Alleged scams dotted foreclosure landscape, Bloated loans played key role in federal case that led to indictments

July 6, 2008, 9:14AM
Alleged scams dotted foreclosure landscape
Bloated loans played key role in federal case that led to indictments

By LISE OLSEN
Copyright 2008 Houston Chronicle

RESOURCES
Sales started slowly at Briar Hollow, a low-slung building with arched balconies that debuted without the big views, posh pool and other amenities of its condo competitors in Uptown near the Galleria. After a year on the Houston real estate market, more than half the units remained unsold.

But in just one month in 2006, two buyers in their 20s closed on three condos — paying as much as $490,000 for just 1,600 square feet. A succession of similarly bloated sales followed. By the end of the year, many buyers were unable or unwilling to make payments and nine of 24 units had been lost to foreclosure.

Many of the sales, it turned out, were part of an alleged $24 million mortgage fraud scheme in which investors and others recruited buyers and supplied them with bogus documents that qualified them for exorbitant loans for Houston homes and condos, according to a recent federal indictment.

After obtaining as much as $100,000 per sale above true property values, part of the loan proceeds were then illegally transferred to co-conspirators in the scheme, as well as to buyers themselves, federal records show.

The pattern of inflated sales prices, absentee ownership and high foreclosure rates repeated itself at several other visible condo projects in pricey Houston neighborhoods: the Bristol Condominiums near the Galleria, the Rutland Lofts in the Heights and the high-rise Tremont Tower in Montrose.

The mortgage scams had gone on since at least May 2004, the indictment said.

David Zugheri, a Galleria-area mortgage company president and former government investigator, said he was stunned such obvious fraud had gone on so long.

"First there was one problem sale, then two, then three. Then a whole building, then other whole buildings," he said. "It was the most awesome display of catch me if you can."


'Taken a huge toll'
So far, six people — four real estate investors and two loan officers, have been publicly accused of engineering the $24 million Houston scam, though the indictment repeatedly refers to unnamed "co-conspirators." The six were among 60 rounded up nationally as part of "Operation Malicious Mortgage" — an effort by federal enforcement officials to target widespread mortgage fraud that has slammed real estate markets nationwide.

The fraud operations "have taken a huge toll" on the local economy, said FBI Special Agent Kristin Rehler, assigned to the multiagency Mortgage Fraud Task force in Houston.

She said when the task force first formed in 2005, investigators saw "a mortgage crisis in the making" because of lax lending practices, generous buyer incentives and entrepreneurs willing to cut corners — or break laws — to make big bucks.

Only $4 million of the $24 million in fraudulent mortgages are detailed in federal court records so far. The case involves more than 60 properties, but it details just a few deals.

The three Briar Hollow sales from January 2006 are specifically singled out.


Allegedly recruited
In the fall of 2005, conspirators recruited a 23-year-old single woman and supplied apparently fraudulent employment and rental history documents needed for her to qualify for loans totaling $434,100 for the 1,487-square-foot unit. The buyer has not been charged and could not be reached for comment.

Legitimate closing fees, including a real estate commission, would have cost around 10 percent or $43,000, experts said.

Yet Southern American Title Company, a now-defunct Houston company, transferred $85,000 of the proceeds to various accounts controlled by real estate investors involved in the scam, the indictment says. One of the investors indicted then cut a check of $6,000 to the buyer.

The same buyer also bought a unit at Tremont Tower condominiums in Montrose, another suspect deal the indictment describes as a $367,500 fraud, records show.

Tremont Tower, a Montrose high-rise with one of the region's highest foreclosure rates, was another casualty of the mortgage fraud scheme — along with other troubles, records show.

Within 11 months, the 23-year-old, unable to make payments on allegedly fraudulent mortgages, lost both places to foreclosure.


Others indicted
Meanwhile, accused investors and loan officers kept working other condo deals.

Some of the largest illicit payments from fraudulent mortgages allegedly were funneled to an investor named Latasha Rene Bellow, a former Katy resident who used the company name Nu Management and Development. She was one of the six indicted in connection with the scam.

Most of the red-flagged loans were processed by Kristen Way or Robert W. Stanley, both indicted, and both former employees of a defunct high-volume Houston mortgage company called Consumer Direct Mortgage.

Bellow, Way and Stanley have all denied the allegations.

It's not clear which employee processed which loan, or how much the two knew about the buyers or documents supplied by others.

But it was their job as loan officers to review and verify borrower information and submit documents to lenders. Both have expired loan officer licenses in Texas, according to the Texas Department of Savings and Mortgage Lending.

At least two more fraudulent Briar Hollow deals closed in January 2006, the indictment says. The buyer was another former Consumer Direct Mortgage employee, records show.

The buyer, single and in his 20s, took out loans totalling $855,500 to buy two units that month, according to public loan documents. The same two units were valued at just $647,500 in 2007, according to the latest Harris County Appraisal District data available.


Lost to foreclosure
When both sales closed, Southern American Title Company transferred $85,000 of the loan proceeds to a company run by Bellow, the Katy investor associated with Nu Management and Development, the indictment says. Bellow is neither licensed as a real estate agent nor a loan officer in Texas, records show.

Separately, the loan officers, Stanley and Way, each collected $11,990 payments from their employer, Consumer Direct Mortgage, related to the sales, the indictment said. Way got another $3,900 from Bellow, the indictment says.

The buyer, unable to keep up with payments on the allegedly fraudulent loans, lost one condo to foreclosure, records show. He did not return phone calls from the Houston Chronicle.

In the nearby Bristol Condominiums, Stanley, one of the indicted loan officers, also purchased a condo — a deal described as an example of wire fraud in the federal court indictment. Stanley's family members also invested in the deals.

Stanley's former supervisor, Bobby Gilbert Jr., said in an interview that he didn't know what was happening with the Briar Hollow loans, though he ran Consumer Direct and sponsored license applications for Stanley and Way, the loan officers. Gilbert said he shut down his business in 2006 when he realized there had been trouble and got a job where he no longer uses his own loan officer's license, which expired.


The fallout
Gilbert said he's cooperating with the ongoing FBI investigation. The feds "told me stuff I didn't know," he said. "I wasn't involved in it, but it happened under my watch."

In recent years, more than one-third of the 24 units at Briar Hollow have been resold at least once because of foreclosures. Foreclosure rates were even higher at the Rutland Lofts, a rehabbed apartment building in the Heights, and at Tremont Towers in Montrose. Both have had the majority of their units lost to foreclosure.

At least two of the lenders who underwrote fraudulent mortgages described in the indictment are bankrupt. So is the company that marketed two of the four condo projects.

Zugheri expects more to come. "I think this is just a random sample of something much bigger."

lise.olsen@chron.com