WHEN CHRIS AND Meghan Driggers of Athens, Ga., were shopping for their first house in the fall of 2004, they spent hours with their real estate agent looking at neighborhoods. One day, the agent mentioned a new community, Milford Hills, where one of the other agents from his firm was selling houses.

It was Athens-Clarke County's first “conservation subdivision,” with 125 single-family homes and townhouses on 56 acres, half of which would be preserved as green space. Plus, it was in a great location, right next to an elementary school, and the developer, Brian Dupree, promised that the community would soon have a clubhouse and a pool.

The couple was sold. They signed a contract and moved into their four-bedroom, two-and-a-half-bath home. The sales price was $159,900.

PARADISE NOT FOUND

It wasn't long before the Driggers family noticed that even though their neighborhood was built out, a lot of the houses were vacant.

DEVALUED: Because of fraudulent appraisals, these townhouses sold for $210,000, about $60,000 above market value. Now they've been foreclosed on and are listed for $119,900.

“That was fine with us,” Chris Driggers says, “until houses started foreclosing and questionable people started moving in.”

And there were other odd things, such as the fact that the neighborhood had no street signs. (The couple would later learn that the developer had never turned the streets over to the county for maintenance.) “A couple of times, ambulances came in and they couldn't find things,” Chris Driggers says. The HOA ended up buying and installing street signs on its own.

The neighborhood quickly began to deteriorate. Driggers, a computer engineer, blamed the officers of the HOA for not staying on top of lawn maintenance, which was supposed to be provided as part of residents' monthly fees. What he didn't know at the time was that there were fewer than three dozen legitimate homeowners in the subdivision.

Then, on April 27, 2006, while working on a job in California, Driggers went online to check the newspaper back home and saw a front-page story announcing that seven people had been arrested in connection with fraudulent sales at Milford Hills. Included in the arrests were the developer, the sales agent, and two appraisers.

A total of 23 named and unnamed co-conspirators were charged under the state's racketeering laws. The arrest warrants claimed that those involved had colluded to commit mortgage fraud on a massive scale, allegedly stealing an estimated $7 million from lenders by dramatically inflating the appraisals on the houses, pocketing the difference, and walking away from the loans.

“I called my wife, and she freaked out,” Driggers says. “I was enraged, but it answered a bunch of [our] questions, like, ‘Why are all the houses empty?' We knew something was up, but we didn't realize it was that big.”

Within weeks, more individuals would be arrested, including C. Michael Rose, a local real estate attorney who had handled dozens of the closings. Local and state law enforcement officers had spent a year putting together their case, sifting through thousands of pages of sales documents. In all, 93 of the 125 homes in the community had been purchased fraudulently.

Milford Hills is the largest mortgage fraud case the Georgia state attorney general's office has ever handled, and it may be the largest ever to occur in the country in terms of the number of houses involved in a single development.

“Typically, with mortgage fraud, it would be just a coincidence if there were more than one or two homes in a subdivision,” says Russ Willard, communications director for the Georgia state attorney general's office. “Here, a huge percentage of the development was part of the mortgage fraud scheme.”

What makes the case important for builders is that whereas most mortgage fraud involves existing homes, Milford Hills was all new construction.

TELLTALE SIGNS

The first person to spot the problem at Milford Hills was Craig Weitzel, a mortgage fraud investigator with SouthStar Funding, an Atlanta-based lender. While attending a meeting of the Georgia Real Estate Fraud Prevention and Awareness Coalition (GREFPAC), Weitzel noticed “these angry soccer moms going on and on about this builder [at another subdivision], talking about shady deals going on, people buying houses and not moving in or renting them out Section 8 [a federally subsidized housing voucher program for low-income families].”

Weitzel took a look to see whether his company had any exposure in that particular subdivision and found a loan that was suspect. When Weitzel talked to the borrower, “I said I was concerned that he might have overpaid for his house. Instead of being concerned, he said it was none of my damned business, and it went downhill from there. He said his wife's family rented it out from them, but he couldn't name anyone living there.”

The borrower on that loan had a name very similar to one that appeared on a loan Weitzel was auditing in Milford Hills. That led to further investigation of other loans SouthStar had booked or turned down. Pieces of information, including buyers whose mailing addresses were the post office box of the developer, began to point to something shady. At another GREFPAC meeting, Weitzel bumped into a detective from Athens-Clarke County. “I said, ‘I may have come up with something. You guys have a problem with Milford Hills.'”

It proved to be an understatement of stunning proportion.

UNCOVERING THE DEALS

How did the Milford Hills case happen? As is common in mortgage fraud when it involves industry insiders, straw buyers played a central role in the scheme, says detective Sean McCauley, of the Athens-Clarke County Police Department. Straw buyers are recruited to buy homes at inflated prices. After closing, they're paid a fee of several thousand dollars from the proceeds of the inflated loan amount. The other conspirators—often a crooked appraiser, mortgage broker, or real estate agent—take their cuts, as well. In many cases, no mortgage payments are ever made and the bank forecloses.

In the case of Milford Hills, the market value of the houses—all basic starter homes—ranged from the $140,000s to about $160,000. The inflated sales prices averaged $210,000 to $215,000.

“The first six months, there were just a few [inflated sales], but the last year and a half, it was nothing but frauds on homes,” McCauley says. “It's unfortunate. There are a lot of legitimate folks who are stuck. They can't afford to move, because they'd take a loss, but if they stay, they have people moving in next to them—homes that weren't supposed to be rented out have ... [renters] in them.”

Dozens of the houses have already gone to foreclosure, with new filings being reported every month, according to county property sales records. Real estate agent Mike Seger has several of the listings for banks that have taken back the properties and are trying to recoup some of their losses.

“The lenders are getting killed,” Seger says. “The houses sold for up to $230,000, and we're selling them now for $110,000 to $115,000 and even less. They're probably worth more than that, but no one is willing to pay that now. It brings us business, but we sure don't like to get it this way. ... These people in Milford Hills—somebody needs to go down big time.”

As much as the lenders have lost money on the loans, the real victims, of course, are the legitimate buyers who trusted real estate professionals to guide them through the complexities of buying a home. The Driggers are among the owners paying property taxes based on inflated sales. Chris Driggers hopes he can appeal his $209,000 assessment and have it lowered.

The couple would move if they could, but there's too much competition from houses in foreclosure. The house next door, for example, is for sale for $120,000, which is $40,000 less than Chris Driggers paid barely two years ago. So he and his wife are waiting it out, hoping the situation will improve as the case progresses. But he worries about the evidence they've seen, such as a steady stream of very expensive cars parked in front of modestly priced homes, that some of their neighbors might be dealing drugs.

“The quality of the neighborhood is poor,” Driggers says, “and it's a direct result of [the fraud]. It looks like hell.

“We love our house. If I never had to leave [it] and see the state of the neighborhood, I'd be happy all the time.”

COULD MORTGAGE FRAUD HAPPEN TO YOU?

In the fast-paced real estate market of the past five years, mortgage fraud has grown dramatically. According to the FBI, lenders lost more than $1 billion due to fraud in fiscal year 2005, more than double their fraud losses of the previous year. Home builders, too, are vulnerable, especially now that the market has cooled off, says Jenny Brawley, lead mortgage fraud investigator for Freddie Mac.

“When you enter into a soft market, there's a tendency to have an overabundance of inventory,” Brawley says. “A builder who [wants] to get rid of some inventory might have a little more incentive or pressure to be taken by someone.”

Mortgage fraud is a sophisticated crime that usually involves industry insiders, so it's often difficult to detect until it's too late and the loan has defaulted. But there are some red flags that should alert a builder that something is amiss.

  • Watch out for “problem solvers.” With a soft market, be suspicious of a mortgage broker who says he has borrowers lined up and 100 percent financing or that he'll buy the properties and turn around and sell them for you. Such a broker “might have straw buyers lined up,” Brawley says.
  • Beware the phantom buyer. Builders are accustomed to dealing directly with the customer. If you have an elusive buyer with an intermediary who insists that all contact go through him, it's a strong sign of potential fraud.
  • Avoid deals that are too good to be true. If someone approaches you and offers you more than the listing price, or a real estate agent wants to list the house for more than you're asking, there's a good chance the person is a fraudster with a crooked appraiser lined up to inflate the price. Ask for a copy of the appraisal and the comparables they're using to come up with the price.
  • Check out those lender pre-approval letters. All too often today, lenders will issue pre-approval letters without checking the information the borrower has provided. Call the lender and make sure the borrower's identity, income, and address have been verified. Straw buyers often inflate their income to qualify for a higher loan amount or steal the identity of someone who will qualify.

    • Unfortunately, builders, too, sometimes commit mortgage fraud, Brawley says, in what is called the builder bailout scheme. It works like this: A buyer doesn't have any money to put down on a house, so the builder says he'll carry a 20 percent loan for the down payment. He inflates the value of the house to cover the difference. It's then presented to the lender as an 80 percent loan with a second lien for owner financing. The second lien is never filed or is satisfied a day or so after closing. The homeowner never has to pay back the 20 percent.

    “The lender thinks there's equity in the house,” Brawley says. “As the economy continues to get depressed, the first time the homeowner misses a payment, it's easier [for the buyer] to walk away, because they have no equity. Plus now, within this neighborhood, you have an artificial market.”