Friday, July 10, 2015

Flipped Out!

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Over the years, I have seen many variations of mortgage fraud. As soon as one scheme is thwarted, another seems to take its place. One particular flipping scheme[i] being currently adjudicated, involving sixty properties (sic), is really for the books!

Michael and Jeremie Sheneman allegedly defrauded both real estate buyers and mortgage lenders through a series of calculated misrepresentations. The scheme lasted from 2003 to 2005, when they were busted.

Their scam was classic mortgage fraud:
(1) acquire control over a large number of rental properties,
(2) induce buyers to purchase the properties through a host of false promises, and
(3) ensure that lenders would finance the purchases by pitching falsified loan documents to the lenders and misrepresenting the buyers' financial standing. 

Note that I emphasized the words “acquire control over” these properties. 

Let's see why that is central to the scheme!

The deceptive actions took place in Indiana, where the Shenemans acquired control over a large number of rental properties being sold by landlords in the South Bend and Mishawaka areas. Many of these sellers had difficulty renting out their properties and were looking to cut their losses and walk away from the homes with their mortgages and taxes paid. So they agreed to sell their properties to the Shenemans. Allegedly, the Shenemans were known to flip houses.

Although the sellers believed they had sold their properties directly to either Michael Sheneman or Jeremie Sheneman, the sellers had in fact merely granted one of the two power of attorney over their properties. Consequently, the Shenemans took control over the properties without ever appearing on any chain of title, because they had the powers of attorney. Each seller received the amount of money agreed upon as the selling price. The funds were not disbursed from a title company, but from none other than the Shenemans themselves. The Shenemans would now seek out the patsies who would be duped into buying the properties for more than the initial seller's asking price, close with a lender, and take the endorsed checks from a lender’s title company, depositing the checks directly into the Sheneman’s own bank accounts.

Back to finding the mark! Once granted control, the Shenemans searched for buyers to purchase the dilapidated properties. Eventually, they found the four chumps who would buy them – sixty properties in all – as follows: a Cameroonian citizen in the United States on a student visa, bought fifteen homes; a Liberian citizen also on a student visa, bought fourteen homes; an electrician, bought twenty-one homes; and a maintenance worker, bought ten homes. None of these people had any real estate experience.

Obviously, to induce these gulls to buy the properties the Shenemans promised a new source of income by purchasing the homes and then renting them out: the more homes purchased, the bigger the profit. False promises! The marks were told that the homes were all in excellent condition and the Shenemans would make any necessary repairs. As a further false promise, the suckers were led to believe that there was little risk because most of the homes already had paying tenants living in them, and, in any case, the Shenemans would help find new tenants for vacant homes. Plus – here’s the rub! – if the buyers ever wanted to get out of the real estate business, the Shenemans graciously promised to buy back properties that the marks no longer wanted. Not enough incentive yet? Then maybe this will do it: the Shenemans also promised to cover all down payments and closing costs. The buyers, despite their modest incomes, could therefore purchase a large number of homes and begin earning an immediate profit - without having to spend a dime out-of-pocket.  

The buyers, for their part, were only allegedly permitted to see one or two of the properties they were purchasing prior to closing. The other homes, buyers were told, had tenants already living in them and a visit to those homes might disturb the tenants. But the buyers were assured that the other homes were all in similar condition and located in comparable neighborhoods.

Now to the financing!

Buyers filled out only minimal paperwork throughout the process. The Shenemans brought each potential buyer to Superior Mortgage, a mortgage broker where Jeremie Sheneman worked as a loan officer. Through Superior Mortgage, each buyer completed a few documents with some very basic information. Jeremie Sheneman then allegedly informed the buyer that he or she was approved to buy a large number of properties. In order to dupe the mortgage lenders, Jeremie Sheneman had falsified key parts of the documents. Among other alleged misrepresentations, numerous loan applications falsely stated the buyers' citizenship, employment status, and finances, and the buyers' signature on many documents was often forged.

Beyond falsifying documents, the Shenemans took other steps to secure financing from lenders and ensure the closings took place.

It was a two-step scheme:

·       Step One: they artificially inflated the buyers' bank accounts, depositing tens of thousands of dollars in order to make it appear as though the buyers had sufficient assets to take on the loans. After the transactions were completed, the money was returned to the Shenemans.

·       Step Two: they masked the buyers' financial infirmities from lenders by utilizing certified checks to cover down payments and closing costs. Lenders therefore had no way of knowing that the buyers were not the true source behind these payments.

After the closing, each of the buyers quickly discovered that the deals they were promised were bogus. A number of the newly purchased homes were hardly habitable. Some had faulty plumbing, others had significant mold and termite damage, and yet others had structural damage and leaky roofs. Moreover, paying tenants were not available at all. Many of the homes did not have tenants living in them, despite previous assurances to the contrary; while other houses had tenants who never paid rent. The few homes that the buyers had actually viewed prior to closing were not even included among the properties they had purchased. Many of the properties were also located in worse neighborhoods than the ones they had visited. Needless to say, the sad saps tried to get to these tricksters, but they were hard to reach, nowhere to be found, did not answer calls, hung up on calls, made few repairs, and ignored repeated requests for assistance.

Predictably, each of the buyers was soon unable to make timely mortgage payments. Of the sixty properties: thirty-six were foreclosed upon, eleven were deeded back to the lender in lieu of foreclosure, six were demolished by the city, and four were sold in tax sales.

[i] United States v. Michael Sheneman 01, 2015 U.S. Dist., United States District Court for the Northern District of Indiana, South Bend Division, July 08, 2015, Filed, Case No. 3:10-CR-126 JD Case No. 3:12-CV-720 JD. The factual background of this case has been set forth extensively in prior orders by this Court [DE 111, 150, 166] and by the Seventh Circuit Court of Appeals. United States v. Michael Sheneman, 682 F.3d 623 (7th Cir. 2012); United States v. Jeremie Sheneman, 538 F. App'x 722 (7th Cir. 2013).

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