Massive Mortgage/Real Estate Fraud in Temecula

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Submitted by mydogsarelazy on January 6, 2007 - 3:57pm

Hi Everyone,

This is from the North County Times of Jan 5th.

JS
______________________________________________________

Suit alleges massive mortgage scam

By: CHRIS BAGLEY - Staff Writer

A network of scam artists convinced unwitting investors to buy houses using questionable loans and then backed out, leaving the investors on the hook for as much as $5 million apiece, according to a lawsuit filed Friday in Riverside County Superior Court.

Temecula attorney Richard Ackerman filed the suit against Jovane Investments on behalf of an anonymous client, who he said was duped into buying five houses in and around Murrieta in early 2005.

The purchases allegedly relied on mortgage loans brokered by Stonewood Consulting Inc., Ackerman said. Stonewood isn't named as a defendant in the suit, but the company and its president appear to be at the center of tangled web of financial advisers and family members who were involved in the alleged scheme, he said.

Stonewood representatives did not immediately respond to e-mail messages or to calls to the company's Murrieta office and its president's cell phone.

According to the suit, the anonymous plaintiff is stuck with 10 loans and payment obligations of more than $20,000 a month, far beyond her ability to pay.

All told, the alleged scheme involved as many as 400 investors and an estimated $1.2 billion of property, Ackerman alleged in the complaint.

The district attorney's white-collar crime division began to investigate the matter late last year, Kelly Hansen, a senior supervisor in the office, said Friday. Hansen declined to comment on the specific case, but said it is one of 19 cases of alleged mortgage fraud the division is pursuing. Mortgage-fraud scams are particularly common when real estate values are already skyrocketing, as they were in Riverside County from 2003 through 2005, Hansen said.

The alleged scam worked like this, according to Ackerman and another attorney whose clients were involved: An investor would buy two, three or as many as eight houses within days of each other. Stonewood would apply for loans on behalf of the client, typically for two loans totalling 20 percent to 25 percent more than the appraised value of each house. The investor would pay the seller close to the asking price, typically $450,000 to $600,000. Jovane Investments would then pocket the excess cash, often $100,000 to $120,000.

Part of that money would be used to make regular mortgage and tax payments on the houses, the attorneys said. It seemed to be a great deal for the investors, the suit alleges, so they would bring in friends and family members. Most were middle-class professionals with annual incomes of $40,000 to $70,000, and many of them were nurses at Rancho Springs Medical Center, Ackerman said.

The cash from each new round of loans was used to cover the regular mortgage and tax payments on the last round, giving the arrangement the form of a classic "pyramid" scam, Ackerman said.

Aside from Jovane, the suit names Sunburst Financial Systems Inc., Oetting Enterprises and several lenders as defendants. The suit also cites payments among the defendants and other parties, including Stonewood Consulting and Hendrix Montecastro, Stonewood's chief executive; and his mother, Helen Montecastro, whom Ackerman said is a nurse at Rancho Springs. Ackerman said he expects to add additional defendants to the suit.

Ackerman said he was still trying to understand the exact relationship among the various participants. But financial documents and recorded telephone calls indicate all were involved, he said: The monthly mortgage payments came from Oetting Enterprises, known most recently to be based in Palm Desert; Jovane Investments was listed on one typical mortgage application as a securities firm managing $96,000 in a clients' assets, Ackerman said.

Sunburst is licensed to do business in Riverside County as Jovane Investments, according to county records. Sunburst is registered to a Chris Oetting of Palm Desert, according to state records.

Investors had no written guarantees that Oetting Enterprises would continue to make the monthly mortgage payments, said Ashley Abano, a San Diego attorney retained by two families that bought houses in the arrangement.

Things began to come apart in the fall, Abano said, when Oetting Enterprises simply stopped making payments on most of the loans. One of the families had taken out loans on eight investment properties and refinanced their own house, Abano said. The family received nine notices of default since mid-December, he said.

In most cases, the families put up little or none of their own money, the attorneys said. But several already have seen their credit ratings plummet, and several are in danger of being evicted from their own homes, the attorneys said.

Banks and other lenders can typically cover part of a defaulted loan by taking possession of the house and selling it.

"The lenders are the biggest victims of all," Ackerman said.

An investor with four, five or six mortgages who attempts to buy another house on credit would set off red flags among lenders, Ackerman noted, especially if he or she had no proven income from renting out the properties. But because most of the loans were completed within days of one another, they hadn't appeared on credit reports by the time the lenders checked, Ackerman said.

Ackerman's own client chose to sue anonymously after she received nonspecific threats over the telephone. Ackerman said he would apply for class-action status next week, a move that would allow him to represent numerous other investors who aren't already aware of the lawsuit.

Abano said he hadn't reviewed the complaint Ackerman filed, but might recommend that his clients join the suit after doing so.

Chris Oetting couldn't be reached for comment. Hendrix Montecastro didn't immediately respond to messages left on his cell phone and at Stonewood's office Friday afternoon. Helen Montecastro also could not be reached.

Stonewood's attorney, Bill Sauls, was in meetings Friday afternoon and couldn't be reached, according to another attorney in his San Diego office, who acknowledged the firm had received the lawsuit. Ackerman said Sauls has denied that Montecastro and Stonewood are involved with Jovane, a claim Ackerman rejected.

A San Diego financial adviser said three of her own clients were involved in the operation. Including investors known to the adviser, to Ackerman and to Abano, the alleged scam took in at least a dozen investors with two to three dozen properties.

"The total number of loans affected by Jovane-related activities is likely in the hundreds, if not thousands, within the Temecula/Murrieta area," the complaint filed Friday alleges.

Depending on the number of properties involved, and depending on how heavily the properties are concentrated in individual neighborhoods, the alleged scam could levy a big blow to local real estate values, according to Ackerman and one prominent real-estate agent.

Large numbers of empty, foreclosed homes in a neighborhood can make it difficult for the banks to sell them for close to the amount of the mortgages they issued. The empty homes for sale can also force other sellers to slash their prices.

Ackerman estimated that renters occupied half or more of the investment properties, but said they were not paying nearly enough to cover the mortgage payments.

Rising numbers of foreclosures last year have already begun to undercut the market, economists, analysts and real estate agents have said.

In Riverside County, one notice of default ---- the first step in foreclosure proceedings ---- was issued for every 330 residents in September, according to RealtyTrac, an information provider. That rate has been rising for more than a year and is now the highest rate in the state.

Contact staff writer Chris Bagley at (951) 676-4315, Ext. 2615, or cbagley@californian.com.

Submitted by TheBreeze on January 6, 2007 - 4:16pm.

Wow! That is huge. You know that if massive fraud has occurred in Temecula, that it has occurred in other areas as well. I think the real estate market is going to unravel quickly this year.

Submitted by JJGittes on January 6, 2007 - 4:34pm.

Its hard to know who to feel sorry for in this story. Seems like all parties were greedy and deserve to go down in flames. I guess the real victims might be the regular folks who made the unwitting mistake of buying their (one and only) homes in neighborhoods where this went on and will now see their equity vanish as the repos are dumped by the banks.

I wonder if this went on it places like 4S and San Elijo and maybe the Carmel Valley/ 56 corridor area.

Submitted by Steve Beebo on January 6, 2007 - 5:05pm.

I don't know how they got loans of 20-25% more than the homes' value, but some appraisers / mortgage brokers / escrow officers should probably go to jail in addition to losing their licenses, and the lenders must be complete idiots.

Submitted by lostkitty on January 7, 2007 - 10:28am.

Steve-
Isnt this how they did it?:

"An investor would buy two, three or as many as eight houses within days of each other"

I read soemwhere that if the deals were done simultaneously the lenders couldnt see that they were being scammed and couldnt see the multiple properties.

I agree - someone should go to jail.

Submitted by Bugs on January 7, 2007 - 10:40am.

A borrower can't pull out more money that the property is worth without a crooked appraisal from a crooked appraiser; and no crooked appraisal occurs except at the behest of a crooked loan originator and a stupid/crooked lender.

Submitted by salo_t on January 7, 2007 - 10:56am.

A friend of mine experienced this. She had her house on the market for three months without an offer but then she got a strange offer out of the blue. An "investment club" offered her full asking price plus an extra 80k on top of that. Only thing was that she would have to return the 80k at close of escrow. So the buyer would pay full price then come out of the deal with 80k in cash. I was trying to figure out how this made sense as an investment and also how they were able to do this in the first place. If maybe it was a group of people established as a corporation than wouldn't the individuals be free and clear when the crap hit the fan and able to bail with all the extra cash they collected?
Needless to say it wreaked of a scam so she passed on that offer.

Submitted by PerryChase on January 7, 2007 - 11:00am.

I would've taken that offer. What does it matter to your friend? Yes, she has good ethics. :)

Submitted by barnaby33 on January 7, 2007 - 11:12am.

Well Perry, you're honest and slimy at the same time. I'm not sure which affects me more; your honesty about a willingness to engage in fraud, or your recognition of it as such.

Josh

Submitted by salo_t on January 7, 2007 - 11:14am.

PC, something about being an accessory to a crime may have helped her shy away from that one. At any rate, a few weeks later some other dummy stepped up and gave her full asking price with a beautiful 100% interest only loan.

Submitted by FormerOwner on January 7, 2007 - 1:31pm.

The scale of this is incredible:
$1.2 billion worth of property / average value of $525K per property = 2,286 houses! The city of Murrieta has a population of 92,000. Assuming an average of 3 people per house, thats around 31,000 houses in the city. If 2,286 of them are owned by this investment group, that's 7% of the total number of houses in the city! Every one of them will probably foreclose or become a short sale. If half of the houses are in Temecula and half in Murrieta that would still be around 3.5% of the housing stock of both cities - just involved in this scam alone.

Add to that all of the people who got in over their heads with teaser-rate loans and all of the people over their heads with home equity loans and you've got a major meltdown underway. My guess is that the % of houses involved in this scam is dwarfed by the number of houses where people just got in over their heads and will not be able to continue making mortgage payments. What would happen to R/E values if 10%-20% of the houses in Temecula/Murrieta goes into foreclosure? Is this going to be another Texas oil-patch situation where there are thousands of empty houses no one wants?

Submitted by Steve Beebo on January 7, 2007 - 2:30pm.

 

According to this article in the Press-Enterprise,

 

http://www.pe.com/localnews/inland/stories/PE_News_Local_D_suit06.379821a.html

 

there are several hundred loans affected.  I think the attorney or the reporter misplaced a decimal point when they quoted the figure of $1.2 Billion.  Still, even a few hundred more possible REOs could do a lot more damage to the already weak market in that area.

Submitted by aguho on January 7, 2007 - 3:37pm.

I can tell by some of the players in this scam that we have many Filipinos involved.Attorney Abano is Filipino as are most of his clients,many of the nurses at Rancho Springs Medical Center are Filipino(as are many nurses in hospitals all over SoCal)

As I've said before, I believe the ethnic market (Filipino & Hispanic) here in SoCal will take the biggest hit as this current real estate cycle spirals down.Mortgage fraud is rampant in the South Bay, and it's just a matter of time before we see a similar story in SD County.

Everyone involved with this fraud in Riverside County is guilty in some way or another.There are no innocent victims here.Greed and dreams of "easy money" made these "investors" an easy target for scam artists.

How soon we forget Ed Rubi..Almost all of his victims were Filipino nurses and active/retired Navy personnel.They too, had dreams of "easy money" and let their own greed destroy themselves financially in the process.

Man Who Ran Ponzi Scheme gets 70 Months in Prison

On February 13, 2006, San Diego, CA, Edmundo P. Rubi was sentenced to 70 months in prison for conspiracy to commit mail fraud and money laundering. Rubi previously pleaded guilty to the charge that the conspired to conduct a scheme to defraud investors out of more than $12 million using his companies, Knights Express, Ltd. and Djmler Enterprises, Inc. Rubi was also ordered to pay restitution in the amount of $12,483,000. According to the plea agreement, beginning in 1999 and continuing up to October 31, 2001, Rubi formed and operated Knights Express Ltd. and Djmler Enterprises, Inc. for the purpose of soliciting investments from members of the public. In connection with his guilty plea, Rubi admitted that he made false, fraudulent, and misleading representations that investor funds would be used to purchase and resell Federal Reserve notes in an international trading program. In actuality, no such international trading program existed. Rubi further admitted that he knew that the investors’ funds were not being used for the purported investment program. Millions of dollars of investor funds were used instead to pay the periodic returns that investors received and to make unsecured investments. Rubi also intentionally concealed from investors the fact that millions of dollars of investor funds were converted for his own personal use and benefit.

Repeat after me.... Get Rich Quick Schemes Don't Work

aguho
88 SNDVL

Submitted by FormerOwner on January 7, 2007 - 4:28pm.

Aguho, I completely agree that the ethnic market will take the biggest hit. I've watched the demographics in Temecula change a lot over the last couple of years. I wouldn't really have major concerns about that except that a lot of the new home debtors don't appear to have jobs that pay anywhere near enough to buy houses at the prices they paid unless they're using extremely risky loans. They probably barely qualify at the initial teaser rate. Downpayments appear to be a thing of the past and debt/income ratios are going to get really ugly once the loans reset to higher rates. On top of that, you've got 1.6%-2% tax rates plus HOA's! I've also heard of a number of cases where people of roughly median income own multiple "investment" properties, all bought near the peak of the market. Yikes! I think a lot of these have nothing to do with the Stonewood scam but the owners are still stuck with huge debt on deflating assets.

Submitted by SD Realtor on January 7, 2007 - 11:25pm.

Steve this makes me think about that Poway listing I posted about awhile back.

SD Realtor

Submitted by The-Shoveler on January 8, 2007 - 7:40am.

Nor_LA-Temcu-SD-Guy

On a related subject,

Driving in this morning I heard a radio commercial for a law firm, Basically it was if you got one of these option arm loans, don't go down in flames, Sue the guy who signed you up for the loan.

Should be an interesting year, courts will be busy !!

Submitted by no_such_reality on January 8, 2007 - 9:45am.

The scale of this is incredible: $1.2 billion worth of property

The scale makes me think they actually thought they were legit. Most crooks and almost everybody in the money business knows when you smack it that large, they will come and find you.

As others said, there's no feeling sorry for anybody in this story. Not even the banks, they've known for years that appraisals are largely formalities.

I wonder if one of the changes we'll see after the credit bubble bursts is banks insisting on using their own appraiser.

Submitted by no_such_reality on January 8, 2007 - 9:45am.

The scale of this is incredible: $1.2 billion worth of property

The scale makes me think they actually thought they were legit. Most crooks and almost everybody in the money business knows when you smack it that large, they will come and find you.

As others said, there's no feeling sorry for anybody in this story. Not even the banks, they've known for years that appraisals are largely formalities.

I wonder if one of the changes we'll see after the credit bubble bursts is banks insisting on using their own appraiser.

Submitted by 4runner on January 8, 2007 - 10:07am.

No_such_reality (realty??),

Isn't the lack of a real appraisal a big part of the problem? Why would a bank insist on using their own appraiser when the loans are just going ot get securitized and sold?

The originators are just short-term holders of the debt...

Submitted by PerryChase on January 8, 2007 - 10:34am.

The lenders are in it for the revenue/profit growth. If they did it the old fashioned way, the capital would be secure but the business would be stagnant and no one will get rich. Now that lenders can off-load the risk, their have even more incentives to focus on the the origination, servicing and securitizing business that brings in big bucks.

It's not going to get better. It'll get worse until consumers can no longer afford any more debt.

The mortgage is just an extension of the credit card. It used to be that only the best customers could get credit cards. But now, it's much more profitable to give credit cards to everyone. So what if a big portion default? You can charge more fees to make up for it.

Think about it. If you make $10 per loan and make 10 prime loans, you have $100. You make 100 subprime loans at $15 each so now you have $1500. 25 might default 2 or 3 years down the road, but by that time it'll be someone else's problem.

This is an interesting PBS Frontline report on the history of credit card. Extend that to subprime mortgages and HELOCs and you have the situation today.
http://www.pbs.org/wgbh/pages/frontline/...

Submitted by no_such_reality on January 8, 2007 - 10:38am.

4runner, I see a couple reasons why:

1. If the loans default too soon or the ratios in the MBS bundle gets out of whack, they come back to the originator. Hence, the OwnIt implosion.

2. Many of the larger banks (BofA, Wells, etc.) keep a portion of their loans and service the loans in the MBS after securitization.

3. Perceived lack of quality in the MBS bundles will drive the required interest rate up, either through coupon rate or discounting to increase the yield to recover capital losses. The banks can't sell "$100M" of loans and only get $90M, the shareholder don't like the impact on the balance sheet.

Submitted by aztecnology on January 8, 2007 - 10:57am.

Massive fraud in my own backyard, this is great! I hope this unravels fast, and puts a stooper on any hopes of an '07 spring rally in the valley. This is potentially well over 2,000 houses in the area, and I think this is the tip of the iceberg in SoCal housing fraud...

Submitted by 4runner on January 8, 2007 - 1:53pm.

No_such,

I agree with you that all of these are likely to occur without a meaningful appraisal process.

I only question whether these are sufficient to outweigh the temptation for short term, easy profits. There is a fundamentally different paradigm between a lender who gets paid to originate loans with OPM and a lender who gets paid based on the rate of return on his/her own capital.

Yes, some banks do keep mortgage loans on their books. However, I can't imagine that originating a loan with them is much more difficult than originating a loan that is to be securitized, as postulated. From a consumer's perspective, they are equivalent. To be competitive, the banks who keep loans on their books have to adopt comparably shoddy lending practices.

As for changes in interest rate, people who buy MBS's "know" that the rate of default is "X," based on historical records. This is the same way that people who invest in stocks "know" that stocks return 10% per year on average. It takes time for the information regarding higher rates of default/lack of meaningful appraisals to work its way into people's consciousness.

Submitted by coreclient on March 15, 2007 - 9:09am.

You want to learn more about this scam or are a victim please check out this site for the latest news stories or details.
http://www.coreclient.110mb.com

Submitted by 23109VC on March 15, 2007 - 10:20am.

i should find one of these houses and buy it.. ;)

i hope this also adds fuel to the housing market that is going down in flames.

Temecula is a great area if you work there. you are 45 min from san diego, there is a plentiful supply of nice houses....and once the prices come back down to reality, you will be able to get a VERY nice house at a very modest price...

i live/work in temecula...currently renting...and wanting to buy but ONLY when it makes sense to do it. right now, you can rent a nice house a lot cheaper than you can buy the same house for...

I've seen 3000 sq ft. HIGHLY upgraded homes renting out at 1800-2000. lots of them are vacant... i bet you could "offer' less than asking and they'd take it just to get some cash flow... try buying that same home and you'll pay $5000/month in mortgage payments, taxes, HOAs,...

i rent. i've got neighbors who bought...and I see the cars they drive, and I know what they do for a living, and I KNOW they can't afford their lifestyle. big house, big cars, small income....

Submitted by ocrenter on November 19, 2009 - 11:23pm.

http://www.nctimes.com/news/local/swcoun...

http://www.pe.com/business/local/stories...

3 years later, the criminals behind the massive Temecula fraud ring are finally locked up.

thanks to Chris Bagley for the update

Submitted by paramount on November 19, 2009 - 11:36pm.

Thank you very much for the update.

And they were charged with Elder Abuse...can't get much lower than that.

Submitted by Rt.66 on November 20, 2009 - 9:27am.

What hit me square in the face when I read about these things are the poor people who just wanted to buy a home. Not an investment, but a home they could raise a family in and afford comfortably.

Any family wanting a home in that area during the bubble years had to bid against scammers like this. Add to that the fake inflated appraisals likely adding tens of thousands of dollars to the mortgages of families who purchased in the wake of the scam purchases/appraisals, and the pain grows.

I hope their punishment reflects the broader pain they caused the community.

Submitted by sdrealtor on November 20, 2009 - 9:30am.

Forget about elder abuse these parasites should be charged under Federal RICO laws.

Submitted by coreclient on February 1, 2010 - 9:15pm.

It has been sad how this has all played out, most of the alledged criminals are currently out on bail, 20 million dollar bail reduced to 50k, what a joke our justice system can be (most of the victims have BK'd and these alledge criminals use the money they stole to mount their defense with a high price attorney while out on bail), all we can do is hope for justice and have faith in the system. To check out the latest of our saga check see out website http://www.coreclient.110mb.com .

r/
cORE

Submitted by patb on February 1, 2010 - 9:50pm.

PerryChase wrote:
I would've taken that offer. What does it matter to your friend? Yes, she has good ethics. :)

Perry.

The matter is it's Fraud.

If a transaction doesn't match the HUD-1
to the penny it's fraud.

I went to buy my house, they had screwed up
and calculated property taxes off by one day.

it was like 6 bucks, i offered to pay cash, they
freaked out and said "No go have a sandwich we will
fix it up here".

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