LI home borrowers turning to illegal default schemes

More Long Islanders faced with mortgages that are more than their homes' worth are turning to an illegal tactic.

They intentionally default and convince lenders to take less than owed in a "short sale" of the house, then covertly arrange for someone they trust to buy the home back for them at today's lower prices, say attorneys, lenders, real estate agents and federal officials. Or they wait for foreclosure, then give money to relatives or friends to buy new homes on their behalf.

It's hard to pull off, hard to catch and risky, but waning home prices have made the combination of "strategic default" and straw purchase tempting.

Some try because loan modifications, once the big hope of distressed borrowers, have been hard to get. Others want to get even with lenders who they feel unfairly gave them high-cost loans. Or they don't want to pay loans based on inflated, boom-era prices.

Prearranged deals cheat lenders, industry veterans said, but others call it karma: homeowners using the system, just like lenders did.

Difficult to track

Lenders, a housing nonprofit, attorneys and real estate agents in Lindenhurst, Oceanside, Bay Shore and elsewhere said they know such deals and attempts happen. The U.S. Department of Housing and Urban Development and mortgage giant Fannie Mae have new guidelines to foil strategic default schemes.

At least one Long Island lender and several agents say they have noticed an uptick in default-straw-purchase attempts but don't think it's widespread. Because it's illegal, participants don't come forward to talk.

About one applicant out of the 1,000 applications received each month by Continental Home Loans is caught trying to pull off the scheme, said Mike McHugh, head of the Melville-based lender. In the past, it was one or two per year, he said.

With fraud, not only the lender is cheated, McHugh said.

"The bottom line is somebody is being stuck with the loss," he said. "We're all paying for that every day. We're paying for that in the cost of our banking system. We're paying for that in the cost of our loans."

Steven A. Milner, chief executive of Mortgage Concepts in Bohemia, says he believes such maneuvers have increased, and his company has ratcheted up efforts to spot conspirators. "You have to look for a reason not to make a loan," he said.

In the past year, Bay Shore real estate broker Jose Martinez said he's refused to knowingly participate in about 12 deals set up by homeowners.

"They sit with me and they tell me, 'Look, I'm losing my house. But I got my cousin, who wants to buy it,' " said Martinez, head of Power Team Realty. "I say 'Whoa. Too much information.' I say, 'It's illegal. You cannot do it.' "

During a drive in Bay Shore, though, there was no shortage of homes for Martinez to point at - a friend here, a cousin here, a father's grown children, all acting as buyers, he said.

Martin, who's behind on his mortgage and didn't want his last name used, said he recently asked about eight friends to "buy" his Bay Shore house. But his friends turned him down, Martin said, so he hired a loan modification firm.

One agent's taleLast summer, Oceanside associate broker Patricia Jacobsen visited potential clients in Valley Stream, only to learn they wanted the home listed briefly, then marked "sold."

The couple had no problem paying, she said, but the home had lost value. Everything was in the wife's name, Jacobsen said, so the husband, whose last name was different, was to buy the house with help from a friend at a big lender.

"They were looking to drop like $125,000 off their existing mortgage," said Jacobsen, of Home and Hearth Real Estate.

When she balked, Jacobsen said, the couple put their lender friend on the phone: "He said, 'You will get your full commission. We have appraisers all lined up to show that the house is not valued at the money.' "

"I was told this is done . . . on a regular basis . . . He said to me, 'If you are not the person to do this, we'll get somebody who can.' "

The next week, Jacobsen said, she saw the listing, with another agency, quickly sold.

At the nonprofit Community Development Corp. of Long Island in Centereach, homeowner services manager Joanie LaFemina said several borrowers told her and the counselors that mortgage brokers, attorneys and agents suggested prearranged sales.

Some "investors" and foreclosure rescue firms jump on such deals, acting as both real estate and mortgage brokers so they can keep all fees, she said: "The buyer's already there. They can make quick capital on it."

Clearly fraud

Lying on loan papers or deliberately defaulting is fraud, said lenders and federal officials, from prosecutors to HUD officials. When reality differs from what borrowers and sellers say on documents, it can be evidence of fraud, they said.

Assistant U.S. Attorney Jonathan Green said straw purchases almost always involve fraud. "You can't deceive the bank into believing it's an arm's-length transaction when in fact it's not," said Green, the mortgage fraud task force coordinator at the U.S. attorney's office for the Eastern District, which covers the Island. "When you say that you're the primary resident and you're not, that's a lie."

No questions asked

Because he knows it is illegal and could endanger his license, Martinez said he has owners sign contract riders acknowledging that selling to a friend or relative "may be considered a fraudulent transaction."

But his policy is don't ask, don't tell. He said he found out after one closing that a sale of his was a strategic default, and he might unknowingly have been the agent on others: "I don't need to know, and I don't need to ask questions."

Martinez says he's lived or worked 20-plus years in the Bay Shore area, where a wave of foreclosures has left little hope - until now.

With loans they can now pay, he said, working-class owners spruce up homes with new siding, windows and more - face-lifts pulling up property values.

"They played the housing market and will have more equity in their homes than they ever expected when property values go back up."