Editor’s note: With billions of dollars flowing in and out of the real estate industry each year, the industry sees its share of fraud and other criminal misdeeds. In this special three-part series, Inman News uncovered the most common schemes, infamous scandals and a host of fraudsters who are still on the lam. (See Part 1: Real estate fugitives take the money and run and Part 2: Real estate fraud schemes run rampant.)

Straw buyers. Inflated appraisals. Falsified loan applications. Fake W2s and bank statements. Interfering with officials from the U.S. Department of Housing and Urban Development.

The different ways of committing real estate fraud are seemingly endless. And the amounts seem to vary just as much, from just a couple hundred dollars to scams worth upwards of millions and occasionally billions of dollars. But the ones with higher dollar amounts and those involving top officials attract the most attention.

Here’s a sampling of some of the most notorious and largest real estate frauds in recent history.

The Savings and Loans scandals

What roundup of real estate fraud would be complete without a discussion of the S&L scandals of the 1980s? The topic is so massive that entire books have been written about it, but it all boils down to real estate.

Savings and loans were originally created to accept savings from private investors to provide home mortgage services for the public. The first U.S. savings and loan association was founded in 1831 and the concept grew from there, with some periods of rapid expansion, such as after World War II.

The federal government’s moves to deregulate the industry in the 1980s allowed savings and loans to offer a broader range of services than they had ever been allowed to offer in the past. The deregulation allowed savings and loans to enter the business of commercial lending, trust services and non-mortgage consumer lending, according to Encyclopedia.com. One of the moves changed the deposit insurance from $40,000 to $100,000. Some observers have said that extension encouraged savings and loans to engage in riskier loans because they knew they’d be covered by insurance.

Later changes permitted savings and loans to make secured and unsecured loans to a wide range of markets, allowed developers to own the institutions and allowed owners to lend to themselves. The institutions began large-scale speculation, particularly in real estate, according to Encyclopedia.com.

Because of that, and the inexperience in handling different types of loans, more than 500 savings and loans were forced to close in the 1980s. The federal government eventually approved a bailout plan in 1989, but the true cost to taxpayers is still up for debate. Estimates have ranged from $500 billion to more than $1 trillion.

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One of the most notable and most costly savings and loan scandals involved Lincoln Savings & Loans, owned by land developer Charles Keating. Prosecutors alleged Keating generated $82 million in bogus profits with the sale of land at inflated prices to straw buyers who financed the purchases with loans from Lincoln. Keating was found guilty of fraud, racketeering and conspiracy.

After federal regulators seized control of Lincoln, they found that although its core business was supposed to be making low-risk residential mortgages, almost 67 percent of Lincoln’s assets were high-risk land ventures and commercial development projects.

Whitewater and the Clintons

Whitewater became a household term in the 1990s during Bill Clinton’s presidency, though few in the general public know that the complicated investigation began with real estate.

Whitewater was the popular name for a failed 1970s Arkansas real estate venture by the Whitewater Development Corp. Clinton and his wife Hillary Rodham Clinton were partners in the deal, along with friends James andSusan McDougal. The partnership bought 220 acres of riverfront land with the goal of selling lots for vacation homes. The partnership did poorly, however, and dissolved in 1992. The Clintons reported a net loss of more than $40,000.

Whitewater had been backed by the Madison Guaranty Savings and Loan, which went bankrupt in 1989, according to Encyclopedia.com. The McDougals also were controlling partners in the thrift.

The Clintons denied any wrongdoing as accusations surfaced over improper campaign contributions, political and financial favors and tax benefits. Special prosecutor Kenneth Starr investigated Whitewater in 1994, as did congressional committees in 1995-96.

In a 1996 trial, both the McDougals and Jim Guy Tucker, Clinton’s successor as Arkansas governor, were found guilty of most of the fraud and conspiracy charges Starr had brought against them. The charges were related to the complex loan-swapping schemes that helped destroy the McDougals’ savings and loan, according to a special report from The Washington Post.

In another trial that same year, two Arkansas bankers were acquitted of some charges and the jury deadlocked on other charges.

Starr in 1998 won permission to expand his inquiry to include the Monica Lewinsky scandal. Questions about Clinton’s relationship with Lewinsky overshadowed Whitewater matters, and Starr’s scope eventually included a range of accusations of fraud, obstruction of justice and abuse of power, all of which contributed to the public forgetting that Whitewater initially began with real estate.

Interfering with HUD officials

Another real estate related fraud at the federal level involved James Watt, Ronald Reagan’s Secretary of the Interior. After he left that position, he was indicted on 41 felony counts for using his connections at the U.S. Department of Housing and Urban Development to help his private consulting clients get federal funds for housing projects in several states.

Watt acknowledged that he had received $500,000 from clients who were granted favorable housing contracts after he intervened on their behalf. He was eventually sentenced to five years in prison and community service, according to news reports.

Household Finance

In 2002, mortgage lender Household Finance agreed to settle with government regulators and pay up to $84 million to consumers nationwide. The mortgage lender had been accused of practicing unfair and deceptive lending in the subprime lending market.

Attorney General offices and banking and financial regulators had coordinated their efforts after identifying a pattern of complaints from borrowers who said they had been misled into agreeing to home loans with different and more expensive terms than they had originally been promised.

The settlement resolved allegations that Household and its affiliates misrepresented home loan terms, deceived consumers about credit insurance, and charged excessive loan origination fees and prepayment penalties. Under the settlement terms, Household agreed to limit prepayment penalties to only the first two years of a loan, ensure that new loans provide a benefit to consumers prior to making the loans, limit upfront points and origination fees to 5 percent, improve disclosures to consumers, reimburse states to cover the costs of investigations and eliminate “piggyback” second mortgages.


Send tips or a Letter to the Editor to samantha@inman.com or call (510) 658-9252, ext. 140.

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