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Thursday, March 26, 2009

How Crooks Played HUD In Albany And Other Cities

After watching that Soprano's episode, I looked around for info about HUD loan frauds in urban areas. This article that focuses on fraudulent operators in Albany, touches on the main ingredients of some typical scams. I'm hardly, an expert on this, but it seems that the key factor at work is the HUD loan guarantees themselves, which create situations in which few people have an interest in policing loan quality. They have little or none of their money at risk. In come the crooks who know a honey pot when they see it.

"AMI, which was purchased by Wachovia Bank in late 2003, specializes in originating and servicing multi-family mortgage financing. Through Fannie Mae (a government sponsored enterprise active on the secondary mortgage market) and its Delegated Underwriting and Servicing program, as well as through the insured lending program of the Federal Housing Administration (FHA). The FHA is a sub agency of HUD. The AMI loans given Aaron Dare and Emerge were FHA insured. As in, covered by taxpayers."

"The mortgage frauds to which Dare confessed utilized straw buyers, recruited by Dare's unidentified conspirator. Supposedly, some were street criminals. Straw buyers are low on the ladder of mortgage fraud. A white collar crime which according to the FBI, has become epidemic. Mortgage fraud is typically committed by rings of real estate professionals. At times involving collusion as high up as the lending level. Even when collusion isn't a factor, the immense profits which flow from the sale of mortgage loans (including high interest and fee rich subprime loans) on the secondary investment market have made some lenders sloppy about underwriting practices."

A common form of mortgage fraud is "flipping". Not all flipping is illegal. In the fraudulent variety, straw buyers are supplied with fake proof of employment and finances by collusive realtors, mortgage brokers, sellers, etc. The straw folk take out mortgage loans they have no intention of repaying. The properties they "buy" have often been acquired cheap by the sellers, who inflate the value of the properties via cooked appraisals. Sometimes by as much as 500%. Hence the loans straw buyers receive are for much more than the properties are worth. Everyone in the ring takes their cut and walks away. The loan goes into default. While momentarily goosing property values (and eventually, local property taxes) mortgage fraud and its aftermath ends up speeding neighborhood decline and depressing values. In troubled or borderline neighborhoods, where mortgage fraud is most prevalent, taxpayers frequently pick up the tag.

In the mortgage frauds perped by Aaron Dare and his unnamed conspirator, the lenders were BNC Mortgage and Fremont Investment and Loan. Both based in California, both highly active national subprime lenders. BNC is a subsidiary of Lehman Brothers Bancorp. Both BNC and Fremont have had other bad experiences in New York State. In 2005, both were defrauded in a Nassau County case involving properties in that county and in Brooklyn. And Fremont, along with several other mortgage lenders, was recently utilized by a ring made up of overlapping groups of real estate professionals from upstate and downstate New York and northern New Jersey. This ring (the Sandella Ring) targeted Suffolk County and wide swaths of Brooklyn. Its most notorious member was Emmanuel "Toto" Constant. Formerly of Haiti."

Like in Soprano's episode, often phony or corrupt non profit housing and development agencies provide cover for the crooks.

"As the Urban League was imploding, Aaron Dare was established a string of state registered real estate entities. Many with "emerge" in their titles. There was Emerge Real Properties LLC, Emerge Construction, Emerge Historic Residential Community, I, II, and III. This time Dare's target was Albany's south side. In early 2001, Dare and Emerge bought 39 residential buildings, covering blocks of a downtown nabe called The Pastures, aka Historic Pastures. Dare also bought a brewery that had been converted into residences, plus a similarly converted schoolhouse in nearby Schenectady. All were designated "historic". Hence eligible for state and federal tax credits. Dare bought the properties with close to $8 million in loans from AMI Capital Inc., a Maryland based mortgage lender. AMI in turn, funded the loans via a warehouse lender in Columbus, Ohio"

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