The Fraud Squad

by Howard Goodman

MIAMI -- The sun-seared condominiums along Brickell Avenue stand tall and shiny, but these days they're pockmarked with vacant units, one after the other ⎯ the foreclosed detritus of what was once Boom City.

This part of Florida has seen more than its share of real-estate bubbles over the years and been home to countless schemes, scams, and cons. There's a reason some call it "Fort Frauderdale."

So, no one should be surprised that the mortgage meltdown here presented a plenitude of new opportunities for wrongdoing ⎯ bad actors getting in on the anything-goes market to rake off thousands or millions in profits, inflating property values as if injecting them with steroids, and, when it all imploded, ultimately leaving behind blighted neighborhoods and victims with emptied bank accounts and ruined credit. Not for nothing is the Sunshine State a perennial leader on the mortgage industry's annual Fraud Index.

The surprise is that South Florida is leading the way in cleaning up the toxic real-estate mess.

Last month, Congress passed, and President Obama signed, the Fraud Enforcement and Recovery Act, which gives prosecutors and regulators new tools to crack down on mortgage fraud and predatory lending. Among other things, the new law establishes a National Mortgage Fraud Task Force within the U.S. Justice Department.

The inspiration for this new crime-fighting entity: the economic-crimes division of the Miami-Dade Police Department.

Police in Miami-Dade County made fighting mortgage fraud a top priority as early as 2006, when the housing bubble was still expanding. "We had a couple of very smart investigators in economic crimes who'd both been real-estate agents, and they could see it coming," says Glenn Theobald, the police department's chief counsel.

At the time, no state statute even defined mortgage fraud. "It was hard to make a judge see that a crime had been committed," recalls Theobald, a 26-year veteran cop with a weightlifter's build and a law degree. So he drafted a bill, saw it through the Florida Legislature, and in 2007, under the new law, it became a third-degree felony ⎯ later raised to second-degree-to knowingly make a material misstatement, misrepresentation, or omission in the mortgage lending process.


Now, if an appraiser falsified a property value to inflate someone's profits, for example, the cops could take action.

THE STRIKE FORCE

With strong backing from Mayor Carlos Alvarez and Police Director Robert Parker, the county formed a mortgage task force, with Theobald at its helm. The unit got started in September 2007 with a staff of five. A year and a half later, the unit's 19 investigators and supervisors have made almost 150 arrests. We're talking cases that rival, in complexity, the painstaking drug-organization takedowns of "The Wire."

Yet, the problem was exploding.

In Miami-Dade County, just 16 suspected mortgage-fraud cases were reported in 2005 and 78 in 2006. They rocketed past 800 in 2007 and topped 1,000 in 2008. (The actual incidence is undoubtedly much higher.)

The foreclosure numbers soared, too.

In 2007, Miami-Dade had 26,391 foreclosures, more than twice the figure for the previous year. In 2008, foreclosures more than doubled again, to 56,656-one for every 32 households.

And that just begins to describe the damage. The inflated real-estate values pushed up property taxes. When the bubble burst, homeowners walked away from their overpriced mortgages and too-high taxes, foreclosures soared, home prices plummeted, buildings and developments were blacklisted by banks. Neighborhoods deteriorated.

At first, Theobald thought that region-wide action was needed, but soon he realized that the same thing was going on from coast to coast. He made dozens of trips to the nation's capital and to points around the country. Last year, Rep. Kendrick Meek, a Democrat from Miami, introduced a bill based on Theobald's idea for a national task force, and the measure was eventually folded into the fraud-enforcement bill that Obama signed last month.

"The bad guys we stop here shouldn't be allowed to move on to Nevada, say, and do the same thing there," Theobald says. "This isn't baseball, there's no three strikes. You're convicted once, you're done."

HOOKING THE BIG FISH

Kenneth Thomas, a Miami-based banking expert and economist, says all the mortgage fraud is reminiscent of the cocaine-crazed '80s, when banks in South Florida were so besieged by deposits of cash that began weighing piles of bills instead of counting them.

"There wasn't enough law enforcement to handle it," Thomas recalls. "That's how mortgage fraud has become. Law enforcement can't keep up."

Not that the feds aren't trying.

The FBI has been stepping up mortgage-fraud investigations. It has assigned 180 special agents to mortgage fraud, up from 120 in 2007, and last year its Operation Malicious Mortgage brought more than 400 arrests.

"In general, we tend to focus on entire rings of fraudsters that collaborate among each other to commit very egregious crimes in multiple millions of dollars," says William Stern, a senior FBI agent who runs mortgage-fraud investigations out of West Palm Beach.

The approach has nabbed some big prizes. Just last month the local U.S. attorney indicted a married couple and the husband's brother-Garry and Yvonne Souffrant, both 33, and Gamaliel Souffrant, 44-for using Progressive Real Estate of Broward, Inc., "to launder millions of dollars in drug proceeds through an extensive mortgage fraud scheme." They were allegedly using straw buyers to help drug dealers buy homes and luxury cars and pocketing millions in mortgage-loan proceeds for themselves. Convictions could bring sentences of up to 40 years.

That big-case strategy makes it possible to nab the worst players and nail them with heavy prison time. But, as Theobald points out, it also means passing over an awful lot of smaller frauds.

"They're not getting to 98 percent of the cases," he says.

According to the FBI, there were 63,173 reported cases of suspected mortgage fraud nationwide in fiscal 2007 (a 36 percent increase over the previous year), and an additional 28,873 cases through February 2009. Against that deluge, FBI officials say the bureau is working not even 2,000 open cases.

DISSECTING THE MONEY TRAIL

In a simple form of the fraud, someone buys a $200,000 condo, has it fraudulently appraised at $800,000, and sells it to a straw buyer-a person who doesn't intend to live in the condo but whose good credit wins a loan. The first guy pays off the original $200,000 loan, and the two of them split the $600,000 difference. No one pays on the $800,000 mortgage, the condo goes into foreclosure, and a bank is stuck with the bill.

Lots of cases are slicker. "This is a crime that evolves," says Sergeant David Goldberger, an investigator with the Miami-Dade Mortgage Fraud Task Force.

Example: Instead of the condo merely selling for $800,000, add the element of phony paperwork: In a quick pivot, the HUD document that actually goes to the lender falsely shows the sale at $1.6 million to an altogether different buyer. A middleman pockets the difference of the two quick transactions.

Now you've got a fraud that involves a lot of players: a shadowy orchestrator and maybe a dirty title agent, a mortgage broker, an appraiser, and the willing or duped straw buyer.

Good luck sorting it all out. "Sometimes you have to dissect the money trail to the minute," says Perry Pitelli, a detective with the task force.

The fraud is often connected with other types of crime, investigators say. Many schemes, for example, are tied to identity theft. Some of the same players turn up in Medicare fraud or immigrant-smuggling cases.

It can easily take six months to investigate a single case, Theobald says. That's why it's a good idea to tap local and state police departments. "They have the manpower," Theobald says, "but they need the training."

Under the new law, the Attorney General Eric Holder is supposed to help with that by setting up a task force that coordinates law-enforcement efforts in the 10 states with the worst mortgage fraud.

Theobald, who's thrilled to see his work turned into a federal law, says that Holder's staff has been in touch with him.

So the feds want to learn from the locals? "I know," Theobald says. "Isn't it cool?"