Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle
D.C. Current
Which Vultures Feasted Best? Money-Saving Tips For Fannie and Freddie; Diamond-Buying Tips for All
By Jim McTague
1287 words
3 June 1996
Barron's
54
English
(Copyright (c) 1996, Dow Jones & Company, Inc.)
As an upshot of the savings and loan crisis in the late 'Eighties, many of the vulture funds established by U.S. financial firms to buy troubled thrift assets have become highly proficient at squeezing profits from underwater loans and properties.

The bones of the failed S&Ls picked clean, the Resolution Trust Corp., established to dispose of the assets, closed its doors last December and was folded into the Federal Deposit Insurance Corp. So the vultures now are looking overseas for fresh carrion. The Whitehall Street partnership established by Goldman Sachs to buy thrift assets from the RTC, for example, is finding similar pickings in France. The soft real-estate market in that country is where the U.S. was about four years ago. Whitehall's investors include some of the nation's bigger pension funds.

GE Capital's agents have been sighted scoping out banks and other properties in Eastern Europe. Vulture-fund experts predict that Mexico will become the next big feeding ground. Investors already have been down there poking at corpses but are waiting for the peso to stabilize.

Congress established the RTC in 1989. The agency disposed of 747 failed S&Ls with close to $500 billion in assets, most of them mortgages. Who bought the stuff? On May 16, in response to our Feb. 13, 1995, request for information, the FDIC sent us what is perhaps the first official list of the top 20 purchasers of RTC assets. The list is somewhat misleading; it does not consolidate purchases made by partnerships sharing the same corporate parentage. For example, SunAmerica, whose Sun NLF ranked No. 1, also purchased lesser amounts through other partnerships.

Some interesting asides: West Coast Land Fund LP is a partnership between Colony Capital, a California company, and the federal government, which has a 75% interest in the deal. KSL Enterprises Group, a partnership of KKR and private investors, purchased several championship golf courses.

-- A critical appraisal of the country's two federally chartered mortgage giants released last week by the Congressional Budget Office takes aim at the extensive lobbying efforts of those two entities.

Both the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac, lobby extensively on Capitol Hill to maintain their government-favored duopoly. They even bought TV time during the GOP primaries to attack Steve Forbes's flat-tax proposal, which would eliminate mortgage deductions and, presumably, hurt their business.

Asked what would happen to operating costs if Fannie and Freddie lost their privileged status, the CBO responds that those expenses could rise by $300 million combined annually if they were forced to pay state and local taxes and pay to register securities offerings with the Securities and Exchange Commission as their private-sector competitors must. However, the CBO says, the two might offset those costs by reducing spending, especially for "lobbying and political risk-hedging."

-- Since 1959, when the Federal Trade Commission last issued guidelines on sales and advertising to the jewelry industry, unanticipated technological advances have provided the purveyors of gold, pearls and gemstones with new tools for deceiving the naked eyes of investors.

Some jewelers have used lasers to drill channels into diamonds through which acid is injected to eliminate any black inclusions. Often these diamonds are advertised as being flawless, though lasering leaves a small opening in the surface that is visible through a 10-power magnifier.

Jewelers also have learned to inject diamonds with plastic to repair fractures and improve the diamond's sparkle. The treatment is not always disclosed, even though the diamond is no longer pure and the plastic might wash out during cleanings, making it worth about 40% less than a naturally flawless diamond.

The FTC's new guidelines say it is deceptive to describe a lasered stone as "flawless." The agency also recommends disclosure of fracture-filling as well as treatments like irradiation that can temporarily change the color of a stone.

Other changes in the 200-page guide include: Pewter articles must contain at least 90% tin; if diamond weight in carats is stated as a fraction, the buyer should be informed that this is an approximation; and if a diamond's weight is stated as a decimal, like 0.005 carat, the figure should be accurate to the last decimal place; it is unfair to use the terms faux pearl, Mother of Pearl or fashion pearl unless they are preceded by the word "imitation" or "simulated"; and the word precious should not be applied to imitation gemstones.

Does this mean the world has been made safer for jewelry investors? Hardly. The guidelines don't have the force of law, according to Antoinette Matlins, author of several books on gems and diamonds. The jewelry industry is self-policing but doesn't do a particularly good job, she says.

Matlins says there are lots of ways for unscrupulous jewelers to get around the guidelines. Sometimes receipts have broad disclaimers in very small print indicating that artificial treatments may have been used to make ordinary stones appear more like rarer stuff. She has gone undercover in the diamond district of New York City and heard jewelers tell her a fracture-filled diamond is high quality but scribble on the receipt a description of a lower-quality diamond. The receipt is sealed in a tiny envelope in the bottom of the jewelry box, and few people ever open it before they get home.

Diamonds and gems -- especially rubies -- often are fracture-filled by manufacturers, but she says half the jewelers selling the stuff don't know how to tell if a stone has been treated in this way. "It's super-simple to learn," she declares. "Why isn't the jewelry trade cracking down on these people?" She estimates that unwitting consumers have purchased hundreds of thousands of fracture-filled diamonds and an equal number of fracture-filled rubies.

What's an investor to do, short of becoming a gemologist? Get the dealer -- not just the appraiser -- to put all representations in writing. And ask if the stone has been treated in any way to enhance its appearance. Finally, read the receipt carefully before you leave the store.

Peggy Willett, executive vice president of the American Gem Trade Association, claims she was disappointed that the new guides no longer required gemstone producers to disclose treatments that permanently change a stone. Such disclosures have been an industry practice. She says under the new guidelines, a producer could take a relatively inexpensive white sapphire, heat it until it becomes blue and sell it as a more expensive gem. The consumer would be none the wiser.

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BIG BUYERS
-- The top 20 purchasers, by book value, of RTC assets.

Purchaser Value
Sun NLF L.P. $1,272,523,200
(SunAmerica)
Whitehall Street 1,097,256,741
(Goldman Sachs)
Home Savings of America 1,062,207,591
(H.F. Ahmanson)
General Electric/Colony
Capital/Robert Bass 955,382,005
Morgan Stanley 893,883,851
Portfolio Funding Group 650,390,000
(G.E. Capital)
Lehman Brothers 594,379,412
KSL Enterprises Group 564,179,880
(KKR and investors)
Daiwa Securities 470,377,571
West Coast Land Fund 457,095,319
(Colony Capital)
Hyperion Holdings 452,357,469
Cargill Financial 451,768,782
Ashford Financial 351,064,000
Oxford Funding 349,844,575
Nomura Asset Capital 279,132,811
First Boston 275,651,007
EMC Mortgage 249,148,708
(Bear Stearns)
Kidder Peabody 245,789,924
Mortgage Capital
Daiwa Finance 243,889,553
Merrill Lynch 206,639,092
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FREMONT HOME LOAN OWNER TRUST 1999-1
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DESCRIPTION OF THE SERVICER                                                    

o    Fairbanks Capital Corp.  ("Fairbanks"),  a Utah corporation,  was formed on
February 24, 1989 by its current CEO Thomas Basmajian.               

o    Financial  Security  Assurance,  Inc. (James Ozanne) and Nomura Asset Capital  Corporation
     each purchased a 25% share of Fairbanks Capital Holding  Corporation on
May
     28, 1998. Cargill Financial Services Corporation  maintains a 25% ownership
and management owns the remaining 25%.
                               

o    Fairbanks  commenced  mortgage  servicing  operations  in 1989  for its own
     account and since 1994 has managed and serviced  third-party  mortgage loan
     portfolios.  Prior to 1998,  Fairbanks  primarily  serviced  portfolios  of
non-performing or delinquent residential mortgage loans.             

o    Fairbanks is a FNMA approved  seller/servicer and a FHLMC approved servicer
   that is engaged in the servicing of first and second lien mortgage loans.

o Fairbanks is approved by both Standard & Poor's and Fitch IBCA, Inc.         

o Fairbanks is currently servicing over 20,000 loans.                          

o    Fairbanks is  currently  servicing  securities  for First Union Home Equity
     Bank, Block Financial,  Cityscape (for FGIC/FSA/Harris Trust), Freddie Mac,
Fannie Mae, and United PanAm Mortgage.                               

o    Fairbanks  currently maintains excess servicing capacity of $3.0 billion in
unpaid principal balance.                                            

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