The temptation of fast, easy money is at the heart of the ongoing subprime loan and foreclosure crisis.
With many lenders eager to loan money to almost anybody, small organized crime rings sprung up around the country. Some found it pretty easy to scam mortgage companies out of millions of dollars.
In one case, prosecutors say a home renovator in Akron, Ohio, named David Willan scammed mortgage companies and local investors out of more than $18 million.
He allegedly did that by flipping hundreds of homes — that is, buying run-down homes on the cheap and then quickly selling them for far more than they were actually worth. Prosecutors say appraisers, a mortgage broker and a title company were also in on the scheme.
Housing Gets Seedy and Strange
On Brittain Street in Akron, a lit-up sign with an exotic dancer on it stands as a testament to just how seedy and strange parts of the housing industry became in recent years. Willan was allegedly laundering money from his mortgage fraud ring through this strip club.
Those close to Willan say he was living large — driving fancy cars, partying, dating exotic dancers. He owned a yacht. Attorneys involved with the case say Willan funneled upwards of $700,000 into the strip club, setting it up as a side business to fall back on as his housing company headed into bankruptcy.
Akron is not Manhattan or San Diego. It is a gritty manufacturing town that never had a housing boom. Willan probably wasn't going to get rich quick buying and selling houses if he played by the rules.
Brad Gessner is a criminal prosecutor with the county. He's bringing the case against Willan. Gessner says Willan gamed the system and made off with "in excess of $18 million."
"We're talking, in a four-year period, about 300 homes," Gesner says.
Gessner says Willan was part of an outbreak of mortgage fraud that played a role in the epidemic of foreclosures. "A lot of those are due to greedy people," he says.
Reports of suspected mortgage fraud to the U.S. Treasury Department rose 700 percent between 2000 and 2006. Gessner says many people figured out how to live a lifestyle they could only dream of by breaking the rules.
"When the mortgage companies were playing free and loose with this, it leads to these problems," Gesner says.
How It Worked
In this case, Willan had a company called Evergreen Homes that renovated and built houses.
Gessner says Willan would buy a run-down house in a troubled neighborhood. In some parts of Akron, that can be done for around $20,000. He'd paint it and spruce it up a bit. Then he would sell it for a lot more — in some cases, around $80,000 — with the help of a crooked appraiser.
"The value of the house through a bogus appraisal goes up, the money is pulled out, and ultimately you're going to find a financial institution holding an $80,000 loan on a house that truly isn't worth more than $20,000," Gessner says.
In some of these scams, the buyer is in on it and takes off without ever paying the mortgage. But Willan allegedly sold the houses to unsophisticated lower-income buyers who didn't know what the houses were really worth.
He allegedly also was working with a mortgage broker who was complicit in the scam. Gessner says the broker put the buyers into loans they couldn't afford, telling them this was their path to homeownership. But half of them quickly ended up in foreclosure.
"We have a mortgage broker who pleaded guilty to his part in this conspiracy," Gessner says.
Evergreen Homes is now in bankruptcy. Willan is in jail awaiting trial.
But his lawyer, Bill Whitaker, says all of this is a big misunderstanding. Whitaker says there was no fraud. Rather, he says, Willan was a victim of the downturn in the housing market.
"They're a housing company and, so, as a result, the downturn in the market affected all companies in the business," Whitaker says. He also says that everyone in real estate is suffering from the real estate downturn, and Willan is no different.
As far as the allegations that Willan was in cahoots with crooked appraisers, Whitaker says Willan "never put pressure on the appraisers and never influenced the appraisers."
Whitaker says the mortgage companies often had their own independent appraisals done on the properties. And he says the investigation itself helped to doom Evergreen Homes by casting doubt on it in the community.
Retiree Investors Say They Were Cheated
Some people in the Akron community became investors in Evergreen homes. They say it seemed legitimate. Evergreen got on Inc Magazine's "Inc 500" list of the nation's fastest growing businesses.
Willan at one point won an award for some houses he built in inner-city Cleveland. Retiree Bernie Wolak was a manager at Ford who invested $135,000 in Evergreen Homes, a "large portion" of his retirement money.
"In the office of Evergreen, there's a picture of the former mayor of Cleveland giving Mr. Willan a plaque for the best builder," Wolak says.
Wolak now believes the fraud charges. He is part of a bankruptcy creditors committee that has been digging through the company's books.
"It looks like the numbers that we were presented were all lies," Wolak says, adding that many people who invested would like to see Willan go to jail for a long time.
"There were friends of his family who invested, friends of his parents who invested, and they are totally betrayed," Wolak says.
And, as if that doesn't sound bad enough, there was the strip club Willan set up toward the end, allegedly so he would have another business after Evergreen failed.
Michael Steel is an attorney for the creditors in the ongoing bankruptcy case. He says after Willan had thrown himself at the mercy of the bankruptcy court, "in that forum, he continued to funnel money to this strip club."
Steel says up to about $700,000 was spent on the strip club, "which was the ultimate slap in the face as far as the creditors were concerned."
Prosecutors around the country are just now figuring out how widespread these mortgage fraud rings became in recent years.
In the area around Akron alone, Gessner says, its like "digging up the roots to an old tree." The more they dig, the more they find spread all over the place.
Gessner says anybody looking to make fast money got involved. He has prosecuted former drug dealers who, rather than risk mandatory drug sentences, have geared their efforts toward mortgage fraud.
In this case, Willan sits in jail. But the strip club remains open. It turns out that he didn't want the club in his name, so he set it up to be owned and run by a friend and his ex-girlfriend, who is a former stripper.
Toward the end, though, the ex-girlfriend said in a deposition that Willan began stealing money from them, too, by taking it right out of the register. They changed the locks and locked him out of the club, she says.