Hot Housing Market Opens Doors for Fraud

In New York, where the real estate market is superheated and state investigators talk of a thriving "thieves market," state Attorney General Eliot L. Spitzer is now investigating three large real estate firms under suspicion of defrauding hundreds of home buyers. But it is difficult to shut down even repeat violators.

In 2001, Spitzer's office forced First Home Brokerage to pay $1.5 million in restitution for home buyers who purchased decrepit properties advertised as "totally renovated." In 2003, the New York City Department of Consumer Affairs found that another large real estate company, Better Homes Depot, had taken "unconscionable" advantage of home buyers by inflating prices and failing to make promised repairs. Better Homes paid $600,000 in restitution and fines for bilking dozens of buyers by inflating prices and failing to make repairs.

Both firms continue to operate and draw lawsuits from angry customers who allege fraudulent practices. Eric Fessler, president of Better Homes Depot, pleaded guilty in 1992 to income tax evasion and paying kickbacks to lawyers who referred clients to his former mortgage bank. Since leaving prison, he has continued to make tens of millions of dollars in the real estate business.

"This stuff is old news -- I never admitted anything, and I have thousands of satisfied customers," he said. "From a dollar point of view, it was less expensive to settle than to fight the city."

Fraud Zone

A decade ago, Jefferson Avenue in working-class Brooklyn was in the throes of a smack-and-crack fever. The avenue is safer now. But middle-class hipsters have discovered its old townhouses, and real estate is the new drug. HUD lists it as a "hot zone" for mortgage fraud.

A large yellow banner hangs off the top of a dowdy walk-up apartment building: "WHY RENT? CASH 4 HOMES. No Down Payment! No Closing Costs!" Neal Faulkner, a 48-year-old who works at a Manhattan hotel, displays a rummy hand of seven business cards he has collected in the past three months from men who want to buy or refinance his house.

"They offer me $2,000 to point out homes for sale," he said. "These same guys convinced my mother to refinance and repair her home -- except that they never made repairs," he said. "She's old and sick and she's got a $170,000 balloon payment at 12 percent interest. They destroyed her wealth."

It is hard to come by precise numbers of those defrauded because -- in New York City or across the nation -- many victims don't realize they have been defrauded or are too embarrassed to step forward. And many sectors of the mortgage industry are not required to report potential wrongdoing.

But interviews with two dozen homeowners, lawyers, mortgage counselors, and city, state and federal investigators suggest there are thousands of victims in New York alone. Disreputable mortgage companies target the elderly because they have built up so much home equity. They target immigrants and renters because they often understand little about buying homes.

Rene Arlain, housing director for the Cypress Hills Local Development Corporation, not far from Jefferson Avenue, counsels dozens of families who spend 70 percent or more of their income on mortgage payments. "The American dream of homeownership supersedes common sense," Arlain said. "The brokers and mortgage firms know that."

These new homeowners are easy prey. Deed theft is classic bait and switch. "Mortgage rescue" experts persuade overburdened homeowners to "temporarily" surrender the title to their house while an "expert" straightens out the mortgage. The "expert" then resells the house to the homeowner at a vastly inflated price -- or simply evicts the family.

"Some scammers sneak in a deed-transfer document as the homeowner signs a pile of papers," said Ludwig of the Neighborhood Economic Development Advocacy Project. "A family in Queens literally wound up on the street."