Manhattan District Attorney Robert Morgenthau said the fraud was the kind of activity that led to the US's current property loan crisis. He confirmed that 12 of the 25, including two lawyers, have pleaded guilty to charges that include larceny and fraud.
AFG Financial Group and its accomplices stole millions of dollars from banks that had loaned money to buy real estate. The banks in some cases later sold the mortgage debts as investments, but because the investments were based on deals that never occurred, the banks, the property sellers, and the investors were left empty-handed.
Cheated banks and lenders included New Century Mortgage which lost $32.2 million, Countrywide Home Loans lost $7.9 million and Washington Mutual in Long Beach, New York which lost $8.6 million.
'This is one of the reasons for the mortgage crisis. This kind of activity is what led to the mortgage crisis,' Morgenthau declared. He said the suspects used inflated property appraisals and phony loan packages, forged forms, pay statements and bank documents to perpetrate the largest mortgage fraud ever in the New York City area.
At a news conference, Morgenthau showed a color photograph of an overgrown vacant Bronx lot that defendants claimed was the site of a two-family house in order to get a $500,000 mortgage.
The district attorney explained how AFG was set up specifically as a vehicle for the fraud. 'If it carried out any legitimate business it was by accident,' he said. He described how between June 2004 and April 2009 the group would find distressed real estate and then get a 'straw' buyer who had good credit but needed cash to front for the purchase of the property.
That buyer usually did not know the transaction was a sham. The buyers were told this was an investment opportunity that would help people save their homes, earn them and other investors a healthy return and cost them nothing but their signatures.
The AFG conspirators would strike a deal to buy and then get a bank to finance the purchase, Morgenthau said. The lawyers said they put the mortgage money in escrow accounts but they and their accomplices actually took the money without paying the seller or anyone else.
Meanwhile, the straw buyers were left with bad credit and no investment return and the lender foreclosed on the seller's property and took ownership. In some cases the banks had already sold worthless mortgage paper on the overvalued real estate on the secondary investment market.
