6 indicted in South Bay mortgage fraud scheme

Central Valley has the most foreclosures in the U.S. (AP)

May 19, 2011 12:00:00 AM PDT
Six people are facing charges as part of a multi-million dollar mortgage fraud scheme in San Jose. The defendants, most of them real estate agents, are accused of targeting low-income buyers by arranging $40 million in loans that never should have been made. While the government is going after these small players, some believe it's also time to zero-in on banks and Wall Street.

The schemes were conducted by two real estate agents from Century 21 Golden Hills in San Jose. Long gone, another real estate agency now occupies that space.

According to the U.S. Attorney's Office, what transpired from 2004 through 2007 was a scheme like many others in America that caused the collapse of the housing market. Low-income families buying their piece of the American dream were sold a house they could not afford. The realtors got their commission and everybody was happy.

The buyers were also referred to the broker, in this case Palacio Mortgage , today a closed business. The broker would find an adjustable mortgage that the buyers could afford for a year or two, the broker got her commission, and everybody was happy. The bank financed the home and sold the mortgage to a third party. The bank got their money, and everybody was happy. That is until the interest rates shot through the roof, the couple could not afford to pay the note, and the mortgage holder foreclosed.

In 2007, California was third in mortgage fraud behind New York and Florida. Real estate agent Jed Lane has seen a change.

"The banks have tightened up, the money lenders have pulled back quite a bit. There are far fewer of them," says Lane. "Private money is almost gone from the market and their criteria is also very tight, so far fewer people are getting loans in the first place."

ABC7 political analyst Bruce Cain says the Obama administration wants to show it is going after low-level anonymous people, and nailing the big fish has to be next on the president's agenda.

"Having one or two major prosecutions at a high level of people that really were either criminally or civilly responsible for the tremendous collapse of the housing market, I think that would be important politically for them to sort of burnish their image as a defender of mainstream," says Cain.

The most serious charges in the 42-count indictment -- like conspiracy to commit bank fraud -- could result in 30 years in prison and a million-dollar fine.

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