The following article is re-published with the kind permission of:

The article was written exclusively by John Marino of the Caribbean Business

Local, federal authorities after multimillion-dollar mortgage fraud. More than 100 mortgage-fraud probes underway, targeting ‘powerful people with a lot of economic resources’

There are more than 100 active mortgage-fraud investigations in Puerto Rico going on right now that cover “all aspects” of the real-estate lending process, Justice Secretary Antonio Sagardía told CARIBBEAN BUSINESS.

“There are many people involved. There are millions of dollars involved. I would say that right now there have to be more than 100 investigations,” the Justice chief said.

The joint federal-local investigations target “powerful people, people with a lot of economic resources,” he added. “This is going to be a public scandal.”

While Sagardía, citing department policy, declined to reveal many of the details of the investigations, he said the probes target “all aspects” of the mortgage business, from the filing of documents by borrowers to the appraisal process on properties to the related transactions made by mortgage banks.

“A mortgage has various stages. The investigators are looking at everything a mortgage involves in Puerto Rico,” he said.

Some of the probes are also believed to touch on attempts to launder “dirty” money through the purchase of real estate, borrowers providing false financial information to obtain loans and the use of fraudulent appraisals to artificially inflate the values of homes, industry sources told CARIBBEAN BUSINESS. In other cases, identity theft and consumer rip-off scams are thought to be involved.

“The banks brought this to the attention of the authorities, and both federal and local authorities have been working very diligently on this,” said Arturo Carrión, Bankers Association executive director. “I’m comfortable they are making progress and the industry won’t be affected as a result.”

Carrión, who also declined to give many details because of concerns it would affect the ongoing probes, said some cases stemmed from an “organized group” that was operating a fraud scheme. While cases of fraud continue, banks are more aware of them and are being more watchful, he added.

Sagardía’s comments come on the heels of recent remarks by Luis Fraticelli, Federal Bureau of Investigation special agent in charge, that mortgage fraud is the No. 2 white-collar crime priority in Puerto Rico behind public corruption. Saying mortgage fraud was a major factor behind the “collapse of the financial system,” the island FBI chief said the problem was growing both here and across the U.S.

Nationwide, there were 63,173 national suspicious-activity reports (SARs), which financial institutions are required to file when they suspect suspicious activity, filed during 2008 related to mortgage fraud, a 36% increase. During the first two months of this year, some 28,873 mortgage-fraud-related SARs were filed, according to the FBI. There were 881 mortgage-fraud investigations in 2006 and, today, there are more than 2,000, Fraticelli said.

The mortgage-fraud probes are just the latest example of increased cooperation between local and federal law-enforcement agencies under the Fortuño administration. That cooperation has spawned federal-local task forces to battle drug trafficking that now cover the island, with Sagardía having assigned four prosecutors to that effort and now working to assign two more.

While local authorities are prosecuting the first mortgage-fraud cases following findings by the island’s Financial Institutions Commissioner’s Office (FICO), federal authorities have made the issue a top priority.

The spike in mortgage-fraud cases prompted Sagardía to assign this month an additional local prosecutor with certified public accounting expertise to the federal unit heading the probes. FICO is also collaborating with federal authorities.

“The U.S. Attorney’s Office asked me for help in assigning a prosecutor because it is getting a lot of cases. This is one of the current priorities of the federal prosecutors,” Sagardía said. “In mortgage fraud, there is one local prosecutor named but, because we are going to see a lot of investigations and cases in this area, we will continue to supply needed resources.”

Federal raids, local prosecutions
There are two high-profile mortgage-fraud probes that have already been made public.

Late last month, dozens of federal agents, including computer and tax specialists, raided Beneficial Mortgage’s San Juan offices after obtaining search warrants May 22 from U.S. Magistrate Marcos López.

On May 7, FICO had issued a cease and desist order against the local mortgage lender, its President Ernesto Acosta Rodríguez, Treasurer Ernesto Acosta Matos and Secretary Carmen Rodríguez Negrón for allegedly committing “serious” violations of Law 97, better known as the Mortgage Institutions Law.

The cease and desist order states Beneficial Mortgage received some $18.7 million as servicing agent for the mortgage loans belonging to Banco Cooperativo de Puerto Rico but failed to pay off debts and cancel liens against the related properties.

“As the original holder and servicer of the loan payments that later were sold to Banco Cooperativo, Beneficial Mortgage collected the money remitted to them for the mortgages of dozens of citizens, but didn’t apply or remit these to Banco Cooperativo for their respective payments and cancellations,” the cease and desist order read.

“Such actions placed dozens of citizens who sold, bought or refinanced their properties in imminent danger of suffering serious financial damage since they trusted the previous debts against their properties had been properly paid off and cancelled.”

The order also added that Beneficial Mortgage’s actions harmed Banco Cooperativo and other financial institutions that provided refinancing or loans. The order states some 130 loans may be involved and the total amount of the alleged fraud could reach $19.2 million.

Last week, the U.S. Department of Housing & Urban Development (HUD) barred Beneficial from originating Federal Housing Administration (FHA) loans while it conducts an investigation.

Meanwhile, former New York Mortgage Bankers President Nancy Hernández and her daughter, company Vice President Noemí Pérez Hernández, are facing trial on hundreds of local criminal counts related to irregularities in making clients’ payments to creditors and withholding revenue-stamp money.

The two women were charged in October for allegedly illegally retaining or delaying payments clients made to creditors to pay off old mortgages or loans after obtaining a loan from New York Mortgage Bankers (NYMB). The criminal charges stemmed from an investigation launched in 2003 by FICO, the Justice Department’s Special Investigations Bureau and Justice Department prosecutors.

A total of 1,380 counts of illegal appropriation were filed against NYMB, Hernández and Pérez Hernández, each facing 460 counts, including 23 counts of violating the Mortgage Institutions Law. The illegal appropriation totals $1.75 million in mortgages and related costs.

NYMB, the beleaguered local mortgage bank founded by Hernández, filed for a $19.7 million Chapter 7 bankruptcy earlier this year. A Chapter 7 liquidation filing means the business ceases operations unless continued by the Chapter 7 trustee. The trustee generally sells all assets and distributes the proceeds to creditors.

FICO issued a cease and desist order against NYMB in September 2007 forbidding it from engaging in any type of mortgage business.

Another island mortgage bank made headlines when federal regulators sued Texas financier R. Allen Stanford and three of his firms for allegedly concocting an $8 billion Ponzi scheme centered around high-interest-rate certificates of deposit.

Stanford hasn’t been charged, but has said he expects to be indicted.

Stanford’s assets, along with those of the three companies, were frozen. These include a 40% stake in a Puerto Rico-based company, Golden Mortgage Bankers, which was purchased in September 2007. As previously reported in CARIBBEAN BUSINESS, the $5 million acquisition signaled a growing interest by the Stanford Group in making additional investments on the island.

Golden Mortgage Bankers President & CEO Raymond Molina told CARIBBEAN BUSINESS at the time that Stanford “is currently researching some potential areas of interest to invest and wants to make contact with members of the local private sector.”

Molina, 72, was found guilty in October 2008 of punching former Puerto Rico Gov. Carlos Romero Barceló during an argument over national politics at a Condado restaurant.

Many of the current probes, however, are the result of local mortgage lenders bringing potential irregularities to the attention of the authorities, according to industry sources. Others are thought to be spin-offs from other federal investigations, such as the big effort to break up identity-theft rings.

For example, in March, federal authorities broke up an island identity-theft ring that stole the personal data of 7,000 public-school children in Puerto Rico. While the stolen birth certificates and Social Security numbers were allegedly sold to illegal immigrants seeking to establish themselves in the U.S., stolen identifications can also be used to secure mortgages and other loans.

A recent report by the Financial Crimes Network on mortgage fraud, based on an analysis of nationwide SARs, found 43% of cases involved misrepresentation of financial information like income and debts and 28% involved forged or fraudulent documents, while identity theft and fraud accounted for 14% of cases and appraisal fraud around 13%.

A U.S. crackdown
Following the Beneficial raid, Fraticelli said the action was part of an increased crackdown by federal authorities on mortgage fraud and other financial crimes amid the fallout from the world financial meltdown.

FBI Director Robert Mueller testified in Washington during a recent congressional hearing that a recently created FBI team is setting priorities on mortgage-fraud investigations, and the bureau is using undercover operations, wiretaps and computer technology to get evidence of economic crimes, Reuters reported.

Last month, President Barack Obama signed bipartisan legislation to clamp down on mortgage fraud and set up a $5 million independent commission to investigate the cause of the worldwide financial meltdown. Obama and other supporters say the bill’s estimated cost of some $265 million a year will more than pay for itself because of the fines and penalties that would result from increased government oversight.

They estimate the money could be used to hire about 160 special FBI agents and more than 200 support staff, including forensic analysts.

Currently, the FBI has fewer than 250 special agents assigned to mortgage-fraud cases, despite caseloads that have more than tripled in the past three years, according to Mueller.

The U.S. Justice Department could hire 200 more prosecutors and civil-enforcement attorneys along with 100 support staff. Other government entities in line to receive money include the Securities & Exchange Commission, Secret Service, Postal Inspection Service and inspector general for HUD.

The FBI has more than 560 open corporate-fraud investigations across the U.S., including matters directly related to the current financial crisis, Mueller said.

The bill also establishes a new “financial markets commission” that will focus on more than 20 areas, including how the government failed to protect investors and the role financial fraud may have played in the meltdown. The group would report its findings by Dec. 15, 2010.

While mortgage fraud has been making more headlines stateside than on the island, that is about to change.

“It’s a virgin area in Puerto Rico, but shortly you will see a lot of cases,” Sargardía said of mortgage fraud. “Believe me, you will see a lot of investigations of mortgage fraud. There are many, many pending cases.”

For additional information on this story, and everything on business in Puerto Rico, please visit www.caribbeanbusinesspr.com.