Friday, August 3, 2007 -- The United States Attorney's Office Central District of California, yesterday announced the indictment of two highly successful Beverly Hills real estate agents and two licensed appraisers on multiple charges of conspiracy, bank fraud, and loan fraud (another term for mortgage fraud) in relation to an alleged illegal house flipping scheme.

Named in the indictment are Joseph Babajian and Kyle Grasso, agents with Prudential California Realty, and appraisers Lila Rizk of Trabuco Canyon and Scott Robinson of Dana Point. Babajian and Grasso were also charged with money laundering.

According to the press release from the Department of Justice, the "defendants and the previously-charged conspirators sent false documentation, including bogus purchase contracts and appraisals, to the victim banks to deceive them into unwittingly funding mortgage loans that were hundreds of thousands of dollars higher than the homes actually cost."

Previously charged in the case are Charles Elliott Fitzgerald, Mark Alan Abrams, Nicole LaViolette, Jamieson Matykowski, and Timothy Holland.

Grasso, Fitzgerald, and Abrams allegedly bought homes at market value on the condition that the original sellers and their agents keep the actual purchase prices confidential, and then conspired to inflate the purchase contracts to make it look as though they actually paid hundreds of thousands or millions of dollars more than they were actually paying. Rizk and Robinson allegedly inflated the appraisals to support the inflated prices.

According to the indictment, the team then sent false loan applications, many in the name of straw borrowers to banks to fool them into approving loans for significantly more than the actual purchase price. (A straw borrower is a made-up person or a real person who borrows the money in name only -- someone else is actually receiving the proceeds from the loan.) In-house escrow companies assisted in laundering the excess proceeds from the transaction.

After defrauding the banks, those charged in the scheme allegedly illegally flipped the houses to unload them on unsuspecting buyers at the inflated prices. Lehman Brothers Bank alone was allegedly deceived into funding more than 80 such inflated loans from 2000 into 2003, resulting in tens of millions of dollars in losses.

In one case in 2000, Fitzgerald and Abrams allegedly purchased a home in Beverly Hills for $2 million and told the bank that they paid $4.395 million. Rizk and Robinson supplied inflated appraisals, and Babajian and Grasso had the listing. The agents allegedly manipulated the Multiple Listing Service database to falsely report that the home was listed at and sold for $4.495 million. The group then submitted a bogus loan application to Lehman Brothers Bank in the name of a straw borrower, and the bank approved the loan for $2.8 million -- $800,000 more than what Fitzgerald and Abrams paid for the property. The fraudsters then split the excess loan proceeds including Babajian's and Grasso's $46,000 in commissions.

Although those charged are certainly innocent until proven guilty, the case draws attention to the growing problem of real estate fraud and mortgage fraud and the threat that fraud poses to the real estate industry and homeowners. Artificially inflated appraisals and mortgage fraud eventually result in inflated housing prices, higher loan default rates, increasing rates of foreclosures, higher property taxes, and the erosion of neighborhoods, not to mention the fact that this white collar crime is essentially bank robbery. Because appraisers consider recent purchase prices when calculating their appraisals, an inflated appraisal and purchase price can artificially raise the prices of all homes in a given area, making housing much less affordable.

If you think that cash back at closing and illegal house flipping are victimless crimes, think again. The victims are very real. Get involved. If you are a real estate professional who is bending the rules, stop it, encourage your colleagues to act with integrity, and report any suspected incidents of fraudulent transactions to local, state, and federal law enforcement. If you are a consumer, educate yourself, so you can spot the signs of fraud, stop it, and report it to authorities.