Lawmakers, particularly the Democratic leaders, have been pushing to get provisions in the proposed $700 billion bailout bill, the "Emergency Economic Stabilization Act of 2008". The draft can be found the House Financial Services Committee website. In a previous post I discussed my opinion that the bailout will not help homeowners facing foreclosure, but I wanted to highlight that in a seperate, shorter entry.

In his testimony to the Senate Banking Committee on the proposed bailout last week, Federal Reserve Chairman Ben Bernanke stated:

First, as a minor point, that one of the things that this program being discussed will do will be to purchase second liens which have proved to be a very significant barrier to the resolution of foreclosures, but more importantly, the housing market is not going to recover if the economy.. if jobs are being lost, if credit is not available and so I do think you cannot seperate this as two completely seperate issues.

From what I've seen, there has not been much discussion about this. Chairman Benanke calls it a minor point but that does not translate into secondary liens will be a minor part of the bailout. Primary and secondary mortgages are already included in the previeous $300 billion rescue plan but according to a blog entry on NJ Heloc Heaven, there hasn't been much success with the HOPE Now program.

In previous posts I discussed how lenders were eager to originate more loans. These were not just for first time buyers getting into the market, many existing homeowners were enticed into taking out equity.

About 28% of the recent foreclosures in Bergen County seem to be a result of people cashing out their equity. Of the 135 homes that the foreclosure process was initiated that had judgments against them in excess of the average purchase price, the average price was $324,838 but the average judgment is $486,531. That's almost 50% more than what they paid for the house.

The chart below shows the number of these foreclosures grouped by the year in which they were purchased. The red line is the number of homes that were purchased in that year and the blue line shows the average difference between the judgment and the purchase price for the homes purchased that year.

What is disturbing is that of these 28% of recent foreclosures, not only do the borrowers need to worry that the property values are less than what they paid, they borrowed more than they actually paid! Lenders seemed to be willing to give out more than the purchase price, probably based on future inflated pricing that hasn't been realized? Don't be persuaded to think that the practice tapered off as much as the graph indicates. Since the Bergen County Clerk doesn't provide mortgage information online, like other NJ counties do, I had to go by foreclosure data. Since it takes time for the foreclosure process to even begin, the data is usually a few months delayed.

Just picture it, you struggled for years to build up a good sized down payment, you spent months searching for the right home for your family that was priced in a range you could qualify for and you have been slowly building equity in the property. But that hasn't been your main concern. While you did expect that your house would increase in value and that your fixed rate traditional loan over time would pay down your principal, your primary motivation was to have a nice home, with a good school system for your children. Then one day you look around and see what's going on. People were pulling money hand over fist out of the real estate market.

House prices are soaring and you're wondering "how can these people afford these houses". You start trying to figure out how much they are making, because you have a pretty good paying job and it took you a long time to save up and buy a house. Pretty soon you realize they're not making more money, they're just able to borrow more money. And it has nothing to do with their income or their credit in many cases. For some, they've cashed out equity at the time they were getting their first mortgage. In some cases they were able to borrow more than they property was currently worth.

You look at your situation and think, I'm in good shape, I have a good job, I already found the home I want, at a good price and after a few short years I'm sitting on more equity than I know what to do with. I want what some of these people are getting. You look at interest rates and say "well, I'd actually save money with a lower rate". Maybe you decide not to go too crazy but you're talking to loan officers and they're trying to get you to see your house as a cash machine.

Maybe that wasn't the case. Maybe you lost your job and needed money, there might have been an illness in the family that drained your resources or it was college time for the kids and you hadn't saved enough. There were so many reasons people decided to cash out equity. Some were unavoidable. Life has hiccups that can derail the best laid plans. But what's been happening is more than just that.

To take out equity in your home, you could either refinance your existing mortgage for an amount greater than what you currently owed to your first mortgage and pocket the difference, or take out a equity line of credit against the equity in the home. And loan officers would have no problem giving these to anyone. No income? No problem! Many lenders were willing to give you a loan without verifying income, just based on the equity in the home.

The problem with refinancing to cash out equity, or taking out a equity line of credit is that you were borrowing against equity that was about to come crashing down. The home prices were artificially inflated due to the amount of credit that was thrown out into the market. With more people able to get loans, home ownership was rising and people were buying houses like there was no tomorrow. Even though our government was concerned about artificially inflated house prices as early as 2001, borrowers and lenders kept on going as if the rapid increase in values was natural and going to continue indefinitely.

Pretty soon, the problems with giving out so many non prime loans started to show up. People were unable to keep up their payments and foreclosures started to rise. The lenders threw out more loans to try and keep house prices afloat but there's only so much that can be done. Eventually values started dropping.

Taking out equity through refinancing or a HELOC, isn't always a bad idea. If you can afford the payments and put the money to good use, it's something you need to do sometimes. But if you tried to take out equity, to get into the real estate market too late in the game, you might end up with two properties in foreclosure. For at least two people facing foreclosure on two properties each that seems to be the case. One purchased a home in 2002 for just over $200k which isn't too bad. The judgment though is over $400k. In 2006 they purchased another home for around $450k which also has a $400k judgment against it. 

Another buyer that purchased a home for around $170k in 2000, has a judgment against that home in excess of $500k as well as another home purchased in 2006 for $750k that has a $500k judgment as well.

Other things might have happened but it seems these people didn't use the equity in their homes wisely or got caught up in the hype at the tail end of the bubble.

If you took out a HELOC and started a side business and your monthly returns were greater than your payments you were in great shape. If you were able to purchase property at reasonable rates that you could rent out to cover your mortgages, you'd be fine too. But with the inflated prices those types of properties were hard to find.

If you need to take equity out of your home, learn from what's happened recently. Really think if you can afford to make the payments. Consider the type of loan you are getting and if the payments will stay the same. Don't take out equity unless you really need it. Your house isn't a credit card to purchase expensive cars, flat screen tv's etc. When people try to get you to take out a loan, remember, they make money when you do, so always look for other opinions and options as well.

I recently found the NJ HELOC Heaven blog and in a conversation in the comments with the blogger, I was reminded of this fraud case in Bergen County that I hadn't seen any updates for.  In fact the article seems to have vanished but seems to be available on AccessMyLibrary.com.

Back in early 2006 there was an article in The Record by Prashant Gopal about a Palisades Park mortgage company, AMG Mortgage, that was accused of defrauding banks for as much as $100,000,000. The guys skipped town and the FBI was looking for them.  Then the story kinda disappeared. No more news on it. It was a lot of money and before the sub-prime meltdown so I was interested in it as I had inclinations even before then that something bad was going to happen in the housing sector before I even knew what a sub-prime mortgage was.

Every once in a while I would search for news and updates and found nothing.  Recently I looked again and it looks like there have been some big developments in the case.  On January 19, 2008, Federal Prosecutors finally began charging individuals involved in the fraud.

The first thing that caught my eye was:

Federal prosecutors have charged the owner of a Palisades Park mortgage firm and 19 employees and customers with taking part in a $20 million bank fraud scheme involving Bergen County's Korean community.

Seven of the 20 defendants pleaded guilty Friday before U.S. District Judge Peter G. Sheridan, admitting they conspired to commit bank fraud.

A 35-count indictment accused 13 others, including Jacob Kim, president of the now-defunct American Macro Growth, of plotting to defraud 16 lenders between February 2004 and November 2005.

The company, with offices in Palisades Park and Englewood before that, catered to the Korean community, offering to help clients borrow large sums in home equity and business lines of credit in return for hefty commissions.

But in order to obtain the lines of credit, the indictment alleges, Kim, 51, and three brokers -- his son, Justin Kim, 27, both of Palisades Park, Jun Hwang, 42, of Cliffside Park, and Jeff Kim, 37, of Edgewater -- turned in bogus applications to multiple lenders without telling them the collateral used to secure the loans was far less than the amount borrowed.

"You would end up in some cases with a dozen banks all using the same property to secure the loan -- none of them knowing that there were any other banks using that same property," said Assistant U.S. Attorney Bradley Harsch.

In one case, AMG arranged for a client to secure home equity loan agreements with at least 11 banks -- using the same $300,000 Ridgefield Park property as security for $1.98 million in credit, the indictment said.

 $20 Million? That's far short of what the original report claimed. What happened to the other $80 Million?!?! That report is no longer online but I saved a copy from Google's cache of the page which stated:

The FBI has said AMG helped Korean-Americans in North Jersey secure as much as $100 million in fraudulent loans. With AMG's assistance, a homeowner would collect multiple loans on a single property, fooling each bank into thinking it was the only home equity lender, the FBI said.

Also interesting, is that of the 20 defendants, 15 were clients of AMG:

Five of the defendants worked for AMG and the other 15 were borrowers. Harsch described some of the borrowers as small-business owners, who used the loans to help their restaurants and nail salons. "Some of it was [for] personal expenses. We don't know in each case what they did," he said.

"One person who pleaded today already paid back his loans, but there are others where the banks are just out the money," he added.

Also indicted were AMG clients James Park, 41, of Hackensack; Jin Hee Song, 35, Tae Woo Lee, 42, Hyun M. Kim, 35, and Dong Jin Kim, 53, all of Palisades Park; Sun Hee Lim, 37, of Fort Lee; Hyeong Ju Lee, 33, of Edgewater; Ma Dung Kim, 50, of Maywood, and Hye sung Park, 37, of Queens, N.Y.

Those pleading guilty were Sin Ah Kim, 35, of Lyndhurst, a former employee; and borrowers Chul Chung, 43, of Ridgefield Park; Dea Hee Lee, 44, of Creskill; Jun Ho Park, 34, of Little Ferry; Jeffrey Ryu, 42, of Fort Lee; and Ha Rim Park, 42, and Sung Woo Son, 37, both of Palisades Park.

They were released on bonds ranging from $75,000 to $250,000, pending sentencing April 25. Under their plea agreements, they each face a maximum sentence of five years in prison and fines of $250,000.

At the time in January Jacob Kim, the owner of AMG was still at-large. But a follow up story on May 6, 2008 announces that "Fugitive Bergen businessman caught".

A Palisades Park businessman accused of masterminding a $20 million mortgage scam was captured at a driving range in Queens last night after eluding authorities since November 2005.

Jacob Kim, 52, president and owner of the now-defunct American Macro Growth of Palisades Park, was carrying $48,000 in cash when agents arrested him as he took swings at the Alley Pond Golf Center. He's due to appear in federal court in Newark this afternoon.

I'll be interested to see how this plays out and hopefully some news comes out explaining what happened to that other $80million?

Update:

I did some searching and I think I found a foreclosure listing for one of the defendants that pleaded guilty, Chul Chung of Ridgefield Park.

The judgement on the property is $312,023.99. The house was purchased in 2002 by Chung for $265,000.  The current tax assessed value is $299,100 and from eppraisal.com we see that the middle value in the range is $396,229.

$321k on owed on a house like this doesn't seem so bad. The question in my mind is, is that the only amount that was defrauded with that property? It is hard to tell because in NJ, junior liens kinda disappear in a foreclosure and only the senior lien holder gets their money, unless the auction goes for more than the judgment amount, then the junior lien holders get some of the excess funds.  Since the scheme was for multiple mortgages on the property, were some of these other loans considered junior loans?

Chung is the only defendant listed in Ridgefield park so is the property referred to in the quote:

In one case, AMG arranged for a client to secure home equity loan agreements with at least 11 banks -- using the same $300,000 Ridgefield Park property as security for $1.98 million in credit, the indictment said.

It seems like it might be.  What happens to the other $1,667,976?  Are the taxpayers going to eat that money when government funds are used to help bail out the mortgage companies? Or was that money in HELOC's that were never used?

 I also found a Press Release from the US Attorney for the District of NJ. (It's a PDF) The press release has some more information that I haven't seen in the press.  It details some of the techniques they used to do this.

Another aspect of the fraud, according to the Indictment, was that AMG helped clients fraudulently obtain business lines of credit or “BLOCs”. Although the BLOCs required that the borrower use the loan proceeds only for business purposes, AMG advised its clients to use BLOCs to purchase residences or pay down mortgages in order to increase the equity in already-existing residences. The clients then would use the residence to obtain multiple HELOCs.

There's another update, on July 28th it was reported that Jacob Kim pleaded guilty to conspiracy to commit bank fraud and will face 10-12 years in federal prison.