The FBI is investigating a massive fraud case in which an unnamed Spokane, Wash., mortgage brokerage firm and its two principle owners allegedly used inflated appraisals and fake documents to induce at least one funding lender to make more than $25 million in mortgages that turned out to be practically worthless.

In one instance documented by the Washington Department of Financial Institutions, a property that sold for $40,000 was appraised at $74,000 just a month later and resold for $73,500.

More than a year after that, the same property was sold at foreclosure to the lender for $64,000, a loss of almost $10,000. But when the lender was finally able to sell the house six months later, it fetched just $16,000, resulting in a total loss of more than $58,000.

"The buyers and sellers of these properties were the victims, but this particular lender took a really big hit," said Enforcement Supervisor Chuck Cross. "The same type of thing was repeated dozens of times over."

Although one wholesale lender appears to have been the main target, the case involves multiple lenders, according to Cross. And while it is centered mainly in Spokane, a town of 300,000 in the western part of the state, it "may bleed over" to Idaho and possibly even Oregon, he says.

The alleged fraud was uncovered by state authorities when numerous complaints were filed with the Attorney General's office and the Department of Licensing by individual buyers. Grievances also were filed against the originator by real estate professionals and businesses affected by the company's practices.

Also under investigation to determine the extent of their role in the scheme are a real estate agent, a realty broker and a pair of appraisers.

State authorities believe that more than 1,000 fraudulent appraisals may have been used in 1999 alone. Of the 73 properties reviewed by investigators, 66 have been in foreclosure.

"Our investigation confirms that the company appears to have violated the Mortgage Brokers Practices Act by engaging in business practices apparently designed to skim the equity on properties and to mislead borrowers, sellers and lenders," the examiner's report says.

The company allegedly used two different variations of the same scheme.

In one version, the real estate agent referred a buyer to the broker, which directed the agent to write a "new purchase agreement" that exceeded the list price of the property. The difference in the two prices was then written up as a second mortgage and given to the unsuspecting seller in place of a cash proceeds from the transaction.

But in a document that was not disclosed to the lender or the seller, the second mortgage was discounted to $1 or forgiven altogether. Consequently, sellers never received any payments.

In the other variation, the seller was sometimes part of the scheme. But those who were not were promised the buyer had good credit and that the mortgage company would monitor the transaction and report any problems.

In both instances, the buyers were poor credit risks who were not likely to have qualified for mortgages without fraudulent assistance.

The illusory second mortgages were created to hide the inflated price of the properties from unsuspecting wholesale lenders. In one case, the "owner" allegedly forgave a total of $83,400 to four different buyers, but none of this information was given to the lender who purchased the loans.

In other instances, downpayments were not disclosed on the final settlement sheets or were paid outside of closing. And in yet other cases, cash that was allegedly paid by the borrowers actually came from money loaned to them by the loan broker.

For more articles by Lew Sichelman, please press here.

Published: August 29, 2001

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.