigator with the California Attorney General’s Office, found Serrano’s checks in a Wachovia account opened by one of Perez’s workers and informed the homeowner that he had been fleeced of almost $7,000.
‘Lose Everything’
Now, with almost $20,000 in back payments hanging over his head, Serrano is again negotiating with Aurora for a modification. If he isn’t approved, he may have to send his family to live with relatives in Mexico, abandon the house and rent an apartment. That would mean walking away from $200,000 in equity built on 25 years of toil, first in the tomato fields of the Salinas Valley and then behind the wheel of a truck.
“I feel like I’m about to lose everything,” Serrano says.
On Oct. 27, Rosenau, the deputy attorney general, busted Perez and seven members of his alleged ring. Three of Perez’s co-defendants were charged with grand theft, money laundering and conspiracy, and two others were charged with money laundering and conspiracy.
Rosa Conrado, Jesus Martin Flores and Alejandrina Maldonado pleaded guilty to grand theft in January. Two other accomplices, David Giron and Samuel Amador, pleaded guilty on March 19.
“Amador has taken responsibility but he was used as a pawn in a much broader scheme perpetrated by Juan Perez,” says his lawyer, Rajan Maline. Lawyers for Conrado and Maldonado declined to comment, and Flores’ and Giron’s attorney didn’t return a call.
Volume Business
Even as Rosenau seeks help from the U.S. Department of Justice to extradite Perez from Mexico, she fears the case is a harbinger of even larger swindles to come.
“This is a volume business, and right now there’s a lot of homeowners who feel like they have no options,” says Rosenau, 47, a former U.S. Army major who helped lead a logistics unit in the Persian Gulf War in 1991.
Foreclosure rescues aren’t just being pushed by criminals; a new industry operating on the edge of legality is mushrooming in states with soaring defaults, says Florida’s Gentili. A crop of new companies are using Web sites, toll-free numbers and commercials on late-night TV to ply homeowners with promises.
Bernadette Perry, a former mortgage broker, and Dean Shafer, a marketing executive, co-founded Loss Mitigation Services Inc. in Orange County, California, in February 2008 to assist distressed homeowners in avoiding foreclosure. As a broker, Perry sold Alt-A mortgages, which are marketed to borrowers with decent credit scores yet shaky proof of income.
One Last Shot
As the imploding housing market vaporized her commissions in late 2007, Perry and Shafer decided to try mortgage rescues. Shafer, now chief executive officer of Loss Mitigation Services, created a mailer informing hundreds of homeowners they might be eligible for a loan modification that could reduce their principal or interest rate.
“We were thinking it’s game over, but we gave it one last shot and sent this out and it lit the phone up,” says Shafer, a youthful-looking 48-year-old who parts his hair in the middle and quaffs protein shakes.
Today, Loss Mitigation Services buys property data collected by First American Corp., a Santa Ana, California-based loan data provider, among others. Shafer sifts through the data to produce leads for his telemarketers and direct mail.
“We expertly present your scenario in a way that optimizes your loan modification outcome,” reads a brochure mailed to a borrower. “That’s why you do not want to do this yourself because you could present your information in a way that kills your modification.”
$3,600 in Advance
About 80 “mitigators” stationed in cubicles at the company’s office near Disneyland field about 500 calls per day from potential clients. Since November, the company has charged $3,600 in advance and says it will refund $2,105 if the lender rejects the application.
The company’s spokesman, Tony Knight of Sitrick & Co. in Los Angeles, provided five letters from former clients praising their services. Perry, 51, who supervises the mitigators, says she resents insinuations that foreclosure rescue is a rip-off.
“We’re the good guys,” she says.
Last May, Loss Mitigation Services sent a letter to one homeowner facing foreclosure, Bobby Turley of Livermore, California, that said, “Your loan modification was approved. The fee for your loan modification is $5,500,” according to a copy of the letter provided by Turley. The homeowner says he paid the fee in May 2008, yet his lender, Washington Mutual, hasn’t modified his loan.
‘We Made Mistakes’
In the letter, Loss Mitigation Services said, “We have a proven track record with a 97% success rate.” Shafer says this statement is untrue and the company no longer uses it in marketing literature.
“We made mistakes in the beginning,” he says. “I will admit that.”
Shafer says his firm isn’t complying with state rules that direct mortgage modification companies to set aside 75 percent of upfront fees until the process is complete. Shafer says obeying the rule would deplete his working capital and cripple the company.
“I’m all for rules and regulations, but they have to be for the good of the masses,” he says.
Commissioner Davi says compliance isn’t negotiable and the rules are designed to protect consumers.
Rejected Loan Modifications
“We can’t have these people taking homeowners’ last dollars,” he says. Regulators haven’t accused Loss Mitigation Services of any wrongdoing.
Bank of America, which became the No. 1 home loan maker in the U.S. after buying Countrywide, last year agreed to modify $8.7 billion in subprime and adjustable-rate loans for 400,000 borrowers to settle predatory-lending lawsuits. California and 10 other states had filed the lawsuits against Countrywide.
The attorneys general alleged that Countrywide, which saw more than a quarter of its subprime portfolio default in 2008, had unlawfully pushed borrowers into unsustainable adjustable- rate mortgages to fuel its securitization business. Bank of America didn’t admit or deny any wrongdoing as part of the settlement.
Ffely Charun, a counselor at the Community Housing Development Corp. in Northern California, says she’s seen Countrywide reject most appeals for lower mortgage payments from borrowers who aren’t part of the settlement.
Larger Monthly Payments
In January, Countrywide held a workshop at a church in Antioch, California, to consider applications for mortgage relief. More than 200 anxious homeowners lined up outside the church on a windswept night, clutching accordion files stuffed with loan documents.
Inside, Charun and other counselors seated at two long tables helped homeowners prepare their applications before they saw the Countrywide representatives. Charun says the few borrowers who have won relief from Countrywide received 90- or 120-day forbearances, which saddled them with even larger monthly payments after the suspension ended and often led to a second default.
“This is just PR,” Charun says, gesturing at the line of borrowers waiting to see the red-shirted Countrywide reps.
Jumana Bauwens, a Countrywide spokeswoman, says the company rewrote 230,000 mortgages in 2008, including loans reduced under the settlement with the states. “We are taking rewriting mortgages seriously,” she says.
A Steeper Loss
Obama’s housing plan may spur lenders to set aside their resistance to adjusting more mortgages, says Tom Holler, the lead organizer at One LA-IAF, a nonprofit community group in Los Angeles. Under the plan, lenders must determine how much it would cost to reduce a mortgage to a level a homeowner can afford versus foreclosing and auctioning the dwelling in a bearish housing market.
If shuttering the house produces a steeper loss, then the lender may reduce the interest rate on the loan instead, as long as modification isn’t barred by investors who are holding the note. With the government subsidizing part of the loss from lowering mortgage payments, Holler says, lenders and mortgage holders alike should be more inclined to participate in the plan.
Mark Zandi, chief economist at Moody’s Economy.com, is concerned that the plan’s reliance on lowering interest rates won’t pack enough punch to make millions of subprime and Alt-A mortgages more affordable. Zandi says it may be necessary for Obama to introduce a follow-up plan to slash the principal on such mortgages to reflect the present value of residences.
Exploiting the Turmoil
In the fourth quarter of 2008, more than 8.3 million U.S. mortgage holders were under water -- their homes were worth less than their mortgages -- and another 2.2 million borrowers will sink if prices fall another 5 percent, according to First American. Unless those mortgages are rebalanced, homeowners may continue to walk away from their homes and the foreclosure spiral will strengthen, Zandi says.
Con artists are only too happy to exploit the turmoil. As Angela Rosenau and her fellow prosecutors watch their caseloads rise, they say what started as a cottage industry will become a large criminal racket if foreclosures aren’t reduced -- aggravating a housing crisis that shows no signs of abating.
To contact the reporter on this story: Edward Robinson in San Francisco at edrobinson@bloomberg.net"
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