Ten arrested in Crisp & Cole mortgage fraud case

Via the Bakersfield Californian
By COURTENAY EDELHART, JOHN COX and GRETCHEN WENNER
January 21, 2011

The once highflying Crisp & Cole Real Estate firm was a “full-service mortgage fraud factory,” federal authorities said on Friday as they detailed fraud, money-laundering and conspiracy charges against 10 people connected to the company.

Principals David Crisp and Carl Cole — who wowed and riled conservative Bakersfield by barreling down streets in convoys of expensive cars, showing up to fundraisers with bodyguards and airing ads that featured a private jet and gullwing Mercedes-Benz McClaren — were among nine people arrested Thursday, said Rob Guyton, an FBI supervisor in Bakersfield. Crisp’s wife, Jennifer, was allowed to surrender Friday morning in order to make child care arrangements.

Also arrested Thursday were former employees Jayson Costa, Julie Farmer, Sneha Mohammadi, Mike Munoz, Robinson Nguyen and Jeriel Salinas as well as Cole’s son, Caleb Cole.

The Crisps were arrested in San Diego County, Carl Cole was arrested in Oxnard and Nguyen was apprehended in Monterey. The others were arrested in Bakersfield and were taken to Lerdo Jail. None resisted arrest or tried to flee, he said.

The arrests follow years of work by federal investigators who pored over thousands of documents.

“In the mid-2000s, Crisp, Cole & Associates was a high-flying real estate firm,” U.S. Attorney Benjamin Wagner said. “Today it has crashed hard, and it has brought many people down with it.”

Crisp, Cole & Associates was the real estate company’s legal name. Crisp & Cole also operated a mortgage brokerage, Tower Lending, and several other companies.

A long anticipated indictment

The 56-count indictment unsealed Friday alleges conspiracy to commit bank, mail and wire fraud and to launder money from about 2004 to roughly 2007, according to the 31-page document. Charges vary for each person named.

Through a series of transactions, houses were bought and resold at inflated prices, sometimes multiple times in a matter of weeks, the indictment alleges. Many of the deals involved straw buyers and borrowers who lied about their income, jobs and the intended use of the property. Homes purchased for use as a primary residence are eligible for more favorable loan terms.

Some of the loans defaulted immediately. Payments were made on others for just long enough to secure financing for the next flip, authorities allege.

Prosecutors have estimated the crimes cost the mortgage industry at least $20 million, although most industry professionals say that figure is low.

Wagner acknowledged that $20 million was conservative, saying prosecutors went with a number they were confident they could prove in court.

“When there’s so much (housing) market movement, it’s hard to separate what is due to the market and what is due to fraud,” he said. “But we know that when there’s a concentrated effort on such a targeted area, it deliberately creates a bell curve in the values of the property.”

Under federal sentencing guidelines, the maximum penalty for some conspiracy charges is 30 years in prison and a $1 million fine. Money laundering carries a maximum 10 years and $500,000 fine.

The fallout

At a Friday afternoon news conference, FBI assistant special agent Manuel Alvarez called the alleged fraud “without a doubt one of the most egregious examples that our office has seen.”

Mortgage fraud doesn’t just hurt lenders, he said. It hurts taxpayers because loans sometimes are guaranteed by the federal government, and it hurts innocent homebuyers who purchased houses based in part on the sales price of comparable homes nearby.

“Many people in Bakersfield have lost their home as a result of this fraud, and many of them will spend years trying to repair the damage that has been done to their credit as well as to their personal lives,” Alvarez said. “By no stretch of the imagination are these victimless crimes.”

Bakersfield Police Chief Greg Williamson called Crisp & Cole “the biggest case of its kind that I have seen in this area, and I imagine probably one of the biggest cases in the United States.”

Federal raids

The FBI raided 13 sites related to Crisp & Cole in September 2007.

Cole, the supervising broker, and Crisp, a sales agent, lost their real estate licenses in 2008. The following year, the California Department of Real Estate banned Crisp from working in any real estate-related field for three years.

Three of Crisp’s in-laws — Kevin and Leslie Sluga and Megan Balod — as well as former loan officers Christopher Stovall and Jerald Teixeira, have accepted plea deals for fraud and aiding and abetting. Kevin Sluga is a former certified public accountant who helped falsify documents for mortgage loan applications.

Sentencing in the plea deals has been delayed to April in order to factor in the degree of cooperation with investigators. Wagner said he expects sentencing to be delayed again pending the resolution of the latest charges.

Asked why no appraisers were among those arrested, Wagner said the investigation is ongoing and he did not rule out additional defendants.

“These kinds of investigations, particularly white collar crime of this sort, you tend to have concentric circles with key players in the middle. Sometimes what we know changes as the investigation goes forward,” he said.

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Who Wants a 30-Year Mortage?

The following is an excerpt from a New York Times Article.  Read the full article here.

Who Wants a 30-Year Mortgage?

By BETHANY McLEAN

As we all move forward with our New Year’s resolutions, it’s a good time to remember the promises our politicians have been making about the American mortgage market. The Obama administration, at a conference last August on the future of housing finance, pledged to have, come January, a plan for Fannie Mae and Freddie Mac, the mortgage giants that are now wards of the government. Congressional Republicans, in their recent position paper, made an even bolder resolution: to build a mortgage market that “does not rely on government guarantees” and “does not make private investors and creditors wealthy while saddling taxpayers with losses.”

This latter promise is pleasing populist rhetoric. The problem is, it may be neither politically nor practically feasible. Even if we forget about the gigantic near-term problem — namely, that the federal government is in the housing market mainly because most banks simply won’t issue mortgages that can’t be guaranteed by Fannie, Freddie or the Federal Housing Administration — there’s the fact that federal involvement in housing has been a constant since the 1930s. A market without government support would almost certainly involve the demise (for most of middle-class America) of that populist favorite, the low-cost 30-year fixed-rate mortgage.

For a homeowner, a mortgage with a 30-year fixed rate (especially one that he can pay off early without a penalty) is a wonderful thing. For lenders and investors, however, it is a financial Frankenstein’s monster, an unnatural product filled with the potential for losses. Absorbing some of the risk of those losses is a large part of what the government does in the housing market.

Fannie Mae and Freddie Mac, for instance, were created by the federal government to buy up mortgages from lenders, thereby enabling them to turn around and issue more mortgages. Among other things, this allowed the lenders to get off their books the two kinds of risk that a mortgage carries. We’re all now sadly familiar with one kind, credit risk — that is, the danger that a borrower won’t pay back the mortgage. The second is interest-rate risk, the danger that interest rates will rise sharply after the mortgage has been made, thereby burdening the bank with money-losing loans. (Interest-rate risk was the root cause of the savings and loan crisis.) The longer a mortgage lasts, the more difficult it is to manage both of these risks. And 30 years is an awfully long time.

Wouldn’t a better solution be for banks and other financial institutions to offer mortgage products that they actually want to keep on their own books? Maybe these would take the form of 15-year mortgages with a rate that would be adjusted after five years so that the banks wouldn’t have to worry about long-term interest-rate risk. This might not even mean the disappearance of 30-year fixed-rate mortgages — the private market has historically provided them to consumers whose mortgages are too big to qualify for a Fannie and Freddie guarantee. But these are usually issued only to the wealthiest, most credit-worthy consumers.

So be wary of politicians bearing promises of a perfect world where average Americans can get the mortgages to which we now all feel entitled and the government is nowhere to be seen. It’s a mirage.

Another Brokers Worst Nightmare: Home Warranty Company Kickbacks May Violate RESPA

On Nov. 23, HUD General Counsel Helen Kanovsky announced HUD’s response to public comments regarding HUD’s interpretive rule directed to home warranty companies (HWC) and real estate brokers and agents. HUD’s response reiterates the Department’s unequivocal position that when HWC’s pay real estate brokers or agents for work performed on behalf of the HWC, and such work is directed toward a particular buyer or seller, then the payment is an illegal kickback for a referral in direct violation of RESPA. (RESPA News RESPA Archives, Posted On: 11/29/2010)

RESPA experts agree that HUD’s interpretive rule, intended to apply to HWC’s, could apply as well to others in the real estate, mortgage and settlement services industries.

HUD’s interpretation of Section 8 as it applies to HWC’s and the Realtor community is defined as the following:

A payment by an HWC for marketing services performed by real estate brokers or agents on behalf of the HWC that are directed to particular homebuyers or sellers is an illegal kickback for a referral under Section 8.
So what does all this mean to us? It seems to us that if you really want to avoid litigation or worse, you should just assume that referral fees based on orders in escrow are going to be risky. Just ask yourself, is a referral fee now, worth the possible headache and financial pain of a legal action later?

Is TransactionPoint a Broker’s Worst Nightmare: Part II

We just learned that Terry Tucker, an executive with Keller Williams Realty in Danville, CA sent an email to potential vendors alerting that the vendors would need to pay or their services may not be used. His office is transitioning to TransactionPoint and the only vendors that will be named as preferred providers are those vendors that agree to pay a fee for orders placed through TransactionPoint.

He writes, “Please be aware that our agents will be highly motivated to order within Transaction Point, as the only other option would be for them to pay for it out of their own pockets.”

Despite numerous calls to Mr. Tucker we haven’t received a call back. Please read the entire email here.

At a time when many federal agencies and every state attorney general are looking into the misconduct of companies in their foreclosure processes, we want to ask if the action by Keller Williams Realty described in Mr. Tucker’s e-mail would be permissible under RESPA. We wonder what HUD would think of this program if implemented at Mr. Tucker’s office?

In PART III, our next post, we’ll examine HUD’s latest ruling on illegal kickbacks under RESPA from Home Warranty Companies to real estate brokers or agents.

We are grateful for your insights and suggestions.

Reader Mail

Thanks for all the comments! We got some really good responses. Here is a sample of a few:

RB said (In reference to FATCO):

Oh yes, and they closed our office completely with one days notice. Eight employees and families on the street. They acted like no big deal, sorry! Well now I take time everyday and educate realtors and others that these companies outsource jobs. We should stop giving business to those who don’t give us jobs period…..Please pass this on and on or were doomed!

ksonti said:

Hi:
Regarding out-sourcing jobs to India – keep real estate jobs in California

I agree we should keep California jobs in California – What will happen to our economy and people who depend on these jobs. I use American Home Shield for my Home Warranty Yes Stewart Title – & Of course Property I.D.

What do people in India know about California Real Estate?

We have outsourced jobs to Bangalore, India – Who will take care of us if we don’t take care of our own Californians? We should hold on to our jobs – No more outsourcing –

I Would like to have a Merry Christmas & Happy New Year – be able to feed my family and keep my home – for which I‘ve worked all my life. Keep California Working…… This goes to the reset of my fellow Californians. Love you all.

Alex Villa said:

Provident Title is holding the line for CA jobs!

Larry Wims said:

Please give Realtors information on all companies in our industry sending jobs offshore.

Keep sending them in, we love to hear your thoughts!

Program uses job-loss coverage to lure home buyers

By Jacob Adelman
Associated Press
November 13, 2010

The California Association of Realtors program allows home sellers to fund insurance plans that pay buyers up to $1,500 a month toward their mortgages for six months if they’re laid off from their jobs.

The so-called Home Payment Protection Program is a nod toward the role job concerns are playing in the housing market, especially in high-unemployment states such as California, where 12.4 percent of the population remains without work.

“Most people out today wanting to buy houses have a fear: What happens if I lose my job?” said CAR president Beth L. Peerce. “This takes some of that stress away.”

Mortgage payment protection programs are nothing new, but what distinguishes the California scheme is that the protection is being pitched as a selling point for reluctant buyers, which sellers advertise as part of their home listings.

Under the program, which covers buyers who lose their jobs within 12 months of escrow closing, a seller can choose to pay $200 for six mortgage payments of up to $1,000 each, or $275 for six mortgage payments of up to $1,500 each.

CAR began offering the service last month but doesn’t plan to begin advertising it widely until January, Peerce said.

National Association of Realtors spokesman Walter Molony said he knows of no other states that are offering similar incentives for job-fearing home-seekers.

The focus on consumers wary of making big purchases in a shaky economy recalls Hyundai Motor Hyundai Motor America’s offer to buy back cars from people who lose their jobs.

Analysts have credited that program with helping boost Hyundai sales since its introduction in January 2009, despite the ongoing economic doldrums.

University of Southern California business professor Lars Perner, who specializes in consumer behavior, thinks the realtors’ program could embolden those who have been putting off buying a home because of job insecurities.

“Taking away some of that fear of getting into big trouble is something that could easily tip the balance,” he said.

But Howard Wial, who directs the Brookings Institution’s Metropolitan Economy Initiative, said the plan would help only a limited number of borrowers with middling mortgage payments and relatively short amounts of time spent without work.

Indeed, nearly half of the state’s unemployed had been out of work for an average of more than six months, according to state statistics based on the year ending in September.

Meanwhile, although the state’s average mortgage payment was $1,055 in September, according to tracking firm MDA DataQuick, the insurance payouts wouldn’t cover mortgages in higher priced counties where sales have been most sluggish.

Average monthly mortgage payments in San Francisco and Orange County were $2,469 and $1,772 in September, DataQuick said.

“It could have some impact on home sales, but I wouldn’t overstate it,” Wial said of the CAR plan. “I think it’s a small step.”

More on the Mortgage Mess

Another opinion supporting real enforcement of banks’ foreclosure practices.

From the New York Times
November 1, 2010

Ben Bernanke, chairman of the Federal Reserve, said recently that federal regulators are “looking intensively” at banks’ foreclosure practices. An investigation is long overdue, though it shouldn’t take a lot of digging.

Consumer advocates, the press, investors and homeowners have already compiled a compelling list of transgressions: conflicts of interest that have banks pushing foreclosures, without a good-faith effort to modify troubled loans. Dubious fees that inflate mortgage balances. The hundreds of thousands of flawed foreclosure affidavits that violated homeowners’ legal protections. The misplaced documents. And it goes on.

For years these problems have been the focus of research reports, Congressional testimony and court cases. Regulators, however, looked the other way, which is how we got into the mortgage mess.

What makes the latest scandals so outrageous is that even after the financial meltdown and taxpayer bailout— and all those vows about accountability — the regulators are still behind the curve. The fundamental problem is that the banks’ drive to profit from the foreclosure process is all too often at odds with the interests of mortgage investors, homeowners and the economy’s health.

That is a big reason that the Obama administration’s antiforeclosure effort, with its voluntary participation by banks, has fallen so short.

Here is the background. The big banks — Bank of America, JPMorgan Chase, Citibank, Wells Fargo — service most of the nation’s home mortgages for investors who own the loans. They are paid a fee by the investors and also make money from fees on delinquent loans.

Servicers are obligated to manage the loans in the best interest of the investors. That means modifying a troubled loan, if reduced payments would bring in more money over time than a foreclosure. Or foreclosing if a borrower cannot make the payments on a modified loan.

If only it worked that way in practice.

Take, for example, underwater borrowers — the millions of Americans who owe more on their loans than their homes are worth. For them, the best modification is often to reduce the loan’s principal balance, lowering the monthly payment and restoring some equity. That could be best for investors too, because even reduced payments are often better than a foreclosure sale. A bank’s servicing fee is based on the principal balances of the loan — a strong incentive not to reduce a troubled borrower’s balance.

Another conflict occurs when the bank that services a primary mortgage is also the owner of a second lien on the same property. Resolving a troubled first mortgage generally requires a write-down of the second lien, a step that banks have been loath to take.

Banks also profit from late fees and other default-related charges assessed on borrowers. And there is an additional incentive to pile on charges, since the bigger the loan balance, the higher the fee to manage the loan. A group of prominent investors — including Freddie Mac, the Federal Reserve Bank of New York and Pimco, the world’s largest bond fund — recently accused Bank of America of fee-padding. The bank denies wrongdoing.

High default charges harm homeowners because they make it increasingly difficult to catch up on late payments and avoid foreclosure. They also disadvantage investors, because the servicer collects the charges from the foreclosure sale before the investors see any money. Everyone loses, except the bank.

Mr. Bernanke said that the regulators’ findings would be released in November. What is also needed is real enforcement — and new rules and possibly new laws — to make banks change their ways.