IOWA CITY, Iowa – A Des Moines attorney and four area businessmen deceived banks into selling homes to them at below market rates, then immediately resold the properties for profit without the lenders' knowledge, federal prosecutors say.
Attorney Jason Springer, business partners Nathan Smith and Patrick Steven, real estate agent Rick Makohoniuk and mortgage broker Jerod Hogan are charged with bank fraud in an indictment unsealed last week. Four of the defendants are scheduled to make initial court appearances Friday in Des Moines, while Smith is set to plead guilty Aug. 28, court records indicate.
The 11-page indictment outlines an alleged scheme that involved the sales of 19 Des Moines-area homes between 2009 and 2011. An FBI investigation led to the charges.
Struggling homeowners would contact a company owned by Smith and Steven, Iowa Loan Modifications, seeking help negotiating short sales in which properties would be sold for less than what lenders were owed. Smith and Steven would use their other company, Iowa Short Sales LLC, to purchase the homes at below market values, according to the indictment. The same day, they would resell the homes to other buyers for a higher price, without the lenders' knowledge. Springer, of Springer & Laughlin Law Offices, allegedly conducted the closings on those transactions, collecting commissions.
Smith, Steven and Springer carried out the scheme for 18 homes that were sold for more than $400,000 of what they had paid in the short sales, the indictment alleges, while Makohoniuk acted as the closing agent in another sale. Hogan, who worked for an Urbandale home mortgage lender, supplied false documents that were used to help deceive the lenders, it adds.
Such a scheme is known in the industry as "flopping" — making the home appear to be worth less than it is, buying it at a steep discount, and then reselling it.
The defendants — who didn't immediately return messages — are accused of committing fraud to evade rules designed to prohibit insiders from profiting off of short sales at lenders' expense.
The victims were identified Wells Fargo, Bank of America, U.S. Bank, CitiMortgage, GMAC Mortgage, and JPMorgan Chase. Home sellers can also face legal and tax consequences from such schemes, but the indictment doesn't allege such harm.
While Smith and Steven were negotiating a short sale with a lender, the homeowner would put the home in a trust that they controlled. Months later, Smith and Steven would purchase the home in the name of the trust before immediately reselling it to another buyer. The maneuver helped conceal their dual roles — negotiating the short sale and buying the home — that would not have been allowed. It also helped them evade "anti-flipping rules" — designed to ensure banks get fair market value on short sales — that prohibit homes from being resold within 90 days.
Smith and Steven allegedly submitted letters to lenders falsely saying that the homes had been marketed for sale. Hogan provided letters from his employers' letterhead that falsely claimed Smith and Steven had been approved for financing to pay cash for homes, it says.
Smith, Steven and Springer are accused of submitting settlement statements attesting that they paid cash for the homes, when in fact they either brought no cash or fraudulent checks to the closings. Smith signed affidavits to lenders falsely attesting he had no relationship to the sellers and no agreements to immediately resell the homes, the indictment says.
In the transaction handled by Makohoniuk, he and Smith allegedly created false paperwork to conceal from a lender that Smith profited from the sale. Makohoniuk created an invoice from a construction company in which he billed Smith for work that wasn't performed; Smith paid him but Makohoniuk returned the money later, the indictment says.