Lenders foreclose on at least 20 properties in mortgage scheme

October 20, 2008

Charter Homes recruited and paid buyers to take out inflated mortgages on dozens of central Indiana homes it built, promising to manage the properties as rentals and make payments for the owners, current and former Charter business partners say.

The 3-year-old local company took advantage of eager real estate investors by offering them a cash bounty for each home purchased, along with checks from Charter to cover down payments. But as lax credit markets tightened and home values reversed course, the scheme began to crumble, an IBJ investigation has found.

Lenders now are foreclosing on at least 20 homes in five Charter subdivisions in the Indianapolis area. The lenders say they haven't received payments since May, even though Charter continues to collect rent.

Charter also is facing numerous liens and more than a dozen lawsuits from unpaid contractors. And its 50 or so home buyers are facing bankruptcy.

The company's frenzied construction of homes at the housing market's peak--financed with imaginary equity and nodocumentation loans from mostly out-of-state lenders--is a prime example of the shenanigans responsible for tanking home values and the miserable economy. Many of Charter's homes are worth only half the outstanding loan balance.

If the government ends up buying bad mortgages, taxpayers could be on the hook for the Charter mess. In fact, officials with the builder have been telling business partners they're pinning their hopes on a government bailout that could lead to lower principal balances on its mortgages.

No one answered phone calls to Charter's headquarters in the back of an old Ponderosa restaurant in Castleton, and Charter owner Jerry Jaquess did not return messages left on his mobile phone. During an August interview, Jaquess denied any wrongdoing.

Shopping spree

Indianapolis carpenter Michael P. Thompson bought six Charter homes. His wife signed for another 11. He said the company promised to handle everything.

Thompson just had to lend his credit history, and show up and sign the mortgage paperwork, which he said required no documentation of his income or employment history. In return, he got $4,000 in cash for each closing. He also got a promise: Charter would sell the properties in five to seven years and split the proceeds with him.

"I didn't put any cash into them," Thompson said in an interview. "I walked to closing with a check from Charter for 20 percent down."

He and his wife, Michelle, have been receiving foreclosure notices on a regular basis for their properties, which are in Fishers Creek in Indianapolis and Reserve at Royal Oaks in Greenwood. Their credit has evaporated.

Thompson said he didn't know letting Charter pay him to buy homes and providing a down payment could be considered improper or illegal. He's been talking with his contacts at Charter, who told him they are trying to renegotiate the mortgages or take advantage of a government rescue program.

But Thompson is worried. His properties are worth less than the mortgage balances. Eight are in foreclosure.

"They sold them [to me] for much more than they're actually worth and got someone to appraise them way too high," he said. "I'm sure they pocketed the money."

Another Charter home buyer, who spoke on condition of anonymity, said he stopped by the company's office to pick up a down-payment check before each closing.

He said the company repeatedly assured him the deals he signed off on were legal. Now, he's not so sure.

"I was misled from the very beginning," said the investor, who signed for more than 10 Charter properties. "I was naive. I entrusted them with my credit, and it was a bad decision."

Illegal practice

The use of "straw" buyers--individuals who lend their credit, often to unnamed shadow buyers--is considered illegal. During the housing bubble, frauds involving such buyers were widespread, particularly in Nevada, Arizona and Florida, said Curtis Novy, an expert on mortgage fraud and a veteran California mortgage broker.

Ultimately, it takes a team to pull off such a scheme, including a builder, appraiser and straw buyers, Novy said.

A warning sign is high sales prices that don't make sense to people who know a market. An example: Several homes in the King Park neighborhood near Dr. Martin Luther King Jr. Park that Charter claims it sold for $450,000 each. It gave the prices in filings with the Center Township Assessor's Office.

Top local real estate agents believe the sales are bogus, designed in part to artificially inflate the neighborhood's home values, and they point to sales of comparable homes in the $200,000 range.

There are essentially two types of mortgage fraud, Novy said: fraud that helps an unqualified buyer get a home, and fraud for profit. The use of straw buyers typically involves the latter, with buyers offered a quick profit in exchange for using their name and credit. The seller pockets the profits from an inflated mortgage.

Either way, neighborhoods suffer.

"It's always bad for the neighborhood and the neighbors," Novy said. "If you have false sales that look pretty on paper while the market goes up, everyone thinks they have substantial equity. But when foreclosures like this hit, it devastates the local values."

No disclosure

If Charter buyers got credit in loan documents for down payments that in reality came from the company, that would break the law, said Bob Nice, a local real estate attorney and an Indianapolis landlord for 22 years.

"What's legal is, if you accurately disclose what happened, you can do what you want to do," he said.

In three home-sale documents reviewed by IBJ, buyers were indeed credited with down payments for homes in King Park. The documents claim that Robert L. Brown Jr. put down $89,000 toward a home at 2045 Broadway St. and $99,000 for one at 2029 Ruckle St., and that Sarah Wilhite put down $95,000 for 2019 Ruckle St.

The disclosures do not show any payment to the buyers--another violation if one was made, Nice said.

The builder likely also secured inflated appraisals using comparable sales numbers that don't really compare--figures lenders were inclined to believe because of the high down payments.

"How many prudent people would put down that much money if they were paying too much for the house?" Nice asked.

Some of the documents also show payments of $1,500 at closing to King Park Area Development Corp., a not-for-profit that receives about 20 percent of its operating budget from taxpayers.

The group had agreed to offer its support for Charter's plans in exchange for the payments. King Park accepted $7,500 from Charter before current Executive Director Janine Betsey took over the post two years ago and canceled the deal.

A spokeswoman for the U.S. Attorney's Office said officials do not discuss or confirm active investigations. No charges have been filed against Charter or its principals.

Tough to prove

Mortgage fraud is one of the toughest, most time-consuming crimes to investigate, said U.S. Attorney Timothy M. Morrison, who oversees a staff of about 30 lawyers for the Southern District of Indiana.

"No two mortgage frauds are the same," Morrison said. "They're like snowflakes. We've had so many of them, and so many different kinds. Each time, we have to decode what the scam is."

Since 2002, Morrison's team has convicted 59 people in mortgage fraud schemes--including mortgage brokers, appraisers, loan officers, closing agents and real estate brokers.

Three attorneys are dealing primarily with mortgage-fraud cases, Morrison said.

"There are just so many ways to siphon money off and defraud people around the mortgage process if everyone isn't diligent," he said. "It's just a long, slow process."

In some cases, civil suits by investors and lenders have exposed fraudulent mortgages.

Jaquess, the Charter principal, is named in a still-pending 2006 lawsuit filed by two Virginia residents alleging mortgage fraud and breach of contract.

The plaintiffs say they were used as "straw borrowers" in a scheme led by Fishers businessman Robert Penn, a former partner of Jaquess' in a company called Homevestors LLC.

The suit charged the borrowers were members of an investment club set up to acquire properties from Penn with no down payments or cash. They were told they could improve their credit ratings and make a profit without actually owning property or taking a risk.

The suit alleges Penn and his group used the investors' names and credit ratings "to falsify mortgage applications, inflate appraisals and mortgage transactions to induce mortgage lenders to make mortgage loans that are not properly documented or secured, enabling the defendants to misappropriate the proceeds of such loans."

The appraiser on many of those loans, locally based Bauter Appraisal Services, also appraised homes for Charter. Owner Fred Bauter could not be reached.

No equity

In some cases, Charter didn't even own the lots where it was building homes.

Steve Carmen, who owns property in the King Park area, bought several lots and sold them to Charter before the builder stiffed him on one, for 2059 Ruckle St., he said.

Carmen and other land buyers would buy and hold lots for Charter to build on in exchange for a promised $10,000 premium to their lot price after the home sold.

They were side deals, with no paper trail connected to Charter, Carmen said. He said Charter is making a good-faith effort to pay him and other creditors.

But buying lots was just a small part of the scheme. Charter had to find buyers with good credit scores to sign for loans far in excess of what the homes were worth.

"These really are straw buyers," Carmen said. "These people don't have that money down. Some of them didn't even have jobs. There's no equity."

Buyers included Charter employees, family members and friends, said David Morton, a Carmel custom builder who also bought and held some lots for Charter before he grew uneasy about the firm.

"They guaranteed they'd make the mortgage payments," Morton said. "I don't know where the cash from closing [was] going."

Lining up

Banks foreclosing on Charter properties include LaSalle Bank and Citibank as trustees for funds created by the investment bank Bear Stearns, along with Colorado-based Aurora Loan Services, a subsidiary of bankrupt investment bank Lehman Brothers.

Other firms foreclosing include California-based Argent Mortgage Co., Michigan-based Perfect Mortgage and New Jersey-based SouthStar Funding.

The banks foreclosing on Charter-built homes are not alone in going after the company, which now manages the properties under a company called Mid State Property Management LLC.

Many of the companies that built and outfitted the homes haven't been paid, either. One of the largest creditors, locally based Best Flooring Inc., is trying to recover on a tab of $202,000, Chief Financial Officer Erik Purvis said.

Like many other contractors, Best Flooring agreed to file liens on the homes in exchange for its work, putting it in line to get paid once a property sells. Best Flooring installed carpet and cabinets in several Charter homes.

"Unfortunately, we found their make-believe investors are happy to close on the King Park homes before we put in the first stitch of carpet," Purvis said.

If the homes actually sold for $450,000, Purvis wants to know where the money went.

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