Prosecuting Collusion and Fraud at Real Estate Foreclosure Auctions

Division Update Spring 2016

The Division’s Criminal Program continued to hold individuals who conspired to cash in on the housing crisis responsible for their crimes. Since early 2015, the Division has charged 15 individuals who engaged in bid rigging and fraud at real estate foreclosure auctions in northern California and the southeastern United States. More than 100 individuals have been charged since the investigation began.

Background

The recession triggered by the financial and subprime mortgage crises led to a surge in homeowners defaulting on their home loans. In many cases, these defaults led to the foreclosure of the properties and their eventual sale at public foreclosure auctions.

Then, in a typical foreclosure proceeding, the financial institution holding the loan hires a law firm or trustee company to run a foreclosure sale, the purpose of which is to obtain the maximum amount of money to pay off the outstanding loan balance, discharge other liens on the property, and, if possible, return funds to the former homeowners. In many jurisdictions, these sales take the form of nonjudicial public foreclosure auctions either at or near the county courthouse.

“This was cheating the system, cheating those that played by the rules.”

Assistant Attorney General Bill Baer, on the massive fraud rings operating in real estate foreclosure auctions nationwide

At the auctions, participants are expected to bid against each other in a competitive process. If the bidding exceeds a minimum bid amount set by the foreclosing financial institution, the highest bidder wins title to the property, and auction proceeds are disbursed to the foreclosing financial institution. Then, if the proceeds exceed the outstanding loan balance plus any foreclosure costs and fees, the remaining proceeds are distributed to other lienholders, and, if these debts are satisfied, the former homeowners. The more vigorous the competition for the property at the foreclosure auction, the better the chances that there will be funds available to be disbursed to all of these parties.

 

The Investigation to Date

The Division and the FBI’s joint investigations have exposed widespread bid-rigging rings made up of real estate investors in southeastern United States and northern California. These investors gamed the system to capitalize on the pain suffered by Americans who lost their homes as a result of the Great Recession.

Here is how their schemes worked: The conspirators would agree to refrain from bidding against each other at the auctions (often in exchange for payments from the “winning” bidder) in order to enable the “winning” bidder to obtain title to a foreclosed property at below-market prices. Sometimes, the conspirators would even hold secret, secondary side auctions to determine which conspirator would be awarded a specific property. These unlawful schemes enriched the conspirators while cheating financial institutions, debtholders, and in some cases, homeowners out of auction proceeds.

The prosecutions resulting from these investigations have covered public foreclosure auctions held across four states:

Locations Where Auction Participants Have Been Charged

Most of the individuals charged have already pled guilty, while others have been indicted and will face trials in the upcoming months. The Division will continue its efforts to root out fraud in the conduct of public foreclosure auctions and will bring to justice the individuals who have participated in these criminal schemes.

Updated April 8, 2016

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