ABA Connection

Mortgage Fraud Mess

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Mortgage fraud doesn’t just nab unsuspecting homeowners. Lawyers can get caught in the web, too.

Such was the case of one veteran real estate lawyer in Florida whose mistake could cost him his license. Offering a rare glimpse into the birth of a fraud scheme, the lawyer recently explained publicly how he fell—and fell hard.

While the causes of fraud and foreclosure are many and varied, the lawyer himself has a much simpler explanation for his involvement: “At the time, it sounded like a good idea.”

Speaking anonymously by prerecorded video at a recent CLE conference in Orlando, Fla., the lawyer recalled how innocent it seemed in December 2005 when he went into business with a woman who was starting a title insurance company.

It appeared to be a good fit for his small practice in Hialeah in Miami-Dade County.

All he had to do was review closing files at $300 a pop and use his escrow account to distribute cash that changed hands in closings—all without leaving his office. The woman, whom he had met through an acquaintance, would get the files to him.

“I trusted the gentleman I knew, who introduced me to this other lady who had the contacts,” recalled the lawyer, who was admitted to practice in 1989. “And I would be supervising everything.”

Things got rolling in early 2006.

“The lady that was heading the title company was finding clients,” said the lawyer in the video that was played for 1,500 lawyers at the conference, which was sponsored by Attorneys’ Title Insurance Fund Inc. Known simply as the Fund, the Orlando-based network of 6,000 Flor­ida lawyers writes title insurance policies, mostly for lenders they represent at closing. Title insurance is a must in real estate transactions as a protection against losses arising out of disputes over property ownership.

The lawyer did not attend the conference in person and did not respond to the Journal’s interview requests.

Though a police officer for five years before going to law school, he told the conference he didn’t realize what he had stepped into.

“The files were coming in,” recalled the lawyer. “She was cooperating with me as far as letting me review the title commitments [and] the title searches. And everything seemed to be going well at first.”

But about three months into the operation, the lawyer became uneasy. The title commitments stopped arriving. He asked the woman how she could close without them. “They told me how they had a good relationship with the bank, not to worry, that they were … able to do the closings without title commitments.”

That was just for openers.

“One day, to my surprise,” said the lawyer, “I received a notice of a bar complaint that was filed against me for somebody that had closed with this title company. And there was money missing from this person’s funds.”

Stealing client money or simply mishandling it can mean disbarment. The lawyer said his real estate practice came under suspicion when a bank alerted the Fund that mortgages hadn’t been recorded for deals he worked.

The lawyer started to investigate. He learned the company had issued different versions of closing statements—one to him, another to the client and yet an­other to the lender. He went to the title company, which operated away from the law office, closed it and changed the locks. There he found more of the same—and worse.

“I discovered forged documents, forged driver’s licenses, forged escrow checks that supposedly were being made out to me that I had never deposited into my account.”

In one file, he found that financing obtained for one property had been applied to another one of lesser value. As the lawyer looked back, the red flags grew brighter—like the time the woman asked him to wire more than $300,000 to a bank on Florida’s west coast. “I later discovered that bank account belongs to a good friend of hers. She was basically embezzling, or stealing, the $300,000.”

The lawyer has since spent a boatload of money trying to make things right for the clients.

“To say that this cost me financially would be an understatement,” he said. “I have to pay claims from clients that closed with the title company. I have had to spend a lot of money and a lot of time trying to correct the situation that I got myself into.”

It isn’t over. The Fund suspended him in late 2006, so he no longer can write title insurance for the network. He has been the target of criminal investigations. And he said he still doesn’t know whether the Florida Bar will take his case to the state supreme court for discipline. Lawyers for the bar’s regional office in Miami say they have no open investigative file involving use of the lawyer’s escrow account or real estate dealings. But they add that the bar occasionally defers action until criminal investigations run their course.


Add this lawyer’s cautionary tale to the growing literature of horror stories detailing the destructive effects of fraud in the mortgage lending field.

Scams and real estate have been partners for a long time. Some earlier real estate lending schemes—like those involving thrifts in the 1980s—involved complex fraudulent transactions designed to fool lenders financing entire developments.

But the latest wave of mortgage fraud generally targets individual borrowers, especially longtime homeowners who find themselves in financial distress. These schemes are carried out by rings that may encompass lenders, brokers, appraisers and other real estate professionals, including lawyers.

“We were fundamentally unaware of the problem,” acknowledges Thomas P. James, a consumer protection lawyer in the Illinois attorney general’s office, which has been aggressively pursuing mortgage fraud only since 1998. “Unsophisticated consumers sitting on all this equity provide a tremendous incentive for thieves.”

James recalls one early case in which he asked state regulators whether they had received complaints about Irvine, Calif.-based First Alliance Mortgage Co. Yes, they replied, about 35 or 40. What happened to them? Nothing. The paperwork appeared in order.

But a pattern of predatory lending emerged after state and federal prosecutors and private plaintiffs lawyers compared notes, then banded together and sued First Alliance in U.S. District Court in California. They accused the lender of misleading borrowers about origination fees that ran as high as 25 percent of the loan amounts.

In 2002, First Alliance settled, making 18,000 borrowers in Illinois and five other states eligible to receive up to $60 million.

At the Legal Assistance Foundation of Metropolitan Chicago, the consumer lending practice a decade ago concentrated on assisting borrowers in danger of losing their homes due to their own dire financial straits—but at least uncomplicated by swindlers. In the late 1990s, the practice began to transform, and today it handles mortgage fraud almost exclusively, representing as many as 100 borrowers at one time.

“These are tough cases, as anyone who has done one can attest,” says Daniel P. Lindsey, supervisory attorney for the foundation’s Home Ownership Preservation Project. “Private attorneys were calling us and saying, ‘Help!’ ”

Mortgage fraud can assume many forms, but Lindsey says his office recently started to see a particularly wicked one called “mortgage rescue” or “foreclosure fraud.”

Scammers prey on borrowers already facing foreclosure with phony promises to keep the bank at bay.

“In the last two years, we’re seeing more and more of this, and we’re filing more and more cases,” Lindsey says. “What they’re doing, by hook or crook, is getting the homeowner’s title. In reality, very few people get their homes back and they lose the equity in them, because that’s what it’s all about—sucking the equity out.”

Adding to borrowers’ misery, Wall Street investment bankers have locked up millions of especially risky high-interest—and sometimes fraudulent—mortgages into bundles to back high-yield bonds. Borrowers attempting to wriggle free from onerous payments and other abusive conditions have little legal recourse against the bankers or the investors who ultimately buy the securities. Investors have a nearly bulletproof defense as bona fide purchasers who bought the bonds in good faith and without notice of fraud in the under­lying loan.

“It’s not hard to satisfy the requirements. It’s usually just a matter of dotting the i’s and crossing the t’s,” says University of Connecticut law professor Patricia A. McCoy. McCoy has co-authored a proposal that would strip bond market players of that defense and impose up to triple damages on those who don’t weed out potentially fraudulent mortgages.


Record numbers of Americans face foreclosures on homes they’ve owned, in some cases, for decades. Many had borrowed in a time when home loans were a straightforward affair, entailing little more than a visit to the neighborhood bank or savings and loan, or to the credit union at work.

“You knew who was lending the money, and they knew who was borrowing it,” says Connie Clark, a senior claims attorney at the Fund. “And they were lend­ing their own money. If a loan officer made a bad decision, his job was on the line.”

No longer. Today, however, bad loans that were made during the 1990s have started to come home to roost in a big way.

Nationwide, new foreclosure filings surpassed 1.2 million in 2006, a 42 percent increase from 2005, according to RealtyTrac, an Irvine, Calif.-based firm that publishes an online database of distressed properties. The trend shows little sign of abatement, with 437,498 more new foreclosures reported in the first quarter of 2007, an increase of 35 percent from the same period in 2006. RealtyTrac projects that the number of new foreclosures could reach 1.6 million for 2007. Meanwhile, the Center for Responsible Lending, a consumer group based in Durham, N.C., estimates that new foreclosures could reach 2.2 million by the end of this year.

Foreclosure trends are easy to identify. Many foreclosures can be directly attributed to the painful effects of mortgage rate upticks on adjustable rate mortgages. But getting a handle on mortgage fraud as a factor is more difficult because industry regulation is split between the federal government and the states, with no coordinated reporting procedure in place.

Though it acknowledges that it offers only a snapshot, the FBI reports that its mortgage fraud caseload grew from 436 in 2003 to 818 for the 2006 budget year that ended Sept. 30. Over the past decade, the Treasury Department’s Financial Crimes Enforcement Network notes a nearly 15-fold increase in possible incidences of mortgage fraud listed by financial institutions on required suspicious activity reports, from 1,318 in 1996 to 25,989 in 2005.

The twin effects of foreclosure and fraud rumble far beyond the $10 trillion mortgage industry. Mortgage lending and the housing market significantly influence the national economy, so disruptions in those sectors can create ripple effects elsewhere. Large numbers of foreclosures can drain the value from neighboring properties and at the same time shrink city, county and public school tax bases.

Though a soft housing market and rising interest rates contribute heavily to today’s debtor woes, consumer advocates say the foreclosure wave also opens unprecedented opportunities for grifters. Along with law enforcement agencies and regulators, consumer advocates note that mortgage fraud cases have increased since the mortgage industry began peddling an array of exotic and complex loans to borrowers during the late 1990s housing boom.

Before many borrowers realized what had happened, they wound up stuck in mortgages they were woefully unable to understand, let alone afford to pay. Sheriffs’ auctions carved exit after exit off the road to home ownership as many borrowers lost control of their situations.

Because first-time home loans generate considerable scrutiny from lenders and government regulators, fraud largely occurs in refinancing, where supervision is considerably more relaxed. Practitioners say they regularly see approved refinancing applications with obviously inflated borrower incomes and puzzling inventories of other assets.

“They might have 14 or 15 credit cards, owe $4,000 to $5,000 on each one, yet still have $40,000 in savings,” says Clark. “Nobody does that.”

And though fraud occurs across the economic and geographic spectrum, the danger may be greatest in inner-city neighborhoods, where the lack of alterna­tives and effective financial counseling drive borrowers toward high-interest and abuse-prone subprime mortgages. Subprime loans are riskier by nature because they’re designed mainly for people with shaky credit. Interest on subprime loans can run as high as 6 per­centage points more than the typical loan rate, a dif­ference that can mean thousands of dollars more in interest payments.


Consumer advocates view subprime mortgages as a primary breeding ground for fraud because of increased opportunities for market-savvy flim-flam artists to take advantage of relatively unsophisticated borrowers.

In 2005, 53 percent of black and 37.8 percent of Hispanic borrowers took out subprime loans, according to a report issued in April by the congressional Joint Economic Committee.

The committee also cited a 2000 study by the Treasury Department and the Department of Housing and Urban Development that found lenders issued five times as many subprime loans in predominantly black neighborhoods than in mostly white neighborhoods. Moreover, the report said, many minority borrowers were steered into subprime mortgages when they would have qualified for less expensive prime loans.

At any rate, the growth of subprime lending over the past decade resembles a modern day Gold Rush. In 1994, the mortgage industry issued $35 billion in subprime loans, about a 1 percent share of the total market. But by 2006, subprime loans reached $665 billion—23 percent of the market.

Statistics probably don’t matter much to Ken and Pat Leahy, though. They’re sort of busy right now, fighting one of those state-of-the-art “mortgage rescue” operations they say stripped them of the deed to the suburban Chicago home where they’ve lived since 1964.

Their Cook County Circuit Court lawsuit is expected to go to trial in late summer or early fall. Leahy v. Harrison & Chase Inc., No. 05 CH 16744.

Besides Harrison & Chase, identified as a mortgage-rescue firm, defendants include firm president J.T. Foxx, three related businesses he controls, and Harrison & Chase employee George Hantzakos. Also named as a defendant is a suburban bank that, the Leahys allege, loaned the defendants $368,000 against their home after fraudulently taking the title.

In court documents and in an interview with the ABA Journal, the Leahys describe an American dream that turned into a nightmare.

The three-bedroom ranch on a half-acre lot in north suburban Glenview was just right when the young couple first saw it 43 years ago.

“The best part was, it was in between my grand­mother’s house and my mother’s house,” remembers Pat Leahy, now 67. “It was five minutes either way. It came in really handy for baby-sitting.”

With a little help from Pat’s mom for the down payment, the home on Pleasant Lane was theirs for $22,000. They raised daughters Anne and Katherine there. As do many American homeowners, the Leahys refinanced several times over the years to build an addition and to put their daughters through college.

“There was only one tree when we moved in,” Pat says. “We have a lot more trees now. Trees and the garden are the only things that relieve my stress.”

Recent years have been unkind to the Leahys. Ken, now 68, always had been the main breadwinner and worked for 30 years in customer service call management.

But in March 2002, the cable TV company complaint center where he worked laid him off in a cost-cutting move. He was unable to find a comparable new job, and the $1,700 monthly mortgage payment was becoming difficult.

The lender foreclosed in June 2003 after it refused to cut the couple a break.

Solicitations from businesses offering help began arriving in the mail long before the sheriff showed up to serve the foreclosure complaint.

“We got hundreds of letters from lawyers, brokers and all kinds of people,” Pat says. “It was 8 or 9 inches high. It was unbelievable. As soon as it hit the public records, they started coming, and kept coming for about three months.”

The Leahys were especially interested in a brochure from a business called Harrison & Chase, which lists a Lincolnshire, Ill., address in court documents filed in their case. The mailer billed Harrison & Chase as “Illinois’ top foreclosure mitigation firm.” Its promises were eye-popping, from a claimed “98.3 percent success rate” to a pledge that the company’s services would be “free and pro bono.”

At the brochure’s urging, the Leahys called a company representative identified as defendant Hantzakos on a Sunday night. They offered to come to the firm’s office the next day, but Hantzakos insisted on coming to see them that very evening.

As the Leahys sat in their living room and explained that their lender had refused to budge, Hantzakos initially offered to work with the lender, telling the couple that “we talk to different people than you do.” At the first meeting, the Leahys also reluctantly signed two forms, one of which authorized Harrison & Chase to exclusively “negotiate on my behave”(sic) in the foreclosure. The other was an exclusive deal to help the Leahys sell their home. They never received copies.

Hantzakos reported later that the lender once again refused to budge. Enter Foxx, the president of Harrison & Chase.

Foxx, who is not registered in Illinois as either a real estate broker or mortgage broker, according to court records, had a new idea: The Leahys could place their house in a “protected trust,” which would shield them from creditors while they restored their own borrowing power so they could refinance.

Though the trust could sell the home, the Leahys would have the first crack at buying it back. The deal closed in October 2003, with the Leahys represented by a lawyer recommended by Harrison & Chase.

As they waited to sign the loan papers at the closing, the Leahys listened as the rescue folks complained among themselves about how many thousands of dollars they had spent for Chicago Cubs playoff tickets that fall.

“At the closing, it was really strange,” Pat recalls. “Nobody spoke to us. We were just alone in a corner.”

Though the Leahys say they never intended to relinquish title to the home, they later learned they had done just that—for $230,000 in an area where the lot alone can fetch $500,000 or more. After satisfying their other mortgage and paying property taxes, the Leahys walked away from the closing with $10,361.

What’s more, they wound up paying $2,500 a month to rent their own home back from the rescuers. They also agreed to pay as much as $290,000 to repurchase the home.


A bad situation quickly become perilous, as the Leahys could hardly make the $2,500 monthly payments. Ken suffered a stroke in July 2004 after the couple had to choose between his medication and paying the rent. A heart attack and a quadruple bypass followed in February 2005, and Ken was hospitalized again with heart problems that April. Some payments were late. Checks bounced for others.

Now the Leahys say they can’t pay the rent, let alone repurchase the place. Consumer advocates say they were snagged by a classic “sales leaseback” scheme.

(A Cook County circuit judge has placed on hold the eviction proceedings against them while the mortgage fraud case proceeds.)

“They kept saying, we don’t want your house,” Pat recalls. “We thought the deed would be in this land trust. We didn’t know we were signing over the deed.”

At their wits’ end, the Leahys went to legal aid lawyer Lindsey. Though they acknowledge that they still owe the defendants and entities they control more than $200,000 for paying off the previous mortgage, the Leahys want a court to void the deal so they can obtain more favorable financing elsewhere.

“It was Mr. Lindsey who later told us what we had done,” Pat says. “The lawyer we had at closing certainly didn’t.”

(The lawyer isn’t named in the suit, says Lindsey, because she wasn’t involved in the apparent deception of the Leahys, although the couple says she failed to adequately explain the transaction to them.)

Fighting mortgage fraud is something like putting out a fire on your own. More often than not, borrowers don’t seek independent legal advice until the flames have nearly consumed them. Still, lawyers for borrowers report success with arguments that focus on their clients’ intentions, rather than the black letter of the mountains of documents they sign.

Using a theory called equitable mortgage, borrowers like the Leahys argue that they never would have entered into such transactions had they known they were giving up their homes. Along with other evidence, the Leahys cite the “gross disparity” between what they got out of the rescue deal and their home’s actual value. Other factors courts can consider include the relative sophistication of the parties, whether the borrower had an independent lawyer, whether the borrower remains in the home after the “sale,” and whether the borrower still pays property taxes and homeowner’s—not renter’s—insurance.

“That’s our core claim,” Lindsey says. “If it looks smells, talks and walks like a mortgage, then the court should treat it as a mortgage.”

The Leahys also have included a count under the federal Truth in Lending Act’s predatory lending provision, triggered when interest on a mortgage exceeds a Treasury bond yield by 10 percent. Treasury bonds paid about 1.85 percent when the Leahys made the deal. By construing the entire transaction as a mortgage, including the $2,500 rent and the $290,000 it would cost to buy back the home, the Leahys calculate their rate at 29.9 percent.

They say the rescuers violated the act not only by failing to disclose the true nature of the deal but also by failing to tell the Leahys they had three days to rescind. Thus, the couple maintains that the statute extends to three years their right to rescission, which would automatically void the interest the defendants have acquired in their home.

The defendants, however, say a deal is a deal, and all the court needs to consider are the terms within the four corners of the documents the Leahys signed. They insist that the Leahys knew exactly what they were doing from the get-go. Though the Leahys acknowledge their debt, the defendants’ lawyer says the couple and others in similar circumstances are nothing but deadbeats.

Says lead defense lawyer William F. Sullivan of Skokie, a suburb just north of Chicago: “When people can’t meet their obligations, they try to make allegations to get out of them. We’re starting to see some very creative things.”

Sullivan describes his clients as the good guys in the otherwise cutthroat world of mortgage rescue. He says a number of borrowers have regained title to their homes by going through Harrison & Chase. After the Leahys sued them, Sullivan’s clients began videotaping closings.

In the meantime, however, the floor may have dropped out of the Illinois fraud market in January, when the state’s new Mortgage Rescue Fraud Act took effect.

Besides requiring extensive disclosures to borrowers about loan terms and their legal rights, the law limits mortgage-rescue-firm profits to 125 percent in cases where a borrower repurchases the home. If the borrower is unable to repurchase, then the rescuer must pay the borrower at least 82 percent of the home’s value. Under either scenario, the Leahy deal could not have occurred.

Sullivan says the new law means the end of the rescue business for his clients because they no longer can make enough money. “Put every protection under the sun in these closings so these borrowers are protected,” he says. “But when you start limiting the price, you start restricting the market.”

Meanwhile, the foreclosure crisis and mortgage fraud continue to confound legislators and regulators at the state and federal levels. Federal banking regulators have taken aim at subprime and other risky loans with calls for more careful consideration of a borrower’s ability to repay, more detailed disclosures of loan terms and more aggressive self-policing by lenders to avoid making bad loans. In the U.S. Senate, a bill introduced in April by Illinois Democrats Richard J. Durbin and Barack Obama addresses mortgage fraud directly by requiring a wide range of real estate professionals to report suspected scams. The bill also would enable borrowers with high-risk loans to challenge deceptive lending practices in foreclosure cases.

But James, the Illinois assistant attorney general, recalls the First Alliance case, where the state’s experts found no problem. He wonders what more disclosure would achieve.

“That taught me that disclosures don’t work,” James says. His office is urging state legislators to impose fiduciary duties on mortgage brokers, who often act as middlemen between borrowers and lenders, taking their cut along the way, sometimes fraudulently. Congress is considering a similar measure in a bill introduced by Sen. Charles E. Schumer, D-N.Y., who chairs the Joint Economic Committee.

James says the concept of duty is much simpler for judges and jurors to understand than the double-talk in a stack of loan documents.

“You have to impose the duty,” he says. “You cannot expect an unsophisticated consumer to read disclosures that are inscrutable.”

At least some temporary relief may be in sight. As the housing market cools, so has the market for mortgage-backed bonds and thus, consumer advocates say, opportunities for mortgage fraud. Skeptics, though, view that merely as a low point in a cycle and predict foreclosures and fraud eventually will rebound to dangerous levels.

Any help may arrive too late for the Leahys. If they lose and have to sell, the blue ranch on Pleasant Lane probably will be gone. The lot would be worth far more after a buyer razed the ranch and replaced it with a new house.

“Our house,” says Pat Leahy, “is a teardown.”



Reports of potential mortgage loan fraud have been rising steadily for the past decade, and they almost doubles from 2003 to 2004. The trend is expected to continue for 2006 once final figures are compiled.

Year — No. of reports

1996 — 1,318
1997 — 1,720
1998 — 2,269
1999 — 2,934
2000 — 3,515
2001 — 4,696
2002 — 5,387
2003 — 9,539
2004 — 18,391
2005 — 25,989

John Gibeaut is a senior writer for the ABA Journal.

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