Office of the District Attorney

Description of the Problem

Real estate related fraud schemes have grown to become a nationwide concern. Victims of real estate fraud and predatory lending schemes in Santa Barbara County are most often senior citizens and people with limited English speaking abilities. In some cases, these victims have lost thousands of dollars to unethical and often unlicensed “real estate professionals,” “mortgage sales associates,” and others. Real estate fraud strikes at the heart of the American dream, where a sophisticated criminal can victimize dozens of people at a time by stealing their life savings and their most valuable asset -- their homes.

The number of homeowners in Santa Barbara County who have fallen behind in their house payments has quadrupled over the past two years as the real estate market has cooled and many low, introductory mortgage interest rates have risen.(1)

An article in the Lompoc Record cited the following relevant statistics:
• In Santa Barbara County between 2005 and 2006, notices of default more than doubled, increasing by 110 percent, from 400 to 841.
• For 2007, default notices more than doubled again, from 841 to 1,978.
• Santa Barbara County officials estimate that 1,978 homes will go into default this year and 765 properties will be taken by lenders.
• Officials also estimate that 885 properties will be sold by lending institutions.
• Last year, county officials saw 841 notices of default and 129 properties taken by lenders. That year also had 293 properties sold by lenders.
• In 2005, there were 400 notices of default in the county and 24 properties went back to the lender, according to county data, and 116 properties were sold by lenders.
• According to county officials, April 2007 made the top 10 list of highest-volume months since 1989 for notices of default and trustees' deeds - when a lender forecloses and takes ownership.(2)

In a report on the nationwide increase in real estate fraud investigations, the United States Department of the Treasury, Internal Revenue Service said:

In recent years, the booming real estate market has helped increase mortgage fraud and other phony real estate related schemes. The perpetrators of these schemes range from mortgage brokers looking to make a fast buck to drug dealers laundering their ill-gotten gains. Every year, these fraudulent schemes victimize individuals and businesses from many walks of life, including struggling low-income families lured into home loans they can’t afford, legitimate lenders saddled with over-inflated mortgages, and honest real estate investors fleeced out of their investment dollars.(3)

Statutory Authority for the Funding
Senate Bill 537, signed into law by the Governor on October 15, 1995(4), enacted section 27388 of the California Government Code authorizing counties to impose a $2 recordation fee to be paid to the County at the time of recording certain legal real estate instruments (i.e. Deed of Trust, Assignment of Deed of Trust, Notice of Default, Reconveyance, and Request for Notice). The use of the funds is strictly limited to finance eligible programs which enhance the capacity of the local district attorneys (and law enforcement where there is already a program in place) to deter, investigate, and prosecute real estate fraud crimes.

Proposed Solution

Real estate related fraud schemes can only be prevented through community outreach and focused investigative programs designed to reach those most likely to be victimized. There has been no centralized real estate fraud prevention, investigation and prosecution program in Santa Barbara County. Creation of such a program, similar to those in existence in more than eight other California counties, will directly address a growing problem in our non-English speaking and elder communities.

Cases of “real estate fraud” generally break down into three areas: home equity fraud; securities fraud tied to real estate; and lender fraud. The District Attorney has historically handled real estate fraud cases without the funding necessary to effectively investigate and prosecute each case where fraud might be suspected. As economic crimes, the cases are very labor intensive requiring specialized expertise and intense preparation prior to filing criminal charges.

The intent of the Legislature in enacting Government Code section 27388 is to have an impact on real estate fraud involving the largest number of victims. To the extent possible, an emphasis should be placed on fraud against individuals whose residences are in danger of, or are in, foreclosure as defined under subdivision (b) of section 1695.1 of the Civil Code. Case filing decisions continue to be in the discretion of the prosecutor. Funds from the Real Estate Fraud Prosecution Trust Fund shall be used only in connection with criminal investigations or prosecutions involving recorded real estate documents.

Performance Measurement
As required by Government Code section 27388, the District Attorney will submit an annual report to the Board of Supervisors for review of the effectiveness of the prosecution program. The report will include statistics on the cases filed and investigated, as well as an accounting of funds received and expended. The Real Estate Fraud Prosecution Trust Fund Committee will annually review the effectiveness of the program as required by the statute.

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(1) Lompoc Record, May 22, 2007, “Making the Mortgage is Getting Tougher,” Malia Spencer
(2) Ibid
(3) Internal Revenue Service, FS-2003-18, December 2003
(4) Chapter 942 of the Statutes of 1995, Amended by Chapter 765 of the Statutes of 2000 (SB 762), and Amended by Chapter 46 of the Statutes of (AB 241).

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