SAN FRANCISCO — At the height of the financial crisis, bargain hunters would gather each week on county courthouse steps to bid on foreclosed properties throughout Northern and Central California. The inventory lists were long, especially in hard-hit areas such as Sacramento and Stockton. But the auctions were generally short affairs — often because real estate speculators were illegally fixing the bidding process.

In the past three years, federal prosecutors have charged 54 people and two companies in three states for bid-rigging during courthouse auctions of foreclosed properties. Most cases originated in California, the state with the highest foreclosure rate during the financial crisis. Nearly identical rings were also broken up in Raleigh, N.C., and Mobile, Ala.

Working in concert, the would-be buyers would appoint just one person to bid on each property on the auction block, thus securing the “winning” bid. Minutes after the official proceeding was over, they would then conduct an auction among themselves, often on the same courthouse steps.

That’s when a property’s true price would emerge. The conspirators would then divvy up the difference paid at the official auction and the private one.

Federal prosecutors say such schemes have operated for decades, once earning a few thousand dollars per property. But the explosion of foreclosures amid the country’s financial meltdown a few years ago upped illicit gains to millions of

dollars. The scammers took money that otherwise would have gone to banks selling the foreclosed properties or beleaguered homeowners who should have been compensated.

The bidding investigations are being driven by a special task force established at the U.S. Justice Department in the wake of the financial crisis to combat mortgage fraud. The probes aim to “stop those who engage in illegal conduct that thwarts the competitive process, and take advantage of American consumers when they are most vulnerable,” said Assistant Attorney General Bill Baer, head of DOJ’s antitrust division in Washington, D.C.

Prosecutors say the circle of conspirators gradually widened at each courthouse: First-time buyers would be brought into the conspiracy as an increasing number of speculators attended the auctions. Those not in on the schemes were often pressured not to return by verbal harassment and, in some cases, physical jostling.

In the last two years, more than 30 people have pleaded guilty to participating in a series of courthouse bid-rigging conspiracies in Northern California counties. Another 11 have been busted in Central California. Similar prosecutions have been carried out in Alabama, where eight people have pleaded guilty in Mobile in the last two years. Five others have pleaded guilty in North Carolina since 2010 to operating a bidding conspiracy around Raleigh.

For many now going to prison, this is their first brush with the law.

Father and son Robert and Jason Brannon were each sentenced to 20 months in prison this month in Mobile, Ala., after pleading guilty to participating in 17 rigged bids. The two opened a real estate investment company in 2003, after Robert Brannon sold a portion of the family farm. When they began attending auctions to acquire rental properties, they discovered that some speculators were rigging the bids and joined in the conspiracy, according to court documents.

In addition to the jail time, the Brannons were ordered to pay restitution of almost $22,000 each, their cut from the rigged auctions.

In April, real estate investor Mohammed Rezaian pleaded guilty to participating in similar scams in Northern California. He has agreed to cooperate in the prosecution of other perpetrators and pay a fine of $213,000. He also faces a little less than two years in prison when sentenced sometime next year. Neither he nor his lawyers returned phone calls.

Federal officials say they expect to charge a few more people in the coming months but that cases are expected to soon drop off now that the heated foreclosure market of late 2008 and 2009 has cooled.

Madeline Schnapp, an economist with PropertyRadar, a company that tracks foreclosures, said sales at auctions have fallen from a height of about 30,000 a month to about 5,000 a month in California as government programs and new laws have made it more difficult for banks to begin foreclosure proceedings.

“There’s not much of a supply now,” she said.

Paul Pfingst, a lawyer who represents another investor charged in participating in a Central California ring, says illegal temptation got the better of many speculators who couldn’t resist victimizing seemingly unsympathetic banks. His client, Andrew Katakis, is accused of participating along with four others in a $2.5 million conspiracy to rig bids in the Stockton area, which has led the nation in foreclosures.

“The amount of money and properties that were changing hands was staggering,” said Pfingst, who maintains his client’s innocence. “It caused many people to cross from legality to illegality.”

AP-WF-06-01-13 1941GMT

Article source: http://www.insidebayarea.com/california/ci_23379517/feds-crack-down-foreclosure-auction-scams

Phoenix, where foreclosures accounted for more than half of all home sales during the worst of the housing crash, has largely been picked clean, so much so that there is now no discount on a distressed property. The same holds true for Las Vegas, according to Zillow
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(Read More: Homeowners Hit by Sandy May Save Thousands of Dollars)

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure re-sale that they would for a non-distressed home simply to take advantage of historic affordability,” said Zillow chief economist Stan Humphries in a release.

On the flip side, housing markets that have not garnered quite so much investor attention are showing the biggest foreclosure discounts: Pittsburgh (27.4 percent), Cleveland (25.8 percent), Cincinnati (20.1 percent) and Baltimore (20 percent).

While investors are certainly broadening their searches to a wider real estate market, some argue that while big discounts may be gone from hot investor markets, there is still good reason to be there.

“The sale price of the property is only one consideration; other factors include the cost of repairs needed to make the property rentable, and what the anticipated rental price of the home is,” notes Rick Sharga of Carrington Mortgage Holdings, a private equity fund investing in distressed homes and mortgages.

“It’s entirely possible that an investor can make a reasonable yield on a property even paying close to market price on a home, if the rental rates are attractive enough. If the investor believes that home prices in a given market are going to continue to rise over a longer period of time, this can also factor into a decision to continue to buy there even without a foreclosure discount,” according to Sharga.

(Read More: Home Prices Rise, but Analysts See Pressure Ahead)

Despite rising home values and a slowly improving jobs picture, many Americans are priced out of the home-buying market due to damaged credit. Others are simply not ready to take a bet on home ownership, after so many lost so much in the historic boom to bust of the last decade. There are now 6.7 million additional households renting, compared to the cyclical low of 2004, according to Census data analyzed by Paul Diggle of Capital Economics.

“The combination of rising house prices and an unchanged homeownership rate is a useful reminder that investor demand is a significant driver of this housing recovery,” notes Diggle. “Admittedly, a number of indicators, such as the National Association of Realtors’ breakdown of sales by type, have been pointing to a growing role among conventional owner-occupier buyers. But a return to more normal levels of activity among this group still seems some way off.”

Household formation is rising, as younger workers start to find jobs and move out of their parents’ homes, but they generally are not moving to home ownership. Until more Americans are able to qualify for today’s record low mortgage rates, the rental play, discount or not, appears to be a strong one.

(*Zillow compared the actual sale price of foreclosed homes nationwide to the estimated price of the same home were it to sell in a non-distressed transaction. Other analyses compare median home prices of non-distressed homes vs. distressed, but that does not take into account the differing sizes and characteristics of the homes. Distressed properties tend to be smaller and in less affluent neighborhoods, which a median comparison cannot incorporate.)

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