Thursday, August 27, 2009

(More) Something local

Two more players have been indicted along with Mary Pat Harper. The buyers who were working with Ms. Harper, Darryl Hanneken and Robert Herdrich, have been indicted on eighteen counts of wire fraud and five counts of bank fraud. Yowza. I have a feeling the US Attorney is not done yet either. According to the indictment, the above-referenced frauds were perpetrated by Mssrs. Hanneken and Herdrich (H&H) "and others." Note: that's "others," plural. Particularly interesting is Paragraph 7 of the that part of the indictment entitled "The Scheme" which says:
"It was further part of the scheme
along with the real estate agents,
mortgage brokers, and attorneys,
intentionally concealed from each
financial institution or mortgage
lender the existence of the lower
actual price and the kickback."

In case you haven't read the previous blog, this is the old dual contract scam. There would be a contract presented to the seller which showed a price well in excess of what the seller actually wanted for the property. A page tacked onto the back of the contract would say that extra money was to be given to the buyer after closing. This extra page was "somehow" removed from the contract when it was presented to the lender. This is bad because the lender doesn't know how much the purchase price actually is.

For example, if you agree to buy my pen for $100 (hey, I have cool pens--I make them myself), but I am going to give you $50 back when you buy it, how much did you actually pay for it. Fifty bucks, right? The only thing is, the lender didn't know about that money that was given back to the buyer because that page was missing, and the parties to the transaction didn't put it on the HUD-1 Settlement Statement. And no, that wasn't the buyers' money, it was the lender's, and it was provided for the sole purpose of purchasing the property (especially considering they never even made a payment on some of these properties). This money was not provided to line the buyers' pockets.

Go ahead, read that quoted paragraph again. Yes, they said "attorneys." Did the attorneys know about the fraud? Looks like the US Attorney thinks so. Did they attorneys do anything to stop it? It sure doesn't look like it. Why not!? It is our job to explain the law to our clients. Most of the time, they follow our advice. Granted, we do not have a duty to wrestle them to the ground to stop transactions like this, but it is damn easy to refuse to be involved. I have walked away from a few transactions--it is not difficult at all.

I looked up a few of these transactions to see what kinds of prices and price changes were involved. Here are a few:
Purchased by H&H for $110,000, sold after the foreclosure for $52,000
Purchased by H&H for $125,000, sold after the foreclosure for $50,560
Purchased by H&H for $125,000, sold after the foreclosure for $52,000
Purchased by H&H for $110,000, sold after the foreclosure for $40,000
Purchased by H&H for $115,000, sold after the foreclosure for $34,900

There are 23 properties referenced in the indictment.

"So what," you say. "They done bad and they got caught, so all is well." Not really. Imagine the impact on neighbors of these properties. Appraisers use comparisons of similar properties (called comparables) when they appraise properties. Say you purchased a property in the dizzying heights of the H&H buying spree. H&H bought at least 23 properties in what appears to be a fairly small geographic area. So, now the comparables are skewed by these over-inflated prices--remember the pen analogy--they didn't really pay the price which appears in the public records. You paid too much, because you didn't do any kickbacks under the table at closing. Now you want to sell or refinance. Based on these new prices, we have some new information for our comparables. Same houses, but different prices. Based on the examples above, your house might now be worth almost 40% less than it was just a few years ago. Don't forget that these properties probably have been sitting vacant for months during the foreclosure proceedings. Now aren't you glad the FBI and the US Attorneys office are taking this seriously? I know I am.

I will keep my eye on PACER (the Federal Court system's online access portal) to let you know of any new developments. Please send me a comment if you see anything else on this case, or if there is any other subject you would like to see discussed.

Thanks to Joshua for bringing this one to my attention.


Times4 said...

Were Darryl Hanneken and Robert Herdich ever sentenced? They were suppose to have been sentenced in June. Also why was'nt the seller indicted? Wouldn't he have to be in on the scam?

Thomas O. Moens said...

It does not appear they have been sentenced yet. It is possible they are delaying sentencing to allow them the "opportunity" to assist in prosecuting others involved in the transactions.

I can only guess why no sellers have been indicted. Here are four completely uneducated guesses.

Guess one: There were numerous sellers, but only two buyers--Hanneken and Herdrich did not buy all of these properties from one person. Perhaps because Hanneken and Herdrich committed fraud several dozen times, and each seller committed fraud once, they wanted to fry the bigger fish?

Guess two: The individual sellers were probably told by real estate agents, attorneys, and loan officers (not to mention the buyers) that these transactions were "totally legit." This does not make the sellers "innocent," but, dang, if you cannot rely on the experts you have hired....

Guess three: The sellers did not put the "extra" money in their pockets--Hanneken and Herdrich did. Say the seller was supposed to get $70,000 for the house, and they jacked the purchased price up to $120,000. The seller gets the $70K he or she was expecting, and the extra $50K went into Hanneken's and Herdrich's pocket, courtesy of the unwitting lender. The seller arguably got the same amount of money as if he or she had sold it to a legitimate buyer, so he or she did not benefit directly from the fraud.

Guess four: The money never got to the seller, and the seller was not aware of the scam. Perhaps the closing agent "accommodated" the buyers by divying up the seller's proceeds. Using the above example, the closing agent may have given a check for $70K to the seller, and a check for $50K to Hanneken and Herdrich. Some closing agents actually will do this (or at least USED to do this), and some will not.

Or it could be a combination of the above, or there could be some other reasons, or they might still be planning on indicting some of the sellers.