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The State

How a bank fell victim to loan fraud

Officials allege a scam used phony appraisals and paperwork to wring millions from deals in the Beverly Hills area.

December 31, 2007|Diane Wedner and Kim Christensen | Times Staff Writers

Prosecutors say the pair recruited real estate agents, including Babajian and Grasso, to find properties, negotiate sales, falsify listings and jack up the "comps," or comparable sales figures, from other transactions in the area.

They allegedly enlisted two appraisers to inflate houses' values, and an Americorp Funding broker to package fraudulent applications for 40 loans directly funded by Lehman, according to the bank's lawsuit.

"In addition to the direct funded loans, Lehman also acquired an additional 44 loans from other lenders, which appear to show the same pattern," the lawsuit states.

The two men used their own escrow companies to crank out fake settlement documents and their own notary to validate them, prosecutors say. They relied on Babajian and Grasso to get title insurance for the homes' inflated values, the government claims, and they installed renters in some of the houses to help cover the payments.

Crucial to the alleged chain of fraud were "straw buyers" -- some of them unwitting players whose identities had been stolen -- who prosecutors say appeared legitimate but were not.

Kathy Moore "bought" her two-bedroom, three-bath house on Portola Drive in the fall of 2002.

The 1,300-square-foot dwelling is set against a steep hillside on a narrow street off Benedict Canyon Drive. At the time, homes on Portola sold in the $700,000 range, sales data show, and the civil suit alleges the conspirators paid about that much for it.

Just a month later, Moore sought a $1.47-million loan to buy the same house. Her application included two appraisals valuing it at $2.5 million and records showing comparable sales prices for properties nearby.

"When you drive through 'Beverly Hills post office' streets like Portola Drive, you see a nice little ranch, a nice little ranch, then a drop-dead house for $8 million," said Stevens, the agent. "But if the loan officer is back East going over these numbers, they have no idea. The comps are easy to skew."

To prove she qualified, Moore's papers included a document reflecting closed mortgage accounts of $847,200 and $946,400 -- amounts that Lehman contends were inflated by at least $800,000 each. Her application also claimed that she paid $8,500 a month for a Beverly Hills rental listed as her home address, the civil suit alleges.

When a private investigator hired by Lehman Bros. later called her, Moore said she got into the deal through a relative and "didn't know too much" about it. Nor did she rent in Beverly Hills.

"Moore stated that she signed the purchase documents in Utah, where she lives, and then sent them back to California," investigator Ann Cochran said in a declaration in the civil suit. "She never lived in the house on Portola."

Moore was neither charged in the criminal case nor named in the civil suit. Reached by telephone recently, she would not discuss her role.

"I was a victim," she said. "It was a horrible thing, and I don't want to talk about it."

In all, a dozen straw buyers told Cochran the same story: that they had been solicited by friends, relatives or others to sell the use of their names and credit histories for up to $15,000.

Assistant U.S. Atty. Jeremy D. Matz said lenders could not have known that straw buyers' applications or other aspects of the deals were bogus.

"It's not surprising that lenders were fooled when every level of the real estate transaction was compromised like it was here," the prosecutor said. "These lenders did due diligence and did push back sometimes. At a certain point, lenders rely on the honor process."

How the fraud unraveled is an open question. In interviews, real estate agents in Monterey and Beverly Hills told The Times that in the spring of 2003 they became suspicious of some of the sales prices reported by the Abrams-Fitzgerald team.

Veteran Carmel agent Fred Noseworthy said that after a colleague in his office pointed out a house that sold for an exorbitant sum, he combed through sales records and found a string of fishy deals.

"In the process of noticing these weird situations -- properties selling at twice their worth -- I noticed the same buyer or firm in L.A., and the same title company," he recalled. "I thought it was weird. Something is going on here."

Brentwood agent Stevens had the same reaction when he looked into the sales history of a house in tear-down condition in his area. It had sold for $759,000 in November 2000 but just two months later sold again for $2.2 million.

Stevens said he called Lehman Bros. and a company that brokered some of the loans, but neither seemed worried.

"The banks said they had appraisals and payment records that were current," Stevens recalled. "So they said, 'Where's the wolf ?' "

Noseworthy took his concerns to the Monterey County assessor, who alerted the district attorney's office there, according to interviews. But when an investigator from the office started to look into it, she discovered that the FBI was already investigating, said Terry Spitz, chief assistant district attorney.

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