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400 charged as U.S. cracks down on mortgage fraud

June 20, 2008|Richard B. Schmitt, Kim Christensen and E. Scott Reckard | Times Staff Writers

WASHINGTON — With Wall Street executives handcuffed and paraded in front of TV cameras and dozens of alleged mortgage scam artists arrested in cities nationwide, the penalty phase of the mortgage meltdown has begun in earnest.

The Justice Department said Thursday that more than 400 real estate industry players, including dozens in recent days, had been charged since March in a federal crackdown on incidents of mortgage fraud that have contributed to the housing crisis. Those arrested included brokers, appraisers, bankers and lenders.

The announcement came on the same day that two former hedge fund managers at Bear Stearns Cos. were arrested on suspicion of misleading investors about a fund that invested in sub-prime loans and collapsed at a cost to investors of $1.4 billion.

The executives became the first Wall Street figures to be charged criminally in the wake of the sub-prime debacle. The charges against them could be a road map for authorities to hold other Wall Street executives to account.

The FBI estimated the losses to homeowners and other borrowers who were victims of mortgage fraud at more than $1 billion. That is a small fraction of the near $1 trillion in losses worldwide that have been chalked up to the U.S. mortgage fiasco, and federal officials said the number of cases under investigation continues to grow rapidly.

California has been a center of mortgage fraud. On Thursday, Justice Department officials in Los Angeles announced the formation of a nine-agency task force to target those crimes.

"Whether committed by unscrupulous lenders, real estate professionals or desperate homeowners, mortgage fraud affects all of us," said Thomas P. O'Brien, the U.S. attorney in Los Angeles. "Defaults on inflated loans and resulting foreclosures impose huge monetary and social costs, as well as making it more expensive for everyone to obtain credit."

In Washington, FBI Director Robert S. Mueller III said the number of cases of possible mortgage fraud the bureau was investigating had doubled in the last three years to more than 1,400 as of May 31.

"To persons who . . . are involved in such schemes, we will find you. You will be investigated and you will be prosecuted," he said. "To those who would contemplate . . . engaging in such schemes, you will spend time in jail. That is the message we're sending out."

Kevin Stein, associate director of the San Francisco-based California Reinvestment Coalition, said he welcomed the federal crackdown but that it may have come too late "for the thousands upon thousands of borrowers who have been victimized by mortgage fraud."

Robert Gnaizda, policy director for the Greenlining Institute in Berkeley, said he feared the government would seek to make examples of mortgage brokers when the true culprits were the lenders and Wall Street firms he said had provided loans they knew were unaffordable in the long run.

"Mortgage brokers only did what financial institutions allowed them to do," Gnaizda said.

FBI officials said their "Operation Malicious Mortgage" focused on individual cases and smaller crime rings. The agency said it was also probing 19 companies, including investment banks and hedge funds, that may have engaged in accounting fraud or other crimes related to mortgage securities.

FBI officials also said they were investigating cases in which gangs and organized crime are suspected of mortgage fraud. "It is a means by which individuals could launder their money," said Sharon Ormsby, chief of the FBI's financial crimes section.

Prosecutors said their crackdown resulted in 60 arrests on Wednesday alone, including in Chicago, Miami and Houston. Mueller said the FBI had seized more than $60 million in assets as part of the sweep, including luxury cars, speedboats and a helicopter.

The 400 cases cover a range of mortgage scams, the officials said. The defendants include a suburban Washington couple charged with running a $35-million fraudulent foreclosure rescue operation called the Metropolitan Money Store.

The firm allegedly used fake buyers to take control of homes while promising the homeowners they could continue living there and buy back their property after a year, when they were back on their feet. But Metropolitan allegedly took out loans against the value of the homes, burying them further in debt and making it impossible for the former owners to reclaim them.

Joy Jackson, president of the Metropolitan Money Store of Lanham, Md., and her husband, Kurt Fordham, were arrested last week in North Carolina. Prosecutors allege that Jackson, Fordham and six other defendants used money from the elaborate scheme to pay for a lavish lifestyle that included luxury cars, houses, jewelry, fur coats and travel.

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