The new civil frauds unit of the Southern District of New York’s U.S. Attorney’s office sued 14 lenders, sellers and appraisers today for conspiring to dupe 17 homeowners into buying properties they couldn’t afford.
The suit, filed by assistant U.S. Attorneys Li Yu and Cristine Irvin of SDNY’s civil frauds unit and attorneys from the U.S. Department of Housing and Urban Development, claims the sellers purchased 17 residential propertiess and flipped, or re-sold, them without substantial improvement to inexperienced, low-income buyers at overinflated prices. The buyers now stand to lose the properties through foreclosure and eviction proceedings.
The sellers worked with appraisers who allegedly overstated the value of the properties in their reports so that buyers would take out home mortgage loans that exceeded the property’s value, the complaint said. And lenders, including Cambridge Home Capital LLC, Buy-A-Home LLC, Gramercy Funding, and others, underwrote the mortgages, allegedly knowing the buyers didn’t have a clue they were paying too much for the properties and eventually would default on them.
The prosecutors, working in conjunction with President Barack Obama’s Financial Fraud Enforcement Task Force, asked a federal judge in Manhattan to enjoin the defendants from committing fraud against other unsuspecting homeowners.
U.S. Attorney Preet Bharara in Manhattan, who is co chair of the financial fraud task force’s Securities and Commodities Fraud Working Group, said today that the suit targets exactly the type of mortgage fraud that helped cause the current housing meltdown. Not only were homeowners duped “but also the government” was, too, he said, as all 17 loans were insured by HUD.
“This office will use every weapon in its arsenal to fight mortgage fraud, including its powerful civil remedies, and will hold those who participate in and profit from these schemes accountable for their actions,” Bharara said in a statement today.
The suit seeks millions of dollars in penalties. HUD OIG Special Agent Rene Febles said today that HUD OIG will continue to work with the SDNY U.S. Attorney’s office and other regional offices to tackle foreclosure scams.
Two financial institutions, Citibank, N.A., and Countrywide Bank, were tied to the fraudulent loans as their affiliates bought them from Cambridge on the secondary market.
New York real estate seller Mitchell Cohen, a defendant in the case, acquired the properties via flipping through three entities he controlled: Buy-a-Home, Metropolitan Housing LLC and Gramercy Funding Group, Ltd. He steered the buyers to Cambridge, which was authorized to underwrite the HUD-insured loans, according to the complaint.
The suit also charges Cambridge with creating false records to make the buyers appear more credit-worthy than they actually were, either by overstating their income or by understating their debts.
In one case, Cambridge fraudulently revised a buyer’s loan application to say the buyer was a head chef instead of a security guard, falsely overstating that buyer’s income by 50 percent, the suit said.
Also participating in the alleged conspiracy were several appraisers who allegedly submitted false appraisal reports that “hit the numbers” that Cohen and Cambridge need to value the homes at or about the inflated prices Cohen charged for them, the suit says.
The suit seeks penalities under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, a statute enacted in the 1980s as a tool to address the savings and loan crisis. The suit also seeks both damages and civil penalties pursuant to the False Claims Act.
Andrew Sandler of Washington, D.C.’s Buckley Sandler LLP said last month that the financial fraud task force is setting the Justice Department’s agenda for tackling the foreclosure crisis. It is adding value by setting priorities, he said.
The Justice Department is looking at foreclosure fraud as a macro problem that originated in larger financial institutions and worked its way down to smaller ones, according to lawyers familiar with the task force. They are trying to sort out glitches from systemic frauds.
Sandler believes that the state Attorneys General will handle most of the criminal foreclosure cases and the DOJ will continue to handle traditional securities frauds; stimulus fraud and TARP frauds; mortgage discrimination cases; and new civil frauds.
“It’s my expectation that foreclosure fraud will best be addressed by the state AGs and DOJ’s False Claims Act,” Sandler, a white collar practitioner who advises the task force, said in an interview earlier this month.
