by Tanta on 8/19/2008 09:02:00 AM

Here we have a detailed two-parter (part one and part two) on a sorry case of mortgage fraud from the OC Register. Dogged local cop pursues small-balance fraud case, nails crook, unveils huge regulatory failure. But . . .

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I have to confess to being as fascinated by the victims in this case as by the perp. Before everybody starts in on me about "blaming the victim," let me point out that yes, fraud is fraud, even when the victim is so lacking in common sense and elementary skepticism as to pass into Darwin Award territory. I do not excuse anyone who preys on the vulnerable, the foolish, or the ignorant.

Nonetheless, it's hard to prevent certain kinds of fraud against homeowners if you do not deal with the extent to which they "work" only because the victim colludes with them, up to and beyond the point where they become so outlandish as to defy belief. The case before us seems to me less a case of "mortgage fraud" than a classic confidence scam that simply takes as its incidental starting point a dubious mortgage offer. In other words, it's like a Nigerian scam email. From part one:

Nobody believed in Osborn more than Steve Ryancarz.

Ryancarz, 62, an Ohio businessman, wanted to refinance his 5,000-square-foot luxury house on a 5-acre lot to get some cash out for his refrigeration company. A major customer had gone belly up, owing Ryancarz's firm $1.2 million, he said.

Ryancarz wasn't just trying to get a loan for himself. He also was trying to do a favor for a friend, Kim Koslovic.

Ryancarz was engaged to Koslovic's mother. Koslovic, 38, and her husband had filed for Chapter 13 bankruptcy protection while he was unable to work because of an injury. In order to keep her modest, $107,000 house, she needed to refinance, but she couldn't find a lender in Ohio who would take a chance on her.

Ryancarz said he found Osborn online in 2003 through HomeLoanAdvisors.com. Ryancarz, who had good credit, figured that by bundling a loan for himself with one for Koslovic, Osborn might find a lender willing to take both.

"No matter how much money I had, I always help people out," Ryancarz said. "That's just how I am. Everybody needs a break. What I could do to help them – could help them get to a point where they turn their lives around, it's worth it."

There were warning signs, even early on. The first loan Osborn delivered for Ryancarz was bungled, resulting in much higher payments than Ryancarz had expected. Osborn blamed the problem on his boss.

Ryancarz said he called Osborn's boss, but the man wouldn't speak to him, so Ryancarz believed Osborn.

"It just snowballed after that," Ryancarz said.

Osborn said he would help Ryancarz sue the first lender, but he wanted money up front to pay for the lawsuit. Ryancarz sent thousands in fees.

Here's how much sway Osborn was able to exert over his victim: Ryancarz sent Osborn money to bail him out of jail when he was arrested for driving without a license. He also sent Osborn money to pay off a purported fine from the Department of Real Estate, according to records Ryancarz provided.

Ryancarz even sent $5,000 to pay for Osborn, his girlfriend and their children to take mini-vacations at the Loews Coronado Bay Resort.

"He said, 'I've done all this work for you. You owe me a favor. How about putting us up for the weekend?'" Ryancarz recalled.

Ryancarz said he believed that Osborn was working very hard trying to get loans for him and Koslovic, and if these loans didn't come through, well, that was understandable.

"I just thought they were axing the loans because of Kim's credit," he said.

Ryancarz never met Osborn in person. Over the phone, he sometimes heard Osborn use abusive language to office assistants, calling them nasty names if they made a mistake or didn't have the right paperwork.

"He was smooth to the clients, but as far as the people that done his work for him, he wasn't too kind," Ryancarz said.

To dispel any doubts about Osborn, Ryancarz would call the lenders that Osborn said he was working with.

Each time, Ryancarz said, he got confirmation.

"You gotta figure he's gotta be on the up and up. He's not going to be jeopardizing his reputation talking to these people or lying to you and saying he did," Ryancarz said. "You fall back on the sense of well, he's doing his job, it's just a little tougher than you thought it would be and blah blah blah."

Or, as Koslovic put it, "It's easy to push time away with the excuse of paperwork and glitches and technicalities, with all those words that everyone uses."

Ultimately, Ryancarz and Koslovic lost their houses.

It turned out that Ryancarz could have done a much better deed for Koslovic if he'd simply paid off her mortgage rather than trying to get her a new loan through Osborn.

Her house was worth $107,000. Ryancarz paid Osborn more than $370,000, court records show.

"I almost done it and I decided, no, that's not getting them where they want to be," Ryancarz said. "So I didn't do that. Hindsight indicates I should have."

My sense is that there will always be someone--a customer of his business who is allowed to rack up a $1.2MM receivable, a mortgage broker, somebody else--able and willing to part Mr. Ryancarz from his money. I am all in favor of prosecuting fraud and tightening up mortgage broker regulations, but I suspect we're kidding ourselves if we think there is any kind of workable law or regulation that will assure that the Ryancarzes of the world are protected from scammers.

I argued last year in this post, Unwinding the Fraud for Bubbles, that it was getting a bit difficult during the boom to tell the difference between the victimizers and the victims in a lot of cases. Now that we're deep into the horrors of the unwind, it is becoming increasingly fashionable in a lot of quarters to accept at face value many people's claims to have been nothing but innocent victims of the mortgage industry, and certainly with poster children like this Osborn character, the mortgage industry doesn't have much of a case for the defense. But some frauds just won't work without the greed, irresponsibility, or outright collusion of the mark. And not all of these cases are as blatantly clear as the Osborn-Ryancarz debacle. Reader Gary sent me this one, from Crain's New York Business:

Noel, a 28-year-old math teacher from Harlem who asked that his last name not be used, always thought it would be smart to invest in real estate. So when his cousin introduced him to a mortgage broker who promised he wouldn't have to put a penny down on a $1 million piece of property in New Rochelle, he jumped at the chance. Then, the same broker told him about a home in Yonkers. Again, he didn't have to put any money down.

Before he realized what he was getting into, Noel says, he was scammed into signing two mortgages totaling more than $1.5 million. The mortgage broker even provided a lawyer for the closing.

"I make $50,000 as a schoolteacher," he says. "There's no way I should have been approved for loans that big."

Hemmed in by monthly payments totaling more than $10,000 and bills for maintaining a third property on Long Island, Noel had no choice but to file for bankruptcy, he says. He filed without the help of a lawyer—he couldn't afford one—and he plans to walk away from the three homes and get a fresh start, this time without dreams of making it big.

"I thought real estate was a good business," he says. "But I guess it's not for me. I'm not buying property again—ever again."

I agree that Noel should never have been approved for the loan. I am perfectly willing to believe that the broker misrepresented Noel's income without his knowledge. But I am not quite willing to believe that Noel did not realize that mortgage loans have to be paid back. How did he think he was going to make payments on $1.5MM in loans out of a $50,000 salary? I mean, the lender probably didn't know what Noel's actual income was, but surely Noel did. Noel is a math teacher.

Noel could be scammed because Noel bought into the idea that real estate investing is a magical kind of business unlike any other kind of business in which you can put nothing down and make no loan payments and strike it rich. This does not excuse Noel's mortgage broker. It explains Noel's mortgage broker.

But what, Tanta?