How It Could Happen in 2008

How It Could Happen in 2008

Sam Hodgson

Real estate appraiser Todd Lackner tried to sound the alarm about questionable condo deals in Escondido and San Marcos.

Part two of a two-part series. Read part one.

Monday, April 13, 2009 | Todd Lackner thought he had finally found someone he could tell about the bizarre real estate sales he had been tracking.

One night in December, he watched television footage of Rep. Darrell Issa, R-Vista, the ranking Republican on the Oversight and Government Reform Committee, grilling the executives of Fannie Mae and Freddie Mac, giant mortgage companies overseen by the committee.

“That’s who I should call — one of the biggest scams in the nation is happening down the street from his office!” Lackner remembers thinking.

For several months, Lackner, a real estate appraiser and mortgage fraud expert, had tracked scores of condo conversion sales in three complexes in Escondido and San Marcos that carried telltale signs of a fishy deal, especially three years into the housing downturn in San Diego County.

The prices recorded on the condos were extravagant, some nearly three times the price of comparable units. A handful of the same names appeared to buy several condos each at the same time. Nearly all of the buyers listed a common mailing address: 3206 Baumberg in the Bay Area city of Hayward.

Lackner had suspicions about the loans used to finance the deals and knew they had likely been sold to Fannie Mae or Freddie Mac. He had plenty of questions for the mortgage executives, whose companies had just been taken over by the federal government, and he wanted Issa to press them on how the sales had gotten through.

Plus, Issa’s San Diego County office is less than six miles from the San Marcos complex, and about 11 miles from the Escondido properties, in a neighboring congressional district. Lackner sent a message via Issa’s website, but got an automated reply saying the congressman would not be able to respond because Lackner doesn’t live in Issa’s district.

Each of these deals somehow made it over the hurdles that the real estate industry and government agencies had erected to render impossible the easy-money excesses of the housing boom. By 2008, banks had started to set higher standards for who could borrow mortgages. Larger banks and mortgage investors had begun to more closely investigate what loans they were buying.

Or at least, that’s what the banks said they were doing in the wake of the subprime crisis that shook the industry and made getting a mortgage a formidable task.

That these 81 loans got through illustrates lingering weak points in post-subprime lending practices. The buyers were straw buyers, individuals who agreed to rent out their identities and good credit scores to a Bay Area man named Jim McConville, whose team obtained mortgages in their names but didn’t follow through on their promise to make the payments, a three-month voiceofsandiego.org investigation revealed.

Whether due to the savvy coordination of the mastermind and his straw buyers or a fault on the part of lenders, the deals show the home financing system — all the way up to the government-sponsored mortgage companies — remained vulnerable to greed and deception in the last year.

These vulnerabilities allowed one man’s network to capture more than $12.5 million, according to sales records, while leaving three San Diego County neighborhoods bracing for an onslaught of foreclosures. In the process, the deals likely add to the great toxic burden the American taxpayer is already bearing in the wake of the country’s mortgage meltdown.

Lackner had already tried to sound the alarm as the deals were closing throughout Sommerset Villas and Sommerset Woods in Escondido and Westlake Ranch in San Marcos earlier in 2008.

He submitted a report to Fannie Mae and Freddie Mac warning them not to buy any of the loans and alerting them that the deals seemed to indicate potential fraud.

Lackner received a form letter back from Fannie Mae. “Thank you for you (sic) inquiry,” the e-mail read. “In order to better assist you, your email has been forwarded to the appropriate party here at Fannie Mae. Please be assured that it will be handled properly and we will responded (sic) appropriately.”

But that was the last he heard from the company, even after he followed up with a phone call. Freddie Mac, on the other hand, called him at 8 a.m. the next day and soon sent an investigator to San Diego to review Lackner’s documents.

Lackner was on to something. But despite those warnings, dozens more condos sold over the next several months to the buyers who listed that same Baumberg address. The loans on those condos likely sold to Freddie Mac or Fannie Mae. If the units make it all the way through foreclosure, it’ll be known for certain which one — Fannie or Freddie — bought the loans.

Lenders Allen Nazari of All American Finance and Rick Gundzik of Pacific Residential Financing said they were duped into making these loans — tricked by McConville and borrowers whose credit and incomes appeared to be more than enough to sustain their investments. They said they were told nothing about a complicated scheme set up by McConville by which his company would snag millions of dollars from the deals. And they now question the appraisals that showed most of the condos to be worth more than $300,000.

McConville agreed to purchase at least 81 condos from distressed developers and orchestrated their sale at much higher prices to more than 20 buyers who had agreed to rent him their identities for $10,000 per condo. He told one buyer he needed the identities to expand his real estate empire because banks wouldn’t let him get mortgages for so many properties at once.

The people who rented McConville their identities believed he would make the mortgage payments, but the payments have stopped — ruining the buyers’ credit and sending the homes into default.

By arranging loans for purchase prices well above market value, McConville was able to pay off the developers and capture more than $12.5 million from the sales, according to documents from Premier Coastal Development, which represented the developers of the condos.

By 2008, the mortgage industry had nearly excised the troublesome innovations of the boom: mortgages that required no down payment; loans available to any borrower, regardless of credit history; and the no-doc loans for which borrowers needed not prove how much money they earned or had in the bank. Gone — or very scarce — were the loans with low, teaser monthly payments for the first few years that carried adjustable interest rates.

But McConville’s team found ways to exploit the system by finding buyers with good credit who could qualify for conventional loans. They got loans with 20 percent down payments and fixed interest rates, the lenders said.

Some experts posit the lenders could have done more to screen the loans. They could have called the buyers to scrutinize their intent, said Curt Novy, president of Corporate Mortgage Advisors, a San Diego-based mortgage fraud investigation firm. Or at least, he said, the lenders could have checked the property appraisals against San Diego real estate listings to learn that there were condos listed or selling for hundreds of thousands of dollars less than McConville’s buyers’ purchases in the same complexes.

“I would see this in 2004, or 2005, when [the lenders] are overwhelmed with work, but in 2008, there’s no excuse,” Novy said. “In this market, in the last year, year-and-a-half, you should be asking questions.”

The fallout from the defaulting loans forced Nazari to close his company’s doors and lay off about 40 employees, he said. And more damage may yet be in store for the other lenders and U.S. taxpayers.

The housing boom this decade spawned innovations in not just the obtaining of a mortgage, but the funding of it by banks. The securitization of mortgages meant a bank could lend a mortgage, then bundle it with several other loans into bunches called mortgage-backed securities. Bigger banks or groups of investors snatched up those bundles, so lenders could make loans with the expectation that they could sell them on to one of these groups and take themselves off the hook for the debt.

But when loans nationwide began to go bad as the housing market declined, many investment groups started losing money and pulled out of the securitization business.

In 2008, when the loans were made to McConville’s buyers, some of the only companies still willing to buy these bundles of mortgages were Fannie Mae and Freddie Mac, even though the mortgage mess had affected them, too.

At the tail end of McConville’s deals, last September, the federal government took over Fannie and Freddie, assuming more direct control of the companies’ day-to-day operation and pumped in funding to absorb their losses. Now the taxpayers own 79.9 percent of Fannie Mae and Freddie Mac.

“You and I are getting stuck with these inflated loans, via Fannie and Freddie,” Lackner said.

There is a way out, as long as the smaller lenders who made the loans to McConville’s buyers still exist. On any loans Fannie and Freddie bought, if they discover fraud or faults in underwriting in the loans, they’ll send them down the chain, requiring the investor that sold the loans to the giants to buy them back. Ultimately, the original lenders might face those buybacks, said Michael Lea, a former chief economist for Freddie Mac.

But the small lenders who made these mortgages might not be in business anymore — like Nazari’s All American Finance. In that case, the loans would be assumed by the last standing link in the chain.

Even before it’s known whether Fannie and Freddie will send the loans back, the congressman Lackner reached out a few months ago has taken note of his concerns.

Frederick Hill, Issa’s spokesman, said Lackner’s original message went unnoticed because the lawmaker’s website is set up to weed out messages that come from outside the district. “It’s one of those frustrating things — we get a million messages a day,” Hill said. “It’s like trying to find a needle in a haystack to get to constituent concerns.”

Issa’s office did, however, respond to Lackner’s complaint when recently informed of it by voiceofsandiego.org. Last week, an investigator from the Oversight and Government Reform Committee contacted Lackner, who agreed to supply information about the McConville transactions.

“We’re absolutely looking forward to reviewing them and to taking the next steps in the investigation,” Hill said.

Lea, the mortgage industry veteran, said he wasn’t shocked to see the system’s susceptibility to the efforts of a mastermind and more than 20 individuals to get these loans through.

“Certainly there have been and were at that time and probably ever shall be ways of gaming the system if you’re smart enough, particularly if it relates to fraud,” Lea said.

“Having straw buyers and inflated appraisals is something that is not new and not part of subprime lending, per se; it’s been in the system for decades.”

Please contact Kelly Bennett or Will Carless directly at kelly.bennett@voiceofsandiego.org or will.carless@voiceofsandiego.org with your thoughts, ideas, personal stories or tips.

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Kelly Bennett

Kelly Bennett

Kelly Bennett is a freelance contributor to Voice of San Diego. You can reach her directly at kelly@vosd.org.

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Will Carless

Will Carless

Will Carless is the former head of investigations at Voice of San Diego. He currently lives in Montevideo, Uruguay, where he is a freelance foreign correspondent and occasional contributor to VOSD. You can reach him at will.carless.work@gmail.com.

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