Mortgage scams hit home amid real estate crunch

NORFOLK

Ping Zhang and Beatrice Harris have never met. The arcs of their lives are a world apart. But they have one thing in common: Both wish they had never heard of Aretha Smiley.

Zhang and Harris allege in court papers that they lost their homes to mortgage fraud, a seedy side effect of the real estate boom and bust that is on the rise in Virginia.

Zhang, 48, got stuck with a mortgage on a waterfront condo that he never even got to live in. It's now in foreclosure, and Zhang is on the hook for the unpaid mortgage and condo fees.

Harris, 67, lost title to the home she's lived in for 23 years and now has to pay rent to the new owner. At one point she fell behind and he had her arrested for trespassing.

Smiley, 37, was the loan officer for a now-defunct mortgage company who engineered both deals. Repeated efforts to contact her were unsuccessful.

The FBI is looking into the two cases.

Both transactions involved a straw buyer - typically someone with solid credit who is recruited, sometimes for a fee, to qualify for a loan and purchase a home with the understanding that someone else will make the payments. The FBI says straw buyers are a common feature of mortgage scams.

The travails of Zhang and Harris are a cautionary tale for homeowners in a time of roller-coaster real estate values. Consumer watchdogs say it's a perfect environment for scammers to latch onto what for most people is their most valuable asset: the equity in their homes.

As the housing bubble deflates and foreclosures proliferate, mortgage fraud is exploding. And Virginia is one of the hot spots.

Last year, for the first time, Virginia made the Mortgage Asset Research Institute's list of the top 10 states where fraud is most prevalent, coming in at No. 7. As recently as 2003, the state ranked 37th.

From all accounts, Smiley cut an impressive figure.

Zhang met her in November 2005 while both were house-hunting with Judy Boone, a Norfolk real estate agent. A native of China, Zhang had just arrived in Hampton Roads to take a job as a computer teacher.

Tall, slim and sharply dressed, Smiley was a smooth talker with a take-charge attitude who wore her Christianity on her sleeve. She looked like she had money, Zhang remembers. She drove a Mercedes.

Unbeknownst to Zhang, it was all a mirage. Smiley had declared bankruptcy in 2003, leaving more than 50 creditors empty-handed.

When Boone showed them both a four-story condo in East Ocean View, Smiley was smitten. The fully furnished unit had an elevator, a surround-sound speaker system and a Chesapeake Bay view.

At $515,500, it was out of Zhang's price range. But Smiley had a proposal.

She would pay the mortgage payments and condo fees for Zhang if he would take out the loan and become the purchaser of record - a straw buyer.

"Judy helped talk me into it," Zhang said. "She said property values were going up in that area and after one or two years I could sell it and make a profit. She told me Aretha would be the actual owner. I would just be a name."

So Zhang signed the papers. It was his first real estate transaction in America.

Boone, who represented both the seller and the buyer in the deal, denies that she helped talk Zhang into it.

"I was leery," she said. "I asked him several times, 'Are you sure you want to do this?' He said he did."

Boone also denies telling Zhang that property values were going to rise: "I told them they had risen in recent years. I made no guarantees about the future."

The loan papers identified Zhang as the buyer and said he intended to occupy the condo. Misrepresentation to a lender that a straw buyer intends to occupy the property is often a key element of mortgage fraud.

A separate agreement between Zhang and Smiley made it clear that Smiley would be the occupant. In that document, she agreed to make the payments for Zhang and to purchase the unit from him within 18 months.

Smiley moved in and began making the payments as promised. After 18 months, Zhang said, she offered him $20,000 to extend their agreement another six months.

He agreed, but the payments soon stopped. The $20,000 never materialized, Zhang said, and Smiley abruptly moved out in February, taking all the furniture with her.

Before Zhang knew what was happening, the property went into foreclosure. Now the mortgage company is coming after him, and his paycheck is being garnished for back condo fees.

The condo is back on the market at an asking price of $314,900 - nearly 40 percent less than Zhang paid.

"My credit has been badly damaged," he said. "It's very painful. I feel it every day in my heart."

In December 2006, Beatrice Harris was getting behind on her bills and decided to try to squeeze some equity out of her house. Her late husband had helped build the modest bungalow off Sewells Point Road in 1962.

At Everyday Lending, on Virginia Beach Boulevard, Harris found a loan officer who was happy to help: Aretha Smiley.

There was only one problem, Smiley told Harris: Her credit wasn't good enough to refinance the property on her own. But Smiley knew a way around that obstacle.

After moving into Zhang's condo, Smiley met Francis Getty, a construction supervisor who was helping build a new condo complex next door. Getty mentioned that he was looking for some investment property.

Getty said Smiley paid him $5,000 to become the buyer of Harris' house and take out a new, larger mortgage.

At the time, Harris' monthly mortgage payment was $821. Smiley explained to her that under the refinancing, she wouldn't have to make any payments for a year. In a handwritten contract, Smiley promised that Harris would be able to buy back the house at the end of the year.

The $115,000 balance on Harris' mortgage was paid off and Getty signed for a new, $170,000 mortgage. Smiley assured him that she would send him the money each month to make the payments.

The payments came for 10 months and then stopped, Getty said. When the one-year term was up, he began charging Harris $1,400 a month rent to cover his payments - nearly double what she was paying before for her mortgage.

When Harris fell behind in January, Getty had Harris and her daughter, Brandy Dobbins, arrested for criminal trespassing. They were taken by police cruiser to the Norfolk City Jail, where they spent seven hours before being bonded out.

It was only after hiring a lawyer, Harris said, that it fully dawned on her what had happened: In her desperation to get out of financial distress, she had been stripped of virtually all the equity in her home.

According to the settlement papers, Harris should have received $43,441 in cash from the refinancing. She received only $3,000, she said.

"I didn't know that I had outright sold my house to this man," she said.

Now Harris is suing Smiley for fraud. Also named as defendants are Getty, Everyday Lending and Jay Zimmerman, the Norfolk lawyer who handled the closing.

"He'd throw me a paper and say 'This is so and so,' and I'd sign," Harris said. "I didn't understand anything."

Zimmerman, who since has retired, was also the closing attorney in the Zhang-Smiley transaction. Zhang also has filed suit.

Zimmerman declined to discuss either case.

Getty said he is a victim, too: "For some reason, I'm being portrayed as the bad person here. All I did was buy a house."

Everyday Lending, meanwhile, has gone out of business. Danielle McDole, the owner, said she had no knowledge of any fraudulent activity.

As for Smiley, McDole said, she was fired.

"I don't know where she is," McDole said.

Harris is living month to month not knowing whether she'll be able to keep up the rent payments. For a time she was hospitalized for depression.

She keeps replaying Smiley's soothing fast talk in her head. Especially galling in retrospect, she said, was Smiley's penchant for flaunting her Christianity.

"She sat right there in that chair and prayed with me," Harris said. "Now I think, what a hypocrite. She's going to bust hell's door wide open."

The FBI reported more than 46,000 cases of suspected mortgage fraud last year - up from 35,000 the year before - with annual losses estimated between $4 billion and $6 billion.

The Boston-based National Consumer Law Center says the explosion of mortgage fraud has even spawned a side industry of scam artists who hold seminars in which they teach others how to drain equity from unsuspecting homeowners.

"So many people now are facing foreclosure because of all the creative financing years ago when the real estate market was at its peak," said Special Agent Leah Wynn, acting supervisor for white-collar crime in the Norfolk FBI office. "Now the balloon has popped, and people unfortunately are suffering as a result. We are seeing perpetrators victimizing and preying on those people."

Foreclosures in Hampton Roads rose 34 percent from April to May, according to RealtyTrac Inc., a company that monitors foreclosure activity.

The scope of fraudulent activity in Hampton Roads is just now starting to become apparent, said FBI Special Agent Tom Tierney, who investigates many of the cases: "It takes 18 months to two years to flush out because the people who are duped don't realize they've been duped until down the road - until it's too late."

Even when and if the scammer is prosecuted in criminal court, more often than not the victim must resort to civil court to unravel the fraud.

"That's a big mess to straighten out," Tierney said. "It will take some time and an aggressive lawyer."

Staff writer Harry Minium contributed to this report.

Bill Sizemore, (757) 446-2276, bill.sizemore@pilotonline.com