When Rescue Means Eviction

By PHILIP SHISHKIN - Wall Street Journal

In 2003, Daphne Webb, a 73-year-old mother of nine, had a heart attack, quit her cleaning job and was soon struggling with medical bills. She and her husband fell behind on the mortgage payments on their white clapboard house in Montclair, N.J.

"Everything came down all at once," says her husband, William, whose $45,000-a-year income as a bus driver wasn't enough to keep the family financially afloat. By 2006, the Webbs were facing foreclosure.

So when two real-estate investors offered to purchase their house, rent it to them and then help them buy it back -- using a long-established practice known as a sale-leaseback -- the Webbs say they jumped at the opportunity. In doing so, the elderly couple waded into the murky world of "foreclosure rescue," a business that targets the growing numbers of distressed homeowners seeking help.

In some cases, according to recent warnings by authorities, homeowners can dig themselves into an even deeper hole by dealing with purported rescuers, while doing little to ward off eviction. Instead of saving homes, federal officials have warned, distressed homeowners can sometimes lose them -- along with any savings they had.

"People are desperate and willing to consider things they were never willing to consider before," says Bradley Elbein, national coordinator of the Federal Trade Commission's Foreclosure Rescue Fraud Project. "It is a real problem." Many rescuers use sale-leaseback arrangements, while others charge homeowners a one-time fee to help them negotiate with creditors.

Sale-leasebacks are a common and legal practice in real estate. To raise cash for short-term needs or to secure tax benefits, a company can sell a building it owns, and then pay rent to the buyer to stay in it. The strategy was particularly attractive before the economic crisis, when credit was easy to obtain and investors believed real-estate prices would keep climbing.

Some leaseback agreements allow sellers the option to repurchase the property at a later date. In residential real estate, a sale-leaseback can allow homeowners in financial trouble to remain in their homes and pay off their debts. But investigators say the strategy is susceptible to fraud when investors don't give homeowners the promised money. Some investors pocket the mortgages they obtain from banks or strip equity from the homes they buy instead of helping former owners get back on their feet, investigators say.

Charges of Fraud
The Webbs allege in a civil lawsuit filed in New Jersey Superior Court that they were defrauded into giving up title to their home, and lost $400,000 in home equity and tens of thousands of dollars in fees paid to the two investors, Ronald Losner and Alyssa Azran. The home, now owned by Ms. Azran, is in danger of being foreclosed on, and the Webbs, who have been paying rent to her, could get thrown out by a new owner.

Through an attorney, Mr. Losner and Ms. Azran denied any wrongdoing and said they prevented the Webbs from being evicted when they were in trouble in 2006. The attorney declined to discuss specifics of the Webbs' allegations. The case is currently awaiting trial.

A number of cases of alleged sale-leaseback fraud have recently surfaced in Florida and California, affecting hundreds of homeowners in these hard-hit real-estate markets.

In October, federal prosecutors in Tampa, Fla., charged Mario Quiroz and Jose Oliveri with wire fraud and money laundering, stemming from sale-leasebacks to 290 homeowners facing foreclosure. Most of the homeowners ended up being evicted and lost any equity they held, investigators say. Messrs. Quiroz and Oliveri, who are accused of defrauding banks of $33 million in the alleged scheme, are believed to have fled to Peru, the Treasury Department says. An attorney for Mr. Oliveri says his client denies wrongdoing. An attorney for Mr. Quiroz couldn't be reached for comment.

On Feb. 2, a grand jury in San Diego indicted William Hutchings and nine others on charges of allegedly defrauding some 400 homeowners. According to the indictment, the homeowners, mostly Hispanic, were told their properties could be protected because they were part of a land grant Mexico made to the U.S. in the 1850s, and that somehow made them immune from foreclosure.

William and Daphne Webb, of Montclair, N.J., are suing investors who bought their house and leased it back to them.
The consultants falsely claimed the homeowners could take advantage of the immunity by turning over their property deeds to trusts controlled by the consultants that were connected to the grant, the indictment states. Most of the homeowners who turned over their deeds and paid fees to the consultants were later evicted, prosecutors say.

Gregory Turner, an attorney for Mr. Hutchings, says his client was going to help the property owners save their homes, but that prosecutors intervened. "There was never an opportunity to demonstrate the veracity of this program," Mr. Turner says.

Foreclosure Proceedings
According to the Webbs' lawsuit, Mr. Losner and Ms. Azram approached them after the couple had sought and failed to obtain federal bankruptcy protection, and the bank that held their mortgage began foreclosure proceedings. They offered the sale-leaseback arrangement for the house, which Mrs. Webb had owned since 1983, says the lawsuit. In a posting on Foreclosures.com, a Web site geared toward real-estate investors, Mr. Losner and Ms. Azran describe efforts by people to save their homes via bankruptcy filings and advise tapping into "this distressed source of people" by approaching them with an offer after they fail to get bankruptcy protection.

The Webbs sold their home to Ms. Azran for $820,000 in March 2006, but received no money in the sale, according to the lawsuit. They also signed a $2,600-a-month lease agreement that stated they could buy the house back if they paid a $45,000 option price after 18 months of paying rent, the lawsuit states.

Mr. Webb says he and his wife didn't fully understand what they were signing. Tom Farinella, an attorney who represents Mr. Losner and Ms. Azran, says the Webbs were told to consult an attorney about the paperwork, but they didn't. "For the Webbs to now claim they are victims of some large-scale scheme begs to differ with the fact that they were adequately advised to retain counsel," says Mr. Farinella.

He declined to make his clients available for comment. New York State court records show that Mr. Losner, a former attorney, was disbarred in 1995 for allegedly unethical conduct in representing clients in real-estate transactions.

According to the Webbs' lawsuit, Ms. Azran obtained a $533,000 mortgage from Credit Suisse through a mortgage broker in Brooklyn, N.Y. The lawsuit alleges Credit Suisse, which is named as a defendant, approved the mortgage even though Ms. Azran didn't list a job on her application and stated her liquid assets totaled just $100. She also listed 11 other heavily mortgaged rental properties, the lawsuit states.

A spokesman for Credit Suisse said "we are investigating the matter." He confirmed that some of the loans it sourced through the Brooklyn broker -- "less than 20%" -- required only a Social Security number, a good credit score and an appraised value of the property.

After obtaining the mortgage, Ms. Azran paid off the Webbs' delinquent mortgage, on which they owed about $400,000. Between April 2006 and June 2008, the Webbs paid about $36,000 in rent to Ms. Azran and Mr. Losner, according to the lawsuit.

The Webbs say they made several inquiries about buying their house back for $45,000 in 2007 and 2008. Their lawsuit says Mr. Losner sent appraisers to the house, which cost them at least $700. He also told them at some point they would need to pay $120,000 to buy their house back, according to the lawsuit.

Meanwhile, Ms. Azran fell behind in her mortgage payments and in December 2007, Wells Fargo, which serviced the mortgage, filed for foreclosure on the house. A New Jersey Superior Court judge has effectively stayed the foreclosure, and the Webbs remain in the house and are paying their rent to an escrow account.