Monday, Jul. 05, 2010

Myrtle Beach area's real estate fallout based in fraud

Hundreds of mortgages containing false information helped fuel the Grand Strand's mid-decade condominium boom, putting buyers and others at risk for federal mortgage fraud charges, according to an analysis by The Sun News of area real estate transactions.

The false information was included to make the condo loans easier to sell to banks and investors on the secondary mortgage market.

Those who helped arrange the loans say they were simply doing what the banks wanted during an era of overheated enthusiasm for mortgage-backed securities on Wall Street.

Similar stories:

• Bad debt returns to bite Myrtle Beach area banks

  Bad debt returns to bite Myrtle Beach area banks

  A lawsuit filed against a former Myrtle Beach mortgage broker who has admitted to bank fraud illustrates a growing trend for banks that were duped by fraudulent loan applications during the real estate boom, and experts warn the fallout could put further pressure on banks already straining from real estate losses.

  Rock Hill-based Coastal Mortgage Services Inc. is suing Darin Epps, the former owner of Myrtle Beach-based Dunes Mortgage, over a loan Epps arranged for a condominium buyer in the Carolina Forest subdivision.

  The lawsuit is separate from a felony bank fraud charge that Epps pleaded guilty to in April. Epps has not yet been sentenced on the criminal charge.

• Myrtle Beach area loans lumped into spiraling mortgage-backed securities

  Myrtle Beach area loans lumped into spiraling mortgage-backed securities

  It took fewer than six months for the loan on a condominium unit at River Oaks Golf Villas to make its way from Myrtle Beach to Wall Street, but the fallout from that ill-fated mortgage and millions more like it nationwide likely will be felt for years.

  The mortgage-backed securities that fueled a rash of risky subprime loans - such as the one at River Oaks - are continuing to implode, hindering an economic recovery and costing U.S. residents billions of dollars in bank bailouts, home equity losses and vanishing personal wealth.

  "Every time you think you've turned the corner, there's another risk factor looming out there," said Frank Hefner, director of the office of economic analysis at the College of Charleston.

• Buyers cash in on Grand Strand real estate

  Buyers cash in on Grand Strand real estate

  A s the Grand Strand real estate market recovers from its collapse, what used to be the exception in real estate sales - a buyer paying cash - is becoming closer to the norm.

  With low-priced properties available and challenges getting a loan, especially for investment properties, buyers with cash stashed away are coming forward and driving the market.

  For buyers such as Peter Stack of Charlotte, N.C., it's the only way to take advantage of the good deals available on the Grand Strand.

• Real estate deals too good to be true; Buyers fall prey to fraud in Myrtle Beach area

  Real estate deals too good to be true; Buyers fall prey to fraud in Myrtle Beach area

  Robert Riley and his wife, Carol, admit they should have been more skeptical.

  But when a friend of a friend pitched a can't-miss real estate deal to them a little more than two years ago at their Bloomington, Calif., home, the Rileys quickly took the bait.

  "He said, 'I'll make you a deal and everybody is going to make some money,'" Robert Riley said, referring to the real estate pitch man. "It turns out we were nothing but a couple of suckers."

• Myrtle Beach area mortgage fraud assailed

  Myrtle Beach area mortgage fraud assailed

  Federal officials on Thursday announced a crackdown on mortgage fraud in the Myrtle Beach area and statewide through the formation of a U.S. attorney's financial crimes task force and an additional full-time prosecutor to handle real-estate-related cases exclusively.

  "The mortgage fraud problem is statewide, but the Myrtle Beach area is particularly vulnerable," William Nettles, the U.S. attorney for South Carolina, said during a news conference at Francis Marion University.

  Nettles said many Grand Strand home buyers in recent years have been victimized by a network of real estate professionals working together to steal money from banks.

The fallout, however, is a local condo market decimated by investor greed to the point where units cannot sell, new mortgages are nearly impossible to get and the FBI is investigating growing instances of fraud.

"There are very few sources of financing for them now," said David Brunko, president of Investors Mortgage Co. Inc., which, at 28 years in business, is one of this area's oldest mortgage brokerages.

Much of the misinformation can be traced to second-home riders. These mortgage documents made it appear to banks as if the condos were being purchased as second homes rather than for their actual use as investment properties to be rented on a regular basis to vacationers.

Experts say the mortgages were written as second-home loans, in part, because it was easier for mortgage brokers to qualify buyers for a second-home loan than a loan for an investment property.

Second-home loans also had lower interest rates and required smaller down payments than loans for investment properties.

More importantly, however, secondary-market investors were more eager to buy second-home loans than perceived riskier mortgages on investment properties.

For example, the Federal National Mortgage Association - better known as Fannie Mae - would not securitize loans on condo-hotel projects such as the ones built along the Grand Strand.

Most banks wanted loans that were eligible to be sold to Fannie Mae, so they did not want the condo-hotel loans, either.

Second-home loans, however, were eligible for Fannie Mae financing and hundreds of units at area condo-hotels - also known as condotels - were financed as second homes based on statements buyers made on their mortgage documents.

The second-home riders signed by buyers agree the property will be for the "borrower's exclusive use and enjoyment at all times."

The second-home rider also forbids the buyer from putting his or her condo into a rental pool or allowing a management firm to control the occupancy and use of the property.

"These were not second homes, but they were being represented as second homes" to banks, said Brian Boger, a Columbia lawyer who this year filed a lawsuit against Investors Mortgage over the issue.

That lawsuit has not yet been served on Investors Mortgage, Brunko said.

In addition to making the loans more marketable, the false information is an apparent violation of federal mortgage fraud laws, according to the FBI.

"If you're closing a loan on an investment property and a second-home rider shows up, that would be a problem," said Elizabeth Settle, an expert in real estate and banking law with the Hagood & Kerr law firm in Mount Pleasant.

Settle, who also is a member of the S.C. Bar Association's real estate practices section, said such practices are "a little piece of why we're in the situation we're in now."

Jeff Brunig, supervisor of the state's white-collar crimes program for the FBI, said that agency is recognizing a growing number of second-home fraud cases, particularly in the Myrtle Beach area.

Such fraud, Brunig said, usually does not become apparent until after the real estate market collapses and bad loans are scrutinized.

"The banks, in a lot of situations, were simply duped," Brunig said during a news conference last month in which the FBI and others announced a crackdown on mortgage fraud in the Myrtle Beach area and statewide.

"If all the paperwork looks appropriate, the bank is going to tend to make that loan, particularly in a market that's rising like it was at the beach," Brunig said. "It's in the rear-view mirror that we can question the banks and what they did."

While law enforcement typically has targeted brokers, lawyers and lenders in the crackdown, William Nettles, the U.S. attorney for South Carolina, said home buyers also are at risk.

"No one is immune to being prosecuted for mortgage fraud if they have committed a crime," Nettles said.

Not enough information

Yili Zhang, who owns a real estate agency in Rockville, Md., bought three condos along the Grand Strand's oceanfront during a two-day period in September 2005 - one at the Ocean Reef resort in Myrtle Beach and a pair at the Avista resort in North Myrtle Beach.

Zhang said she knew little about Myrtle Beach at the time, but a colleague convinced her the area would be a good investment.

"The husband of one of my colleagues plays golf and he went to Myrtle Beach and saw that there were so many beautiful condominiums on the waterfront," Zhang said. "They bought some and told us what a good buy it would be."

All of Zhang's condos have since gone into foreclosure, sticking a trio of banks with more than $1.1 million in bad debts.

"We tried to sell the property, but there was no way to cover the mortgage," she said.

Zhang's condos were among 252 first- or second-row condo properties purchased along the Grand Strand in 2005 with loans arranged by Investors Mortgage, according to county real estate records.

Eighty percent of those loans - 202 of them - included second-home riders.

Investors Mortgage was one of the area's most prolific condo mortgage providers during the boom.

In 2005, the company wrote mortgages for nearly one out of every five condos sold in Horry County census tracts that touch the oceanfront, according to federal Home Mortgage Disclosure Act data.

About 17 percent of those condo loans now are in foreclosure, with bank losses totaling $8.5 million so far.

It is not yet clear how many more condo mortgages arranged by other banks and brokers had the second-home riders.

Zhang said she bought her condos as investment property, not as second homes. Even so, she signed a second-home rider for one of the Avista condos.

Zhang said last week she was not familiar with the rider.

Boger said he doubts many buyers paid attention to or realized the significance of the documents they were signing. He said the mortgage brokers and lawyers who attended the real estate closings should have more clearly explained the documents.

"Somebody was not giving the buyers the proper advice they needed," he said.

Clearing up the gray

Brunko said condo loans were easier to get in 2005 because the Fannie Mae guidelines that many banks used were "very gray" and projects now clearly defined as condo-hotels could be construed as second homes back then.

Fannie Mae documents show the agency has never provided financing for loans secured by the types of condo-hotel units sold along the Grand Strand.

The agency's 2002 guidelines state that the availability of daily cleaning services, rental pooling agreements and the presence of a registration desk are among the factors that could make a project a condo-hotel and, thus, ineligible for financing.

The guidelines appeared to leave lenders some subjective wiggle room, however, by adding that "typical 'second home' projects in which the units may be rented on a short-term basis are not necessarily hotels.'"

"If we had any question about a property, we went to Fannie Mae and asked for clarification," Brunko said. "They would say, 'Well, it's got a lobby and commercial amenities, but that doesn't necessarily make it a condotel.'"

Brunko said Fannie Mae's guidelines were ill-defined during the height of the boom because the agency wanted to buy the condo mortgages just like every other secondary-market investor.

"Fannie was competing with Wall Street," he said. "They wanted to securitize those loans just like Wall Street was doing."

Fannie Mae spokesman Jason Vasquez said he could not comment on Brunko's assertions because he has seen no evidence to back them up.

Fannie Mae updated its guidelines in late 2006, adopting stricter definitions of condo-hotels and leaving no doubt about the lack of financing eligibility for many Grand Strand projects.

"You can't get those loans any more," Brunko said. "That's why it's such a tough market now."

The lawsuits

That lack of financing opportunity is at the heart of the lawsuit Boger filed against Investors Mortgage on behalf of Jennifer Powers, a former Myrtle Beach real estate agent who purchased four condos in 2005 with loans arranged by the mortgage brokerage.

Powers, in court documents, says Investors Mortgage misled her by telling her the unit she bought at Sands Beach Club was a condo that qualified for the type of Fannie Mae financing available for second homes.

Mortgage documents show Powers received a second-home loan for the unit, based in part on the second-home rider she signed.

When she tried to sell the unit in 2008, however, Powers said she learned it was instead a condotel that could no longer be financed.

Powers accuses Investors Mortgage of fraud, negligent misrepresentation and unfair trade practices.

Brunko, who said he has not seen the lawsuit, said the allegations are not true.

Among the documents in the lawsuit is a "condominium questionnaire" that loan underwriters or property managers must complete as part of a mortgage application. The questionnaire for Powers' condo states that her unit is eligible for second-home financing through Fannie Mae.

Boger said misstatements on that questionnaire played a major role in convincing a bank to provide financing for Powers.

The questionnaire purportedly was signed by Susan Hinson, an employee of Myrtle Beach-based The Noble Co., which was the property manager for Sands Beach Club at the time Powers bought her unit.

Hinson, in court documents, states that she did not complete the form and the signature is not hers.

Pat Nobles, president of The Noble Co., said his firm did not complete the form for Powers' condo.

"We are so conscious of the importance of those documents that many years ago we made the decision that only two people - myself and our vice president of operations [Jennifer Harmon] - can sign them," Nobles said.

Powers, in her lawsuit, said Investors Mortgage completed the questionnaire "in contravention to protocol so the loan would be underwritten without any questions."

Brunko said that is not true.

"She can allege that all she wants," he said.

In a separate lawsuit filed by Boger, condo buyer Robert Ferrell alleges that Myrtle Beach appraiser Kay Van Hoesen included false information on an appraisal to make it appear as if the unit he bought in 2005 was eligible for second-home financing through Fannie Mae.

Investors Mortgage also arranged the financing for Ferrell, according to county property records. Ferrell signed a second-home rider as part of the mortgage for the condo unit, property records show.

Van Hoesen did not return telephone calls. She has denied the allegations in court documents.

Boger said the two cases are representative of the widespread mortgage fraud that took place in the condo markets along the S.C. coast at the height of the real estate boom.

"I have 1,000 cases of this in my office," Boger said, referring to mortgages with false information. "All of it was fueled by the frenzy of rising property values."

Misleading information

It would be difficult for some buyers to argue that they did not know they were buying condo-hotel units, based on the marketing materials used to help sell the properties at the time.

Many of the units sold in 2005 were at established condo-hotel properties - such as the Bay Watch Resort in North Myrtle Beach and the Coral Beach Oceanfront Resort & Suites in Myrtle Beach - that advertised room rentals on the Internet and in publications geared toward vacationers.

The Multiple Listing Service operated by the Coastal Carolinas Association of Realtors also clearly stated that many of the units were being sold for their investment potential, with phrases such as "very good income" or "nice rental potential."

Some of those listings stated that the units were on rental programs, even though the mortgages used to obtain those units prohibited such rentals.

Powers, a former sales agent for Myrtle Beach-based Condolux, advertised a unit she was selling as having an "on-site rental company [and] good rental potential."

That unit was in the same building as the unit Powers now is suing over, claiming she did not know it was a condotel.

Ken Moss, a Little River lawyer, said the practice of using second-home riders for condo-hotel purchases was "rampant" during the real estate boom.

"Every closing attorney saw it," he said.

The banks also knew what was happening, said Richard Lovelace, a Conway lawyer who specializes in real estate and banking law.

Lovelace estimated 99 percent of the condos sold along the Grand Strand during the recent boom were investment properties. Only 1 percent truly qualified as second homes.

"The second-home rider is black and white, but what essentially happened is the banks said we don't care about it," Lovelace said, adding that greed influenced many loan decisions when condo sales were hot.

"The underwriting got sloppier and sloppier," he said. "It all goes out the window when the banks aren't paying attention."

Neither Moss nor Lovelace are among the lawyers listed on closing documents for the Investors Mortgage loans.

Most of the area condo loans that Investors Mortgage brokered in 2005 were for Cleveland-based Ohio Savings Bank, one of the dozens of banks nationwide that hedged their futures on a rising real estate market.

The bank, later known as AmTrust Bank, grew from a local savings and loan to one of the nation's largest mortgage lenders.

Ilene Angarola - director of communications for New York Community Bancorp Inc., which now operates Ohio Savings Bank's branches - said she cannot comment on the condo loans Ohio Savings Bank made in the Myrtle Beach area during the real estate boom.

That is because New York Community Bancorp acquired some of Ohio Savings Bank's assets and liabilities after it was seized by federal regulators last year, but did not play any role in the bank's loan decisions.

Ohio Savings Bank went into a financial tailspin starting in 2007 because of its exposure to risky real estate loans, according to an article in the Cleveland Plain Dealer newspaper. The Federal Deposit Insurance Corp. shut down the bank in December, citing $2 billion worth of toxic real estate loans, such as the ones made for Myrtle Beach area condos.