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It's scam season

Scrambling to avoid foreclosure, more owners fall prey to rescue fraud.

September 09, 2007|Michelle Hofmann | Special to The Times

WHEN Eddie Baker Jr. retired in 2000, he found himself struggling to make the $1,100 monthly payments on his three-bedroom Los Angeles home and eventually fell behind on the $205,000 mortgage.

Facing foreclosure, Baker, a devout Christian, prayed for assistance. And in June 2005, his prayers seemingly were answered in the form of an offer to help save him from foreclosure and credit ruin.

But that offer turned into a nightmare instead. In May of this year, attorneys for Baker, 69, filed a civil suit in Los Angeles Superior Court against several co-defendants, alleging fraud related to the retired photo technician losing title to his home.

Baker's story is a familiar one to Benjamin Diehl, deputy attorney general in the consumer law section of the California attorney general's office. As Southland foreclosure rates continue to rise, the number of people who will lose a home to a rescue scam will increase significantly within the next two years, Diehl said.

Maritza Gutierrez, a supervising investigator for the Los Angeles County Department of Consumer Affairs' real estate fraud unit, said that from April to June, her section recorded about 50 cases involving alleged foreclosure scams.

But with 4,000 notices of default being recorded in L.A. County each month and the sub-prime fallout still gaining speed, Gutierrez said that number will probably triple for the same period in 2008.

Cynthia Reed, Baker's attorney, said Public Counsel has about a dozen cases of alleged foreclosure fraud pending. "Two years ago, maybe we had one," she added. The pro bono group provides free legal services to residents who can't afford private representation.

Foreclosure rescue schemes are not new. In February, Downey resident Martha Rodriguez pleaded guilty to federal fraud and money laundering charges for her role in a $12-million rescue scam. According to the U.S. attorney's office for the Central District of California, Rodriguez promised to help homeowners refinance but submitted applications for larger loans in the names of "straw buyers" (people who sell the use of their personal information), paid off the loans in default and pocketed the excess. And sometimes, the defendants simply stole the information from the unsuspecting.

Thom Mrozek, a spokesman for the U.S. attorney's office in L.A., said these types of crimes often have two victims: "The original homeowner who loses title to the home, and the bank who loaned money to the straw borrower, because the straw borrower does not repay the loan, and the bank had funded a loan for an inflated purchase price."

Rodriguez faces a maximum possible sentence of 40 years in federal prison. She is scheduled for sentencing in December.

Easy access to information is one reason for the growing fraud problem, experts say. If a borrower fails to pay the mortgage, the bank files a notice of default with the county recorder's office, usually after three consecutive missed payments. Rodriguez stated in court records that she targeted people by perusing computerized database lists of homes going into foreclosure.

It may look legit

Experts say sophisticated fraud rings can include brokers, appraisers, escrow agents, loan processors and underwriters. And, they add, paper-based systems, blind chains of title, faceless transactions and straw buyers are giving such rings an advantage.

"Because modern mortgage lending is very much like an assembly plant, there are opportunities for these fraudsters to take advantage of weak links along the way," said Michael Pfeifer, an attorney with Pfeifer & Reynolds LLP in Orange County, who specializes in fraud-for-profit rings and represents lenders and brokers in civil fraud recovery cases.

The scams can range from the simple to the complex, Deputy Atty. Gen. Diehl said. In addition to the lease-buy-back schemes, bailout scammers offer loans from private investors who require upfront charges or outrageous service fees, which often push homeowners further into debt, back into foreclosure or result in complete loss of title. Other scams feature self-proclaimed experts who promise to speak with the lender for an upfront fee and then disappear. And buyout scams come packaged as low-ball offers or fake appraisals.

Equity thieves will offer people facing foreclosure a short-term loan to cover their debts or agree to refinance the loan, said Manuel Duran, an attorney with Duran & Flanagan in Los Angeles who has served as prosecutor in foreclosure scam cases.

Although the homeowners already have bad credit, they often can still refinance, he said, "but the [swindler] tells them they won't be able to."

Sometimes, Duran said, scam artists say they need signatures to take out a loan to pay foreclosure fees. In other cases, they promise to refinance the loan but draw out the process to the point that the owner has no choice but to accept help from the fraudulent investor or co-signer.

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