Monday Morning Cup of Coffee: Countrywide, LandSafe accused of fraudulent appraisals during housing boom

Plus, Mueller says Manafort committed mortgage malfeasance

Monday Morning Cup of Coffee takes a look at the news coming across the HousingWire weekend desk, with more coverage to come on larger issues.

In the run-up to the housing crisis, many corners were cut and rules broken throughout the mortgage industry as industry participants chased the almighty dollar.

One of the areas that experienced relaxed standards and some outright criminal activity was the appraisal industry.

In some cases, lenders were using handpicked appraisers to inflate the appraised value of a home to secure a higher mortgage amount. From there, it was just a question of what to do with the extra money.

In the wake of the crisis, the government sought to reform the appraisal process with the adoption of the Home Valuation Code of Conduct and by introducing appraisal management companies to ensure “arms-length” transactions between lenders and appraisers.

And while the appraisal industry has substantially improved since then, there are still some skeletons in the industry’s closet, and one of those skeletons could be about to see the light of day.

That’s because a federal judge recently granted class-action status to a lawsuit alleging that Countrywide Financial used LandSafe to conduct “sham” appraisals to increase the number of loans Countrywide originated during the mid-2000s.

The lawsuit is filed against Countrywide, LandSafe, and Bank of America, which bought Countrywide and LandSafe during the crisis.

During the time in question, LandSafe was owned by Countrywide, and was part of Bank of America’s purchase of Countrywide. BofA later sold LandSafe Appraisal Services, the company’s AMC, to CoreLogic for $122 million.

But before all of that, Countrywide and LandSafe were allegedly generating fraudulent appraisals to boost loan numbers.

According to Baron & Budd, the law firm representing the plaintiffs, during the time period in question, Countrywide required borrowers to receive their appraisals through LandSafe as a condition of their loan.

The lawsuit alleges that, as part of the scheme, LandSafe cherry-picked certain appraisers, withheld information, and took other actions outside of the Uniform Standards of Professional Appraisal Practice to generate appraisals that benefited the lender.

According to the lawsuit, plaintiffs were charged between $300 and $600 for each of the allegedly fraudulent appraisals.

The lawsuit alleges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), a federal law originally designed to combat organized crime.

Earlier this month, District Judge Christina Snyder certified the nationwide class, stating that the plaintiffs provided “substantial evidence that could be used to prove an alleged RICO scheme on a class-wide basis.”

Now, the real fun awaits once the trial begins.

Late last week, the investigation into Russia’s alleged interference in the 2016 presidential election kicked into another gear, when the Department of Justice announced that it charged 13 Russians and three Russian companies with interfering with the election.

But that wasn’t the only development in the case.

Justice Department special counsel Robert Mueller also accused Paul Manafort, who served as President Donald Trump’s campaign manager for five months in 2016, of some mortgage misconduct as Manafort fights for bail in his ongoing indictment.

Last year, Manafort was charged with conspiracy against the United States, money laundering, failure to file reports of foreign bank and financial accounts, working as an unregistered agent of a foreign principal, making false statements to the DOJ, and other charges covering a period of approximately 2006 through at least 2016.

Richard Gates, who was a close aid to Manafort and also served as Trump’s deputy campaign manager for a time, was also charged along with Manafort.

Manafort allegedly used shell companies to buy luxury real estate in the U.S., before borrowing millions of dollars using the those same properties as collateral, thereby obtaining cash without reporting and paying taxes on the income.

But, according to a report late last week from Politico, Manafort’s alleged actions involving those properties went beyond that.

From Politico:

The filing by Mueller’s office says Manafort obtained a mortgage using “doctored profit and loss statements” overstating “by millions of dollars” the income for his consulting company, DMP International. Prosecutors appear to be referring to a $9.5 million mortgage that Federal Savings Bank of Chicago extended in late 2016 to a Manafort-linked firm, Summerbreeze LLC.

According to the court filing, linked here courtesy of Politico, Manafort is trying to secure a $10 million bond using properties that he owns as collateral, but Mueller alleges that the properties Manafort wants to use are not as free and clear as Manafort makes them out to be.

From the indictment:

The Fairfax property is claimed by Manafort to have no mortgage. In fact, it was posted to secure a mortgage of over $9 million from The Federal Savings Bank, which was secured by both the Fairfax property and the Bridgehampton property. The bank can thus proceed against either or both properties in the event of foreclosure. It is misleading to claim the Fairfax property has no mortgage when, in fact, it has been posted to secure a mortgage that substantially exceeds the value of the property. Moreover, Manafort himself has questioned his ability to maintain the payments on all his mortgages; thus, the risk of foreclosure by the bank on this property is not fanciful, which would seriously affect its market value.

And later in the indictment:

Further, the proposed package is deficient in the government’s view, in light of additional criminal conduct that we have learned since the Court’s initial bail determination. That criminal conduct includes a series of bank frauds and bank fraud conspiracies, including criminal conduct relating to the mortgage on the Fairfax property, which Manafort seeks to pledge. The government has secured substantial evidence that Manafort secured this mortgage from The Federal Savings Bank through a series of false and fraudulent representations to The Federal Savings Bank. For example, Manafort provided the bank with doctored profit and loss statements for DMP International LLC for both 2015 and 2016, overstating its income by millions of dollars.

In the indictment, Mueller states that his team can provide more evidence of Manafort’s alleged misdeeds during his next bail hearing.

And it looks like Manafort’s defense could soon become more difficult.

That’s because it looks like Gates is about to flip and is ready to testify against Manafort.

The latest development comes courtesy of the Los Angeles Times, which reported over the weekend that Gates is nearing a deal with Mueller’s team that would see Gates testify against Manafort.

From the Los Angeles Times report:

A former top aide to Donald Trump's presidential campaign will plead guilty to fraud-related charges within days – and has made clear to prosecutors that he would testify against Paul J. Manafort Jr., the lawyer-lobbyist who once managed the campaign.

The change of heart by Trump's former deputy campaign manager, Richard W. Gates III, who had pleaded not guilty after being indicted in October on charges similar to Manafort's, was described in interviews by people familiar with the case.

If Manafort maintains his not-guilty plea and fights the charges at a trial, the testimony from Gates could provide Mueller's team with first-person descriptions of much of the allegedly illegal conduct. Gates' testimony, said a person familiar with the pending guilty plea, would place a "cherry on top'' of the government's already-formidable case against Manafort.

The article notes that Gates is expected to plead guilty at some point this week.

So, here’s hoping you have a better week than Paul Manafort. Cheers!

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