Slow Moving, Multi-Million Dollar Scheme Exploits Post-Recession Vulnerabilities
Scammers claim to “short sell” distressed properties for homeowners, but then rent them, never exchanging title with a bona-fide purchaser
Original homeowners left with skyrocketing mortgages, utility bills, but no claim to home as properties are shuffled along to multiple successive new ‘owners’ once fraud is discovered
Post-recession glut of foreclosed properties, tangled ownership of “robo-signed” notes leads to delayed foreclosure action by banks
Lengthy court processes, expensive lawyers’ fees, and difficulty serving “shell” companies make civil remedies for victims difficult and rare
“Low-priority” for former DA Hynes allowed the fraud to fester and expand for years
Introduction: The Fraud Explained
A new form of real estate fraud is using several aspects of the post-recession era to reap unearned profits while scores of homeowners are stripped of their equity but left with massive mortgage and utility debt. The fraud ring targets distressed and “under water” homeowners in neighborhoods like East New York, Cypress Hills, and Canarsie and pretends to “short-sell” their homes, only to rent them in the original homeowner’s name (or a shell company to which the property is transferred) and keep the income.
“It’s essentially a fake closing,” says Jomo Thomas, a real estate lawyer who has represented some of the victims. “The homeowners are signing documents, but they don’t really know what they signed or if it’s valid.”
Thomas said the distressed homeowners are often targeted through various nefarious methods, like gaining access to reports of delinquent mortgages and other debt, or paying “runners” and others within the community to refer them. In other instances, the fraud ring simply blankets the neighborhood with solicitations by mail, leaflets under the door, by telephone, and even in person. While some of the targeting involves illegal practices in their own right, what happens to the homeowners next is far worse.
“They’re told the house cannot be saved, but they’re given some sort of cash payment for moving out as part of a ‘short-sale,'” Thomas said, advising the figure was usually somewhere between five and ten thousand dollars. “But in reality, while there’s a deed transfer, the original homeowner is never taken off the mortgage note.”
The scammers then rent the rooms in the homes by converting what are usually 2-3 family structures into illegal boarding houses. Mortgage and utility bills, meanwhile, are kept in the original homeowner’s name.
Banks quickly becoming aware of nonpayment on the mortgage note but are hesitant to act. Many are still reeling from a glut of inventory via sub-prime loans gone sour, and are loath to foreclosure on more properties. Mortgage holders also share an underlying uncertainty as to what credits they possess due to robo-signing and other questionable recession-era practices. The result of their delay is usually a two-year window that inadvertently allows the scammers to reap a windfall profit.
Mixed with a cumbersome court process even when banks do act, the fraud can go uncorrected (and illegal rents can be received) for as long as four years on a single property. With all the properties involved in the scam, the fraud ring has likely obtained several million dollars through their activities.
Brooklyn Brief has interviewed several victims of the scam, where similar or related shell companies were repeatedly involved. While the general parameters of the fraud were often the same at the scheme’s outset, each story had its own particular developments that only further complicated the lives of the homeowners targeted.
234 Richmond Street: Brazen Tactics and a Thicket of Litigation
Yolanda Rodriguez was in trouble.
The Dominican-born, life-long Brooklynite bought her house on 234 Richmond Street in 2008 for roughly $500,000. In a familiar refrain for those churned through the real estate crash, she lost her job and, by the beginning of 2009, found herself unable to cover monthly mortgage payments in excess of $4,000. Worse, as her house had fallen “under water,” with a new valuation of only $365,000, earlier reassurances that she could always refinance or sell at a higher price evaporated.
Then a company came along with a solution to her problems.
“I found a paper under my door from a company saying it would ‘short-sell’ my property,” said Ms. Rodriguez. “The company claimed I could get out from the under debt, clear the mortgage away, not have any problems with the bank, and maintain a good credit score.”
Agents from the company, 4135 Kings Highway Corp., met Ms. Rodriguez at her home, and later at the eponymous building for which they were named, Ms. Rodriguez said.
“Everything indicated I would be doing a short sale,” Ms. Rodriguez explained. In 2010, she signed documents that would effectuate a deed transfer (once they found a buyer, the company claimed), but she never attended a closing. The agents provided her with $5,000 in cash as “moving expenses,” and told her to take a vacation, as she would not have to worry about the house any longer.
“I went back to my country [the Dominican Republic],” Ms. Rodriguez said. “I called them from there and they said, ‘yes, everything was taken care of, don’t worry, you’re free.'”
Ms. Rodriguez returned to New York and was living at a new address in Cypress Hills when she eventually received notice from the gas company that they would be terminating her service, due to an outstanding debt at 234 Richmond Street in excess of $9,000. Worried, she made a call to the electric company, and found out she owed them $10,000, again for continued service at her old home.
She swallowed a lump in her throat and called the mortgage company.
“The mortgage was never satisfied,” Ms. Rodriguez claimed. “They told me I still owed $200,000 and were wondering why I stopped paying.”
She furiously dialed the agents who claimed they would short-sell her house, but no one would answer her calls. In the meantime, the document she signed (in 2010) to sell her property was finally filed (in 2013) to effectuate a sale–but the new owner was 4135 Kings Highway Corporation, the very entity she hired to “short sell” the home. The documents claim the company bought the property for more than $466,000, an amount neither Ms. Rodriguez nor the bank ever claims to have received (and no “satisfaction of mortgage” was ever filed in tandem with the deed transfer).
Ms. Rodriguez was incensed when she surmised what had occurred. She immediately returned to her former home, where she found rental tenants living at the property. She told them they had to leave.
“If I’m responsible for the mortgage and all these payments, then I still own the home,” Ms. Rodriguez said. After the tenants left, she reoccupied the property, but soon received an unannounced visit.
“They sent someone to come and demand rent from me,” Ms. Rodriguez said. “I told him to go away. I had changed the locks, so he broke down the door.”
Still, Ms. Rodriguez refused. 4135 Kings Highway Corporation then quickly sold the home again (within a month and a half of filing documents claiming ownership) to a company called USA Realty & Services Plus Corp. for a purported price of $20,000.
Ms. Rodriguez is now embroiled in a thicket of litigation. The bank, after years of not receiving mortgage payments, has moved to foreclose upon the home, but Ms. Rodriguez contends in her defense that she doesn’t even own the home anymore. She points to the fact that USA Realty & Services Plus Corp., in a brazen move, has sued Ms. Rodriguez for back rent, claiming she is their tenant and must pay to continue residing at the property.
Ms. Rodriguez has instituted her own legal action against both 4135 Kings Highway Corp. and USA Realty & Services Plus Corp., alleging that these entities are related and in fact controlled by the same players behind the scenes who have swindled her through a fraudulent conveyance of real property.
“I’m asking to either be given the title back, or be relinquished of the mortgage through an actual short sale,” Ms. Rodriguez said.
But even after spending $10,000 on lawyers for her own claim, Ms. Rodriguez has had trouble finding a reliable means to serve what are “shell” companies, with no individuals named behind the entity and no verifiable addresses. And as none of the legal matters have been consolidated, Ms. Rodriguez’s civil action has been delayed while the other cases moved forward.
Unable to pay lawyers further legal fees, Ms. Rodriguez is now litigating and defending herself on her own behalf. The outcome of all the cases involved with the property are unclear.
104 Sunnyside: an Investor’s Dreams Are Literally ‘Stripped’ Away
In 2006, Rocio Santos was taking advantage of the booming market to become a real estate investor. She secured mortgages to purchase two properties, one on East New York’s Crescent Street and another on Sunnyside Avenue in Cypress Hills. The Sunnyside Avenue property, which later became involved in the fraud, was bought for $580,000. Leasing out both properties (save for one room for herself at the Crescent street address), the rental income covered most of the mortgage obligations. It seemed like a smart move that would pay off down the road.
“It was a little stressful, but everything was going fine until the recession hit,” Santos said. “Suddenly, my tenants couldn’t pay their rent.”
By 2010, Ms. Santos was looking for a way out on at least one of the properties. A friend named Henry (who declined to use his last name in this story as he worked and continues to work in the real estate industry) heard about a company that could “rescue” distressed homeowners and free them from their mortgage obligations through a short-sale of the home.
“I had previously tried a loan modification, and they could only adjust my payments by about $200,” Santos said. “It wasn’t enough. I needed to get out of my obligations for one of the properties. I told Henry, ‘great, I will give you Power of Attorney, work with these people on my behalf to do a short sale.'”
Though Henry admits he was offered $1,000 for each referral of this kind he made to the organization, in an interview with Brooklyn Brief, he claimed he had no idea of the company’s true intentions. While initially believing he was assisting a friend in need, Henry was unwittingly facilitating the fraud’s occurrence. Though he ultimately complied with the company’s directives, his suspicions grew over time, and he eventually confided in Ms. Santos that something might be amiss.
The company Henry worked with, CNB Realty Group LLC, at first said they would short sell Ms. Santos’s home outright. But later, they advised that Henry would sign a deed on her behalf to transfer the property to their corporation, and that they would later sell the property from their corporation to a new short seller. With his Power of Attorney, Henry signed Ms. Santos’s deed over to CNB Realty at a closing with an individual he was told was an attorney, but whom he later found out was merely a notary public.
The $1,000 referral fee he was promised never came his way, buy that was the least of his concerns. The sale, in August of 2010, lists CNB Realty as buying the property for $588,000. But while Ms. Santos received about $8,000 in moving expenses, the remaining $580,000 was never reported as received by her or her mortgage company. Thereafter, CNB Realty never asked for Ms. Santos’s pay stubs, her tax returns, or any information normally needed to facilitate a mortgage negotitation or reduction.
“My assumption was that if this company was not in contact with me or Henry, they were working on arranging a short sale,” Santos said. “But then they weren’t asking for the documents they would need. My concerns grew greater and greater as time went on.”
Three months went by. The mortgage company called. Ms. Santos told them “she was working on a short sale” and that she had hired a company that should be contacting them soon. The mortgage company told her that would mark her property in a list of inventory with similar circumstances. She called CNB Realty, who advised they were working on effectuating the short sale, but that “it just takes time.”
“I regret never having given the bank CNB’s contact information,” Santos said. “I figured CNB would contact my bank soon enough.”
Henry and Ms. Santos drove by the house a few months later that and noticed the property was rented. Moreover, extensive renovation had been performed, converting the property to what looked like a single room occupancy or boarding house.
“They’re trying to find a buyer for a short sale, but in the meantime they’re renting it to earn income?'” Henry said. “We started getting really nervous.”
The pair again got in touch with the individuals who held themselves out as CNB Realty.
“They played dumb. They acted like they didn’t know us, like they didn’t remember anything about us, the property, or the sale,” Henry said. “I asked for an in-person meeting, and they declined.”
After that, the company would not take their calls. Ms. Santos immediately contacted the bank to tell them she had been defrauded, but they were unmoved.
“‘That’s a legal issue that doesn’t concern us,'” Santos quoted them as saying to her. “‘The note is under your name; that’s all we have to go on.”
CNB Realty, meanwhile, transferred the property to a second company, 1334 ADR LLC, in January 2011, purportedly for $588,000, the same amount it “paid” for the property at the outset. This entity then transferred title to LPKM Enterprises, Inc. in May 2013 for a reported $20,000. Like the first transfer from Ms. Santos to CNB, no “satisfaction of mortgage” was recorded in either of these subsequent transactions. Neither Ms. Santos nor her bank report receiving proceeds from the sales to pay off the mortgage obligations.
Some four years later, the mortgage company finally sued Ms. Santos for the outstanding debt. Between late fees and attorneys’ fees, she now owes about $700,000, or $1.2 million with both mortgages combined (though she continues to timely pay the mortgage on the other property, where she resides). She consulted a lawyer, but is not sure how whether to retain one for a lawsuit because she doesn’t necessarily want the house back, only to be free of the mortgage.
“How do I get my mortgage settled if I don’t have the deed?” Santos asked rhetorically. “If I get the deed back, I can at least give it back to the bank” she said (in what’s known as a deed in lieu of foreclosure). “I even thought about buying the house back from these thieves, just to be done with them.”
With the debt obligation hanging over her head, Ms. Santos fears for herself and her child. Her assets were recently frozen, and a foreclosure of the Sunnyside property is now pending. But with the market value of the house now much lower, Ms. Santos worries the bank might come after her Crescent street property as well.
“I’m worried they’ll take the house where I still live with my son to satisfy the debt,” Santos said. “I’m a single mom. I don’t know where I would go.”
With an auction of the property imminent, the house was stripped of parts of materials. The front door is boarded up, sealed with a padlock. A litany of housing violations for work without a permit and other issues have incurred penalties against 1334 ADR LLC and LPKM Realty Enterprises in the tens of thousands of dollars. But since these entities involved in the fraud are mere “shells corporations,” whomever eventually takes control of the property will have to clear these debts away. If no one purchases the property, it may be Ms. Santos’s obligation.
130 Crystal Street: Everything Stays in Place, Except for the Deed and Rent
When Joel Hernandez was falling behind on payments to his home, his brother Israel wanted to help. The property, at 130 Crystal Street, was purchased in 2007 for $560,000 (with the help of a $448,000 mortgage). Even with tenants in several units, the payments became too high of a burden after only a few years.
“We tried a loan modification, but we could’t do it,” Israel said. “For some reason, we didn’t qualify.”
But Israel had heard through a friend about a company that was helping people in the neighborhood short sell their properties. Supposedly, they could complete the transaction in three to six months. A meeting was arranged with a company called CNBB Realty Group Corp.
“The company promised they could move things quickly,” Israel said. “Their representative said he would negotiate with the bank on our behalf, and that we didn’t even need an attorney. All we needed to do was sign the deed over to them.”
The brothers soon attended a meeting with the representative from CNBB and a notary public, where they signed over the deed. CNBB paid the Hernandez brothers $7,000 to move out. The property was eventually listed as sold on in August 2012 (but via documents dating back to early 2011) to CNBB Realty for $567,000. However, other than $7,000 in moving expenses, neither the Hernandez brothers nor their bank ever reported receiving an additional $560,000 from the sale.
For a short while, however, all seemed well. The brothers were free to return to the property, where they would collect mail. After a few months, they saw late payment notices from their bank.
“The bank would write to us, saying they were going to have to foreclose, but also did we want a loan modification?” Israel said, recalling the mixed message. He called the bank to tell them they were working on a short sale with a company they found.
“The funny thing was, we actually went to Bank of America not long after that,” Israel said. “We were approved for a modification. But we had already engaged this company to short sell the house.”
Tenants were told to stop paying rent to Joel Hernandez, and to start paying it to CNBB. The Hernandez brothers were perplexed by this, but figured it was par for the course.
“The property mostly stayed the same, except for who got the deed and rent,” Israel said.
But then months turned into years. The fraud became apparent itself not in a dramatic announcement, but in a slow-moving series of revelations. A large water bill still came to the house in Joel’s name. The electricity was disconnected, citing a $5,000 outstanding charge.
“We still felt we had a responsibility to the tenants, who were caught up in all this,” Israel said. “We worried for them. So we ended up paying those bills ourselves.”
CNBB soon stopped answering the brothers’ calls. But another company came into the picture, demanding rent from the tenants as the new owner. Property records revealed the home had been resold in May 2013 to KPLM Realty Enterprises, Inc., for a mere $25,000. Again, neither the brothers (nor their bank) saw any portion of the proceeds.
After learning of the subsequent sale, the Hernandez brothers hired a lawyer to take CNBB and KPLM to Court, claiming a fraudulent conveyance of their real property. CNBB never appeared in the action, rendering them eligible for a default judgment, but the brothers were advised a judgment against the shell corporation would essentially be worthless. KPLM sued Israel Hernandez right back, demanding rent from him when he occupied one of the units after a tenant moved out. The bank, meanwhile, has moved to foreclose against all parties involved with the property (Joel Hernandez, KPLM, and CNBB). The cases are not consolidated.
“I thought I would win the case, because of the fraud and everything,” Israel said. “The Judge said, ‘listen, they are the owner of the property because the deed is in their name, but I see you still have the mortgage.’ My lawyer said, ‘exactly, so can’t you see they defrauded us?'”
But it didn’t work out that way. The Court proposed that Israel could can stay in the apartment, but the company would continue to own the home and rent the first floor of the basement. Though living rent-free, Israel would have to chip in for utilities. But even then, KPLM eventually asked that Israel be forced to pay all utilities in full.
“We went back to court still, fighting and fighting over every little thing,” Hernandez said. “Despite the agreement, later they wanted me to pay the utilities in full. They stole the property out from under us, and they won’t even agree to pay half the utilities?”
After spending $9,000 for a lawyer, and with a $650,000 mortgage with all late fees and other charges added, the squabble continues over a home now valued at only about $400,000. The bank is expected to soon sell the home in a foreclosure (as a secured creditor, the bank has a right to force the sale of the home to satisfy the outstanding debt, regardless of who now has title).
“We can’t do anything, because the bank is about take their action,” Hernandez said.
The Perpetrators: Common Addresses, and Business Names, in Borough Park
Despite different twists in the victims’ stories, at the outset, the fraud involves a common scheme. Indeed, records indicate several similarly-worded companies involved in the transactions sharing common addresses in Borough Park.
1334 58th Street, between 13th and New Utrecht Avenues, is the home of CNBB Realty Group Corp. CNB Realty Group LLC, and CNW Funding, Inc., companies whose names appear on documents involved in the transactions. The building is a residential condominium with no apparent retail space.
In the accounts profiled in this story, the “second shell” or “third shell” entities that are eventually “sold” the properties in subsequent transitions after the initial fraud takes place (USA Realty & Services Plus Corp., LPKM Realty Enterprises, and KPLM Realty Enterprises) all listed their headquarters as 5308 13th Avenue, Suite 248, a nondescript unit above a cellular phone store with no signage or indications of any offices or business activity.
This unit is also reportedly home to Williamsbug Realty & Services Group, Inc., Brooklyn Realty & Services Group Inc., Brooklyn Realty Enterprises Corp., Brooklyn Realty III Corp., Brooklyn Realty Managment Group Inc., and Brooklyn Realty Plus Group Corp. (though these entities do not appear in any of the paperwork for the transactions mentioned in this story). The location is just blocks from the 58th Street condo that serves as headquarters to the other companies mentioned previously.
More companies sharing the same management as the entities involved in the fraud spread beyond the borough. At least one listing for a property (in Coney Island) owned and managed by CNB Realty lists a manager who is also named as the manager for a range of other real estate companies in East Flatbush. Thes other companies, with names like Big Brooklyn Rehab and Dream Home Realty, list their headquarters in Ozone Park. And other entities, like 1334 ADR LLC, list a headquarters in Monroe, NY.
‘Bargain and Sale’ Deeds, But Key Documents Missing
While the documents involved in the transactions may appear legitimate upon presentation, a closer analysis reveals certain signs commonly associated with fraudulent real property conveyances, according to attorney Jomo Thomas.
“The fact that the companies never use a title insurance company is a smoking gun,” attorney Thomas said. “The alleged transfer documents aren’t claiming a property transfer with an existing lien. By not acknowledging the existing mortgage, it’s assumed that the mortgage is either satisfied or should be satisfied with the sale. But there’s no title insurance company that guarantees that, which is fishy.”
The lack of other crucial closing settlement statements, like those indicating a satisfaction of the existing mortgage, or a conveyance of the property free from encumbrances and ECB violations, indicates trouble.
“They’re trying to make it look like a bargain and sale deed, but they can’t call it that because that’s not what it is,” Thomas said. “But if they admitted that there’s an existing mortgage, they would trigger tax consequences and recording fees, which they’re trying to avoid. They’re trying to leave as little on record as possible.”
Finally, the same notary public is used on almost every single filed document, often with dates when the victims can prove they were out of town.
Loopholes in the Law
The perpetrators of the fraud took advantage of a unique and rare confluence of factors. The aftermath of a nationwide recession (based on real estate speculation) left a waves of distressed homeowners. But in working class neighborhoods of Brooklyn, rents were also rising. A ring savvy enough to connect with local communities in the subprime mortgage fallout, but also knowledgeable about the law, devised a means to exploit individuals and lending institutions alike. The result was a slow-moving, multi-million dollar scheme that relied on distraction and deception to glean illicit rents on scores of properties, using expansive delays by others to their advantage.
At the outset of the fraud was exploitation of distressed homeowners and their mortgage lenders’ vulnerability. A glut of foreclosures left banks hesitant to seize only more properties. Allegations of “robo-signed” mortgage notes even made banks worried their mortgage might be voided if they contested a suspicious subsequent deed transfer (and many notes were often transferred from one bank to another, causing further delays and uncertainty). Some of the banks who issued mortgages (like Golden First, which provided the original loan to Yolanda Rodriguez) were also in hot water themselves with the Federal Government for fraudulent representations in order to insure their practices, and later often folded, and/or were acquired by other companies (such as IndyMac, which provided the loan to Rocio Santos). Finally, well-intended laws and practices were also put in place to protect distressed property owners, like longer periods to take offers for a short sale. The sum total of these efforts usually allowed a two-year window to emerge between the time the initial fraud took place and the first legal filings.
When the banks finally moved to foreclose after several years without receiving mortgage payments, the scammers utilized several unique quirks of the Brooklyn court system to stall litigtion, allowing them to collect rent for several more years before they eventually vanished. Brooklyn Housing Court, overloaded with foreclosure case inventory, was quick to allow adjournments, slowing any process to a crawl. Even when a matter did come before them, adjudicators known as “referees” governed over mandatory settlement conferences where they were more interested in finding a palatable if unglamorous compromise between litigants’ stated positions rather than investigating the underlying facts of a matter. Most victims in the scam were not taken seriously anyway–unable to afford legal fees, they often asserted their own defense and failed to bring an action for fraud.
A recording process with little scrutiny also provided the scammers further protection. Deeds filed with the Department of City Finance’s Office of the City Register (claiming a title transfer but failing to list an existing mortgage, or claim satisfaction of the mortgage) were rarely scrutinized, lawyers for the victims say. An expose in the New York Times showed how this department only recently began to “red flag” suspicious recordings. Additionally, agents behind a shape-shifting mixture of opaque Corporations and LLCs were allowed to scribble illegible signatures on deeds without printing their names, listing only the entity’s name in print and an office phone number (without an address). The result is that the new “owners” of the properties can have lawyers appear for them in Court, but those behind the “corporate veil” can elude being tracked down.
Criminal Charges Largely Unexplored by Former DA Hynes
While almost all of the fraudulent conveyances took place, Charles J. Hynes presided as the District Attorney of Kings County. But victims claimed he was dismissive of their allegations.
“We went to him, I even made an appointment,” said Yolanda Rodriguez, regarding DA Hynes. “He told me he wasn’t sure how wide of a scale it was, but that if I could round up more victims, he would take another look.”
With her lawyer, Ms. Rodrigeuz made another appointment with additional victims, and returned. The meeting was curt and her lawyer was forbidden from attending.
“I came with her, and they wouldn’t even allow me into the meeting,” said Jomo Thomas, who represented Ms. Rodriguez. “They wouldn’t hear from someone who investigated these cases and could explain the legal intricacies.”
The sum of the meeting, according to those who attended, was the DA Hynes did not find the case significant enough to investigate. He suggested the alternative of civil court as a remedy, they said.
But a new District Attorney, Kenneth Thompson, assumed office this year, after a campaign focused on revamping the DA’s approach to neglected neighborhoods like East New York and Brownsville.The victims have considered getting together again to approach him.
“Hopefully he might see it differently,” Rodriguez said.
“It’s definitely a fraud,” Thomas said. “A fraud upon the homeowner, a fraud upon the State, and a fraud upon the IRS.”
Shells and Shadows
Brooklyn Brief has reached out (or attempted to reach out) to the Department of City Finance (to understand the process and scrutiny for recording real estate property transfer documents), as well as contacts for former DA Charles Hynes, the banks involved in the mortgages for the properties, and the legal entities involved in the transactions (through their attorneys). In many instances, the above-mentioned individuals and the entities could not be reached as of press time, while those who could be reached declined to comment on this story.
Attorney Jomo Thomas, who represented the few victims who could actually afford to retain him and sue for fraud, was not surprised.
“The companies involved in this even go so far as to have a different per diem attorney come to every court conference,” Thomas said. “You always get the run around as to who is behind the whole thing. It’s just shell companies being named in the lawsuit. You never deal directly with the real players–only their shadows.”
Both City Finance Commissioner Jacques Jiha and City Sheriff Joseph Fucinto made themselves available to discuss their recently-appointed roles, their interest in prosecuting deed fraud, and the need to make residents aware of such schemes to prevent them in the future.