Prosecuting predatory borrowing

Houston Chronicle:

Sales started slowly at Briar Hollow, a low-slung building with arched balconies that debuted without the big views, posh pool and other amenities of its condo competitors in Uptown near the Galleria. After a year on the Houston real estate market, more than half the units remained unsold.

But in just one month in 2006, two buyers in their 20s closed on three condos — paying as much as $490,000 for just 1,600 square feet. A succession of similarly bloated sales followed. By the end of the year, many buyers were unable or unwilling to make payments and nine of 24 units had been lost to foreclosure.

Many of the sales, it turned out, were part of an alleged $24 million mortgage fraud scheme in which investors and others recruited buyers and supplied them with bogus documents that qualified them for exorbitant loans for Houston homes and condos, according to a recent federal indictment.

After obtaining as much as $100,000 per sale above true property values, part of the loan proceeds were then illegally transferred to co-conspirators in the scheme, as well as to buyers themselves, federal records show.

The pattern of inflated sales prices, absentee ownership and high foreclosure rates repeated itself at several other visible condo projects in pricey Houston neighborhoods: the Bristol Condominiums near the Galleria, the Rutland Lofts in the Heights and the high-rise Tremont Tower in Montrose.

The mortgage scams had gone on since at least May 2004, the indictment said.

David Zugheri, a Galleria-area mortgage company president and former government investigator, said he was stunned such obvious fraud had gone on so long.

"First there was one problem sale, then two, then three. Then a whole building, then other whole buildings," he said. "It was the most awesome display of catch me if you can."

So far, six people — four real estate investors and two loan officers, have been publicly accused of engineering the $24 million Houston scam, though the indictment repeatedly refers to unnamed "co-conspirators." The six were among 60 rounded up nationally as part of "Operation Malicious Mortgage" — an effort by federal enforcement officials to target widespread mortgage fraud that has slammed real estate markets nationwide.

The fraud operations "have taken a huge toll" on the local economy, said FBI Special Agent Kristin Rehler, assigned to the multiagency Mortgage Fraud Task force in Houston.

She said when the task force first formed in 2005, investigators saw "a mortgage crisis in the making" because of lax lending practices, generous buyer incentives and entrepreneurs willing to cut corners — or break laws — to make big bucks.

Only $4 million of the $24 million in fraudulent mortgages are detailed in federal court records so far. The case involves more than 60 properties, but it details just a few deals.

...

There is much more. This is an important aspect of the mortgage crisis and I think it is much bigger than just the few cases in this story. It is possible that the general downturn in housing just exposed it, but I think it was also a contributing factor to the rate and depth of the downturn.