San Diego Housing Market News and Analysis
Massive Mortgage/Real Estate Fraud in Temecula
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Submitted by mydogsarelazy on January 6, 2007 - 3:57pm
This is from the North County Times of Jan 5th.
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 firstname.lastname@example.org.
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