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Originally published February 27, 2009 at 12:00 AM | Page modified February 27, 2009 at 11:18 AM

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Mortage-fraud case shows how real-estate insiders scammed the system for profit

Former Bellevue loan officer Christopher Brooks is expected to appear for sentencing in federal court today after pleading guilty to conspiracy in connection with submitting fraudulent loan applications to lenders. His sentencing comes as law-enforcement agencies are being inundated by banks with suspected mortgage-fraud reports.

Seattle Times staff reporter

A federal judge today is expected to sentence a former Bellevue loan officer to prison for perpetrating what prosecutors say is one of the largest home-mortgage fraud cases brought so far in Western Washington.

Christopher Brooks, 39, pleaded guilty to conspiring to commit wire fraud in connection with fraudulent loan applications on 18 Puget Sound-area homes that went into foreclosure and were sold by banks at a loss of more than $2 million.

A grand jury indicted him and his co-conspirators last summer for obtaining about $27 million in fraudulent loans on more than 50 homes in the region. Brooks admitted to paying borrowers to take part in the fraud.

In a memo to the court, Brooks' attorney acknowledged his client could be viewed as "a poster child" for the nation's mortgage mess but said the court should take into account the complicit behavior of the banks and give him a lighter sentence.

But prosecutors said that, while the defrauded banks had "admittedly lax standards," Brooks should serve more time given the fraud's sheer scale. What's more, they note, after Brooks' arrest last July, he violated terms of his bond by trying to sell a home on Craigslist and attempting to fraudulently negotiate with a bank for lower mortgage payments in another deal.

Brooks' mortgage-fraud scheme and the fallout spotlight an intensifying debate over how to deal with millions of loan defaults and foreclosures that are crippling the nation's housing and credit markets. In response, banks are scrutinizing loan documents more closely and are flooding regulators with "suspicious activity reports," which they are required to file within 30 days of detecting suspected mortgage fraud.

66,000 reports

Earlier this month, John Pistole, deputy director of the FBI, told Congress that the "exponential rise in mortgage-fraud investigations" is straining the agency's white-collar-crime section, forcing the agency to consider reassigning some agents from terrorism cases.

The FBI received more than 66,000 reports from banks last year, compared with fewer than 7,000 in 2003. Those suspected-fraud reports capture a fraction of the problem. Only banks — not other types of lenders or real-estate professionals — are required to report suspicious activity.

In Washington state, the FBI received more than 1,000 such reports last year, up from about 400 in 2005 during the real-estate boom, said Robbie Burroughs, a spokeswoman for the FBI's Seattle field office.

"Right now we have agents who are dedicated only to mortgage fraud," she said. Some bank reports this year are for loans dating to 2006, she said.

In an effort to handle the growing caseload and coordinate resources, local, state and federal investigators in Washington state are forming a mortgage-fraud task force that will focus on King, Snohomish and Pierce counties. Tracking down all the players in a mortgage-fraud scheme can be daunting, they say.

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"It's been my experience in the majority of the cases that everyone is involved," from the real-estate agent to the mortgage broker, the borrower, the appraiser, the escrow agent and even the seller, Special Agent Hilary Sallee said. "If one person is not on board, the deal may fall apart."

Brooks' attorney, Peter Camiel, said in his memo to the court that law-enforcement agencies are leaving out one offender:

"The financial institutions in this case, although listed by the government as victims, were often more akin to unindicted co-conspirators who not only encouraged Mr. Brooks to come in with more and more mortgage-loan applications, but also profited from the loans that he produced."

Lenders were warned

The deluge of mortgage-fraud cases that is straining law-enforcement agencies now, experts say, could have been prevented if all lenders had followed traditional underwriting standards and been required to report fraudulent activity.

Assistant State Attorney General Ned Jursek recalls a talk he gave to a group of real-estate-industry professionals a few years ago. He warned them that no-documentation loans were extremely vulnerable to fraud. He was exaggerating the risk, some lender representatives there told him.

"What lenders were taking was just shocking," Jursek said, noting that many were selling the mortgages to Wall Street. "Regulators were sounding the alarms, but it was falling on deaf ears at the time because lenders were making so much money."

Now, with almost one in every 10 home mortgages nationwide either delinquent or in foreclosure, banks are digging into stacks of old loans and unearthing massive mortgage fraud. On new loans, banks also are being more diligent about doing independent appraisals and calling the Internal Revenue Service to verify a borrower's income — only to discover more fraud.

Most mortgage fraud happens during the application process, when the borrower's income, assets and employment are misrepresented to obtain the loan on a property that's being purchased for an artificially inflated price. Even though no-documentation loans largely have disappeared from the market, that hasn't stopped some from submitting forged tax returns and other documents to lenders.

"Ultimately the responsibility falls on the lender because they're the ones making the loan," said mortgage broker Joe Krumbach, a former president of the Seattle Mortgage Bankers Association.

Richard Hagar, head of American Home Appraisals and a national expert on mortgage-loan fraud, said incompetent or corrupt appraisers are key to fraudsters' ability to dupe the lenders.

"Underwriting is still not being done properly," Hagar said. "Regulators need to address that."

A new federal law aimed at preventing fraud takes effect in January 2010 and will require lenders to report data on the loan originator, loan-origination company, field appraiser and supervisory appraiser on every mortgage they fund.

Loan originators and real-estate appraisers already are required to meet higher standards in Washington state. Trainee appraisers could operate here without registering until April 2006, and loan originators until January 2007.

That may not be enough. Pistole, the FBI official, testified to Congress that "many mortgage-finance-related entities are either loosely or completely unregulated at the state or federal level," and that expanding the fraud-reporting requirement would be "a major step forward in addressing the practice of mortgage fraud."

Brooks: Pawn or not?

Brooks, a former loan officer at America Mortgage of Bellevue, and his wife, Amani Moss, were indicted by a grand jury last summer on charges of conspiracy and wire fraud in a property-flipping scheme that prosecutors say tricked lenders into giving $27 million in fraudulent loans on more than 50 homes throughout the Puget Sound region.

Moss has pleaded guilty to aiding and abetting wire fraud.

Brooks' plea agreement lays out how the scheme worked from March 2005 to January 2006:

Brooks and his co-conspirators found straw buyers — people with good credit who posed as buyers and borrowers. In exchange, Brooks paid each straw buyer $7,000 to $10,000. Brooks then prepared and submitted fraudulent loan applications in the straw buyers' names, including false statements about their income and employment.

Federal agents say straw buyers generally aren't aware of the magnitude of the fraud. By the time they find out, their credit is ruined, but they may be reluctant to come forward for fear of being prosecuted for participating.

The nation's biggest subprime lenders funded many of these loans, including Countrywide Home Loans; Long Beach Mortgage, a subsidiary of the former Washington Mutual; BNC Mortgage, a unit of the bankrupt Lehman Brothers; and Argent Mortgage, bought by Citigroup in late 2007.

Under his plea deal, Brooks has agreed to pay the lenders $2.4 million in restitution — a sum he'll be required to pay over time.

"I plan to fully repay my debt to society and repay my restitution," Brooks wrote to the judge. "Going forward, I plan to work in construction, starting as a project manager and eventually becoming a small homebuilder."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

Copyright © 2009 The Seattle Times Company

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