Good credit can attract a bad deal
More mortgage fraud scammers are targeting area, and an FBI team is targeting them...The scam artist walks away with the difference between the loan amount and the price paid for the home when, at closing, he represents himself as a consultant, remodeler or other service provider. Money is directed to him or through companies controlled by him... The straw buyer scam and other types of mortgage fraud have become so popular locally that the FBI's Houston division has formed a unit dedicated solely to fighting mortgage fraud...Though no one can give a precise figure, experts say many Houston-area homes are being lost to foreclosure because of mortgage fraud. "This is an epidemic that will come to roost in the Houston housing market," said Zugheri, president of Houston-based First Houston Mortgage Ltd.

Good credit can attract a bad deal
More mortgage fraud scammers are targeting area, and an FBI team is targeting them
By PURVA PATEL
Copyright 2007 Houston Chronicle

Cynthia Muir thought she got a good deal in 2003 when a friend told her that with his help she could buy a town house and sell it for a profit in six months.

He promised to pay the monthly mortgage payments and rent out the Galleria-area home until they decided to sell it, she said.

But the payments rarely were made, she said, and the home never was rented out. Instead of profits from what she thought was a wise investment, the software consultant was left with a home that cost her more than it was worth.

Muir found herself entangled in a fraudulent deal she claims took advantage of her strong credit score to close on the property, according to a lawsuit she later filed.

Mortgage frauds like that alleged in the lawsuit are known as "straw buyer schemes." Such schemes are gaining popularity in Houston, said Ricki Ortega, an investigator with the FBI.

In such schemes, the scammer finds people with good credit, persuades them to buy homes and promises to pay the notes and do all the legwork.

Unbeknown to the homebuyers, the crook, usually working with appraisers, mortgage brokers, the seller, or loan officers, arranges for a bank loan higher than the value of the home and walks away from the deal — leaving the homebuyers with a bigger note than expected and damaged credit if they fail to pay the note.

The scam artist walks away with the difference between the loan amount and the price paid for the home when, at closing, he represents himself as a consultant, remodeler or other service provider. Money is directed to him or through companies controlled by him. Sometimes a kickback comes under the table from the seller.

The straw buyer scam and other types of mortgage fraud have become so popular locally that the FBI's Houston division has formed a unit dedicated solely to fighting mortgage fraud.

Currently, the office has about 25 multimillion-dollar cases open involving various types of mortgage fraud. If left unchecked, the fraud could have repercussions for the local housing market as bankers, fearful of the growing problem, make it harder for homebuyers to get loans.

Texas ranks seventh in the nation for loans that involved fraud, according to the Mortgage Asset Research Institute, and Houston ranks third in serious early loan defaults — a sign that many of the loans likely involved fraud.

Though fraud long has been a problem, Houston still hasn't seen the worst of it, Ortega said.

"Everything's on the upswing," she said.

The lawsuit

As for Muir, her so-called friend Lawrence Randall Benham was actually more interested in her credit rating than in her potential as an investment partner, Muir alleges in her lawsuit.

Muir also sued the appraiser, who she claims inflated the property's value; the mortgage broker, who she alleges knew the property was overvalued; and the title company, which she claims failed to protect her.

"I should have just never let someone be in charge of something like that," said Muir, who acknowledged that she never saw the property before buying it. "It doesn't matter that they seem nice and clean-cut, and they act like they're knowledgeable. He didn't care about me."

Muir paid $448,000 for her four-bedroom town house. In 2006, the Harris County Appraisal District valued the property at $298,057.

Federal investigators since have arrested Benham, and a grand jury indicted him on five counts of wire fraud, two counts of mail fraud, one count of bank fraud and one count of money laundering. One of the wire fraud counts includes allegations of wiring money related to Muir's loan.

Muir filed a suit in 2004 against Benham that names several others who also allegedly bought overpriced homes through him. Benham's attorney declined to comment.

She also sued broker Terrell Samuels, owner of A Touch of Green Mortgage Services, accusing him of conspiring with Benham to hide the true value of the property.

Some of Samuels' company's assets, such as documents, computers and office supplies, were seized earlier this year as part of a $1.5 million default judgment against him in a separate civil suit that alleged he was involved in an unrelated scheme.

Samuels, whose office was near Benham's on Post Oak, denied he conspired with Benham and said his company ordered the appraisals and left it up to the lender to approve it.

"I'm not real sure what transpired with her particular situation, but we had a quality-control system in place to make sure we're doing what we're supposed to be doing," Samuels said. He said his company stopped working with Benham as soon as a client complained.

Samuels has two fraud complaints under investigation by the Texas Department of Savings & Mortgage Lending's enforcement division, according to the agency.

Muir says she had no closing. In a hurry, she signed papers in Benham's office, and he had them notarized by one of his employees, she said.

She also sued Houston Title Co., which she claims failed to look out for her .

The company declined to comment. A spokeswoman for lender CIT Group also declined to comment.

The arrest

In February, Benham pleaded guilty to one count of wire fraud and one count of mail fraud and admitted to making between $1.5 million and $2 million via mortgage fraud since 2002 and using the money for his business, a Land Rover and a plasma television, among other things.

As part of the agreement, several charges were dropped, including the wire transfer related to Muir's loan, in exchange for Benham's cooperation.

Prosecutors alleged Benham found homes for sale and then used the credit and identifying information of straw buyers on loan applications and also exaggerated buyers' incomes. He then allegedly arranged for the straw buyers to buy the homes at inflated prices. Benham's attorney declined to comment.

The indictment alleged that Benham, who owned Benham Investment Group, Paradigm Properties and Builder Funding Service, was able to take out more than $8.9 million in loans in other people's names.

He would take a cut from the loan proceeds at closing, according to the indictment. Investigators declined to comment on Benham because many of the details of his case still are sealed as he awaits sentencing.

But they did say such frauds need the buyer's strong credit score, usually 700 or higher, to apply for a type of income loan that only requires borrowers to "state" their incomes without providing supporting documentation. The application then states an inflated income for the owner and states the home will be owner-occupied, which gets the buyer a lower interest rate and less scrutiny.

Meanwhile, an appraiser usually provides an inflated price for the property, unbeknown to the buyer, and the swindler applies for a loan for the over-appraised home in the buyer's name. The home seller and buyer rarely talk, so the buyer often never learns the home's true selling price, investigators said. The swindler then buys the home at market value, gives a cut to others involved, pockets leftover loan proceeds and disappears.

This isn't the first time Benham has had run-ins with the law.

In 2000, he was denied a mortgage broker's license by the state Department of Savings & Mortgage for lying about a previous felony conviction related to a hot check.

'A blind eye to fraud'

Investigators predict more frauds will surface if the economy cools and interest rates rise, because it would be more difficult to turn homes over.

Many scams don't surface because mortgage companies are sometimes reluctant to report fraud. Often it amounts to indicting themselves if they turn in employees who commit fraud under their watch, said David Zugheri, a Houston mortgage broker. Many also fear being hit with defamation lawsuits if they report the activity.

"The industry is turning a blind eye to fraud," said Zugheri, whose own company was sued for defamation by a former employee fired for suspicious activity. "The industry is completely inside-out right now."

Those defrauded also are often reluctant to come forward.

Despite the damaged credit history and burdensome debt they're often left with, they aren't always innocent in the law's eyes since they often sign documents with inflated incomes. Often, the FBI's Ortega said, the buyer will sign an application saying the home will be owner-occupied to get a lower mortgage rate even though the property will be rented.

"Those misstatements translate to federal felonies," Ortega said. "It's a lie and it's a lie to obtain money, which makes it a fraud. By and large we haven't really pursued the straw borrowers, but if you get somebody who has done multiple properties, they're on the hot seat. They are criminally liable and could be indicted."

Muir wasn't indicted for signing certain papers, but she acknowledges the flawed reasoning that entangled her in Benham's scheme.

"When I went to the office to sign the papers, he shoved a stack that was a ream thick in front of me," she said. "Name me one person who has bought a property or two in their whole life who understands what all that paperwork says. There may be some people, but I wasn't one of them."

According to her lawsuit, she did notice the high appraisal value. But when she questioned it, Benham got angry and told her appraisals can't be inflated.

Later, according to her suit, she learned the appraiser, Donald W. Scales, compared the town house she bought to real estate across the street, which was worth much more.

Scales said he couldn't recall everything about the appraisal but said that it was meant for the lender, not for a buyer to decide if a property should be purchased.

"I don't remember details of the thing, but I heard it wasn't used for the purpose it was intended," said Scales, who said he didn't have an attorney representing him.

Muir managed to hang on to the property by burning through her savings and temporarily renting it out before selling it for less than her loan.

Repercussions

Though no one can give a precise figure, experts say many Houston-area homes are being lost to foreclosure because of mortgage fraud.

"This is an epidemic that will come to roost in the Houston housing market," said Zugheri, president of Houston-based First Houston Mortgage Ltd.

In the end, it's not just the swindled lenders or bereft straw buyers that suffer. The fraud sends ripples through the economy because many loans are wrapped into mortgage-backed securities and sold to investors. When the investment goes bad, sometimes lenders must buy those securities back. Sometimes, the investors or taxpayers eat the loss.

If investors get wary of the investments and take their money elsewhere, banks could get more reluctant to lend and tighten lending requirements.

"The potential does exist," said Barton Smith, an economics professor at the University of Houston. "We've already seen construction loans start to get hard to get. But I think the Federal Reserve's going to find out that to avoid a collapse, they'll have to back off their interest rates to provide enough liquidity to the financial system to not bring the whole stack of cards down."
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