Slow housing market speeds up scam

Predatory buyers are borrowing more than what a house is worth, pocketing the difference, then foreclosing.

By JEFF OSTROWSKI

Palm Beach Post Staff Writer

Sunday, October 28, 2007

Even after the South Florida housing market peaked in 2005, Johnson Cuffy knew how to score big profits in real estate.

First, the Broward County real estate investor found a Fort Lauderdale house for sale for $245,000. Then, inflated appraisal in hand, he convinced the lender that the home was worth $340,000.

Cuffy, a 29-year-old who works with his father and siblings at a family-run mortgage company, landed a loan for $340,000, paid the seller $245,000 and pocketed the $95,000 difference, state investigators say. Profits secured, Cuffy let the home go into foreclosure.

He was arrested in July after the seller alerted officials to the scheme.

An isolated case? Not by a long shot. Cuffy is one of the few to be caught, but the lucrative scam, known as "cash back at closing," became rampant in South Florida as the combination of a slowing housing market and easily available mortgages created an opportunity to fleece lenders.

No one knows how many times other scammers used this rip-off throughout South Florida, but investigators and real estate experts say the dubious deals have been common in the past two years.

"My phone has been ringing daily with people wanting to report suspicious real estate sales," said Detective Ted Padich of the Florida Department of Financial Services in West Palm Beach. "This is going on in every neighborhood in Palm Beach County."

The Mortgage Asset Research Institute of Reston, Va., backs that assertion. Florida has moved to the top of its list of fraud-riddled states, based on lenders' complaints. Losses from mortgage fraud hit a record $1 billion last year nationwide, according to the FBI, which lists Florida among the hot spots.

The mortgage swindles add a sinister story line to the flood of foreclosure filings that have followed the real estate bust. Although politicians, consumer advocates and the media often portray foreclosure as the inevitable collision of overreaching borrowers and overeager lenders, some defaults are caused by predatory borrowers rather than predatory lenders.

Buyers who see a chance to make a quick buck fuel the fraud. They typically work with appraisers, mortgage brokers and title agents to present phony documents to lenders, investigators say. For mortgage brokers, the paydays are generous: subprime lenders pay hefty fees to brokers who bring them business.

Although nothing is illegal about cash-back-at-closing deals in which all the details are disclosed to lenders, the arrangement veers into fraud when the sale is arranged to trick mortgage companies into lending far more than the house is worth.

The sellers typically are little more than innocent bystanders. Desperate to sell in a soft market, they receive strangely generous offers even as the imploding housing market has put most buyers in a bargain-hunting mode.

"Everybody walks away with their coin, and the bank is left holding the bag," said John Swope, the Florida Department of Financial Services detective who arrested Cuffy.

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