Crime Reporting Case Study: Mortgage Fraud
Deborah Potter, NewsLab
“This was happening all over and everybody was in on the scheme.”
–Patrick Scott, business editor, The Charlotte Observer
For years, it seemed the sky was the limit for real estate in Charlotte, N.C. The second largest U.S. banking center after New York City was one of the nation's fastest growing areas in the early 2000s. But the boom in home sales was driven in part by subprime loans that resulted in a wave of foreclosures.
In 2007, a year-long investigation by The Charlotte Observer found the surge in foreclosures “had as much to do with the builder as it did the borrower,” said business editor Patrick Scott.
The builder was Atlanta-based Beazer Homes USA, at the time one of the ten largest home builders in the country. The newspaper found it had aggressively sold starter homes in the Charlotte area to low income buyers in ways that made a high rate of foreclosures inevitable. A Beazer subsidiary arranged larger loans than many buyers could afford and sold homes for more than they were worth. The paper uncovered falsified mortgage documents and apparent violations of federal law, as well as federal and state lending rules.
The sales strategy was a financial success for the home builder, the paper reported, but the new neighborhoods fell apart. At the time the series ran, almost one in five buyers in Beazer's Southern Chase subdivision had lost their homes to foreclosure, more than six times the national rate.
That neighborhood was not an exception. The paper's investigation found that in dozens of newly-built developments of low-priced homes around Charlotte, foreclosure rates were 20 percent or higher.
“Prices fell. Renters moved in. Crime sometimes rose,” the paper reported. “But as the foreclosures piled up, authorities were unaware.” The investigation revealed that no one was tracking foreclosures at that time–not the city, the county, the state or the federal government.
“Nobody ever had shown the public officials that there's an issue here that needs to be recognized, and a problem in the growth of Charlotte, which has been pretty lax in any sort of regulation,” said Scott.
“We knew immediately that we had written something profoundly powerful,” said lead reporter Binyamin Appelbaum. “What was less clear for a while was what difference it was going to make.”
Faces of foreclosure
The newspaper's four-part series, Sold a Nightmare, put a human face on the subprime meltdown as it pinpointed who was to blame. Beazer marketed its homes at apartment complexes, taking people like 20-year-old maintenance worker Chris Wood on tours of its new developments.
“I went in thinking, 'I don't make enough money. I'm making $9 an hour,' ” Wood recalled.
He was startled when a Beazer employee told him he could afford a home. He borrowed $500 from his grandmother to make the deposit.
As it turned out, he didn't make enough money. Wood's final loan application misstated his income and debts. Without the misstatements, he did not appear to meet FHA's requirements for the loan he needed.
He was suddenly spending 45 percent of his income on debt payments each month. He was in trouble almost instantly.
While the paper repeatedly noted that buyers like Wood share responsibility for loans they accept, the series “explored how the bad actors operate,” said database editor Ted Mellnik, who developed an interactive online map of the neighborhood that vividly illustrated the scope of the problem. The map highlighted every foreclosed home in the Southern Chase neighborhood and linked to background information and a photograph.
“What I liked about that map was it really let people visualize this neighborhood and see what kind of houses they are, and kind of in a way see what kind of people they are,” Mellnik said. “People could see this isn't a crummy slum somewhere and this should be sort of a normal neighborhood.”
The online package also included video profiles of two couples who owned homes at Southern Chase. “They were really critical to hearing the stories of the homeowners and seeing…how these people really were bright, average, ordinary people,” said business editor Patrick Scott, “It's not like [Rick Santelli of CNBC] on the floor of the stock exchange talking about loser homeowners who took on the bad loans knowing that they shouldn't have. This wasn't the case.”
The series provoked an immediate outcry from local and state officials. “There was a tremendous amount of outrage about the facts we were reporting,” Appelbaum said. During the reporting process, however, “the FBI had made it very clear to us they were not interested in mortgage fraud, they were busy preventing terrorism,” he said; the US attorney for the Western District of North Carolina[Preferred1] was equally uninterested. After the stories ran, federal and state agencies announced investigations.
“The FBI basically told us that they were investigating this because they couldn't ignore it,” Appelbaum said. “We had detailed a case that was so blunt and clear in its particulars and massive in its implications that they had to deal with it.”
North Carolina wound up passing legislation “ensuring that lenders can't make loans without understanding whether the people have the ability to pay them,” said Scott.
Beazer eventually admitted that some employees had violated federal lending rules and got out of the mortgage lending business. The company fired its chief accounting officer for attempting to destroy documents.[i] It remains under investigation by the FBI, the Internal Revenue Service and the Department of Housing and Urban Development for possible criminal violations. The North Carolina Real Estate Commission is also investigating the company’s lending practices.
“It's always extremely gratifying when you can do a project that is a public service that has a wide reach and a broad scope and you did before almost every other newspaper in the nation,” Mellnik said.
“We surprised some people,” said reporter Lisa Hammersly, who also worked on the series. “It woke some people up. I don't think enough change came out of it, but it may yet. It's not over.”
How they did it
“Sold a Nightmare” was the third major housing investigation The Charlotte Observer had published in less than three years. In 2005, the paper discovered that minorities were more likely than whites to get risky, high-priced loans. The next year, the paper looked at the result: a pattern of foreclosures never seen before, concentrated in brand new suburban neighborhoods built for lower-income buyers. The unanswered question was, why?
“We knew there was something smelly going on,” said Mellnik. “It was just a question of whether it could be nailed down.”
Appelbaum, one of the Observer's banking reporters, worked alone on the project for months while also reporting other stories. He knew he was onto something criminal very early on, after seeing that one Southern Chase homeowner's income had been inflated on his final loan application. “That was mortgage fraud plain and clear,” Appelbaum said. “Who was guilty was a different question.
“My concern was to build up a pattern of evidence that would show that this had happened broadly and systematically and that people had been taken advantage of.”
Eventually, Appelbaum was assigned to the project full time, with help from Mellnik and Hammersly. To nail down the numbers, they examined county property records, building permits, court bankruptcy records and Federal Housing Administration data. Mellnik created a map of Southern Chase by “scraping” data from county government Web sites, including photos of each house, parcel maps and an ArcView shapefile. Appelbaum and Hammersly also spent countless hours in Southern Chase.
“Much of the information you need is not in public records at all, either print or electronic,” Appelbaum said. “You had to knock on enough doors and convince enough people to trust you with their personal, confidential financial records and you had to know what you were looking for when you got those records, and you had to believe it was worth doing that 200, 400, 600 times before you were sure you saw a pattern.”
Just seeing a pattern wasn't enough, Hammersly said. “When you can gather the documents, then what you need is sound experts who can walk you through it, look at the documents and say, 'Here's a problem,” Hammersly said. “It took some looking to find people willing to do it.”
The reporters consulted forensic appraisal experts as well as the state banking commission and the Securities and Exchange Commission. “You have to look at who the regulators are [and talk to them],” said Hammersly. “The banks did not want to talk about what it was like to be left on the hook.”
Getting through to Beazer was even more difficult. The company insisted Southern Chase was just an aberration, so the paper collected data showing that half the builder's other neighborhoods around Charlotte had even higher foreclosure rates. “They stopped talking to us after that,” said Scott.
By the time the series was ready for publication, the Observer team had grown to 20, including researchers, photographers and designers. The project included eight stories, which ran over four days, along with buyer profiles and “how to” information that Appelbaum described as “a guide to the perplexed, a set of instructions for helping yourself.”
Using graphics and break-out boxes, the paper explained in simple terms how no-money-down loans and teaser rates can hurt buyers, and how foreclosures damage people and neighborhoods. “We used the pages inside to do explanatory journalism on a really confusing thing,” said Scott, “trying to break this down into components that were clear and meaningful.”
Foreclosures in many other areas have been well documented by journalists since the Observer's series ran. But[Preferred2] the Charlotte journalists believe there is still fertile ground to be explored.
Low-down-payment mortgages insured by the Federal Housing Administration account for nearly a third of all mortgage loans now being made, according to an investigation by The Washington Post, which found signs that the program is being seriously abused.[ii]
“That agency is really ill equipped to be providing or backing and overseeing loans,” said Scott.
The toll of foreclosures
When a community is riddled with foreclosures, “the pain is just extraordinary,” said Hammersly. She urged reporters to examine the issues on an extremely local level. “The closest look in your own neighborhood can be more telling that all the 'suits' holding news conferences across the country.”
For Appelbaum, the important question is what happens next to communities like Southern Chase all over the country, and to the people who live there[Preferred3] . “Those are now our new slums, our new forgotten places,” he said. “There's a real chance the solution to this crisis is just to walk away from too many of those people and it's a topic that deserves more coverage than it's gotten.”