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New Kind Of Foreclosure Fraud Sweeping California

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(AP)

(AP)

STOCKTON (CBS 5) — For those who are losing their homes to foreclosure, it’s a bitter pill to swallow. But some homeowners may have lost their homes to investors cheating on the courthouse steps.

Richard Northcutt and Yama Marifat are part of a ring of at least six men who have pled guilty to a new kind of foreclosure fraud called “bid-rigging.”

It all started on the courthouse steps in Stockton, where there are thousands of foreclosures up for bid. It’s a fast-paced world where cash is king, and the highest bidder nabs the best deal. With that much money swirling, federal officials say some people cheat.

In fact, a disgruntled bidder tipped off U.S. Attorney Benjamin Wagner to a conspiracy so complex, the feds now admit it may be one of the contributing factors into why San Joaquin County leads the nation in home foreclosures.

“What they would succeed in doing is getting together and agreeing that nobody would bid,” said Wagner.

Here’s how it worked: Instead of competing against each other, the group of investors would select just one person to bid, allowing them to buy foreclosed properties often for just a penny over asking.

And the bidders who didn’t play along were muscled out. “People knew who they were. They sent out the message to other bidders that they were not welcome,” said Wagner.

The other bidders were not welcome into a second private auction, where the same house was re-sold at a higher price. The difference was profit that the group would split. “They had a formula that they used to divvy up those profits,” said Wagner.

So why would that generate the might of the U.S. Attorney’s office? Because they say bid rigging not only drives down the prices of real estate, but it also steals equity from those homeowners trying to weather this financial storm.

But one auction expert calls the feds heavy handed. “I think a lot of folks see foreclosure investors as you know sharks or vultures picking off of dead carcasses,” said Sean O’Toole, founder and CEO of Foreclosureradar.com. “That is unfortunate because at the end of the day they are cleaning those dead carcasses off our streets.”

O’Toole used to buy foreclosures, on the courthouse steps in Martinez and said real estate investors are struggling to make a dollar. “There may be other debt on the property you may have to pay property taxes,” he said.

So he admits that could give some an incentive to cheat. “When you have a group of people that stand together every day the temptation is high. I think its human nature to say ‘Well geez John we just had lunch together, I am not going to bid you up.’” But he believes most know better than to cross the line.

U.S. Attorney Wagner disagrees. “The auction process is not a highly regulated process. So unfortunately that allows fraud to creep in.”

It was a temptation Marifat and Northcutt couldn’t resist. Both have admitted to making hundreds of thousands of dollars from the bid rigging scheme. “This is not going to be the last that you hear about these types of prosecutions,” said Wagner.

(Copyright 2011 by CBS San Francisco. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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