Subprime Lending Case History

Subprime Lending

The Trail of a Real Estate Fraud from the New Jersey Boardwalk
to the Boardrooms of High Finance

By Stephanie Ayres

The seaside town of Asbury Park, New Jersey was one of the first communities in the United States to feel the pain and devastation that can be caused by a tidal wave of mortgage fraud and flipping. But it is more than just a tale of greed and coldhearted indifference to the effects these activities can have on peoples' lives. It started with the usual scheming outlined in the diagram and proceeded up the money chain through a corrupt mortgage lender and into the upper atmosphere of big-bank securitization. Why didn't the banks look more carefully at the bad loans they were buying? Perhaps they were too busy making money on them.

At street level in the Asbury Park scheme, investor William Kane bought run-down properties. He worked with Gary Grieser to recruit straw buyers for the properties. Mortgage broker Robert Skowrenski allegedly worked with Kane in originating loans using false documents obtained from Grieser and inflated appraisals on the properties from a group of appraisers who participated in the scheme: Richard Calanni, John R. Brown, Roland Pierson, Thomas Brodo, Richard DeBenedetto. The real estate settlements were handled by a couple of accomodating attorneys-Stanley Yacker and Richard Pepsny.

The mortgage loans originated by Skowrenski's company were sold to Walsh Securities Inc, a New Jersey family firm which funded the loans and resold many of them to Greenwich Capital Markets. Greenwich Capital Markets, at the time of the Asbury Park scheme, was an affiliate of Citizens Bank and Royal Bank of Scotland. In April 2000, "Business Week" magazine reported that Greenwich Capital Markets was the fourth largest securitizer of subprime mortgage loans in the United States. A "New York Times" report of March 15, 2000 had placed it third.

Obviously Walsh Securities was not the only source of subprime loans for Greenwich, but the multi-billion-dollar subprime securitization market provided a way for Greenwich, and a number of other affiliates of large banks, to make money while passing some of the risks of subprime loans off to someone else, a practice that has been growing since its profit potential was discovered during the savings and loan bailout of the late 1980s.(1)

The ring working with Kane and Grieser was just one of several such flipping gangs operating in the Asbury Park and Monmouth County area at about the same time. Another ring was headed by Barry Fauntleroy who worked with his brother Thomas and others in flipping properties first in Monmouth County and then down the road in Essex County, New Jersey. When his scheme collapsed in 2002, Fauntleroy's own New Jersey home burned down, and he disappeared as lawsuits were being filed against him by creditors and the State of New Jersey. Fauntleroy was later located in the Caribbean island of St Lucia by a New Jersey newspaper reporter and has since returned to the United States according to 2004 press reports.

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1)This is not to suggest that the Asbury Park case is typical of all mortgage frauds. Certainly Walsh Securities was a weak link which apparently allowed bad loans to flow through. Many lenders end up taking losses on fraudulent mortgage loans, and all too often, the FHA ends up covering the bad loans.

(2) A detailed account of the so-called "workout plan" for the New Jersey communities hard-hit by real estate flippers can be found on the website of an organization called "New Jersey Citizen Action."

A February 2003 report by "Inner City Press" noted that Greenwich Capital Markets had loaned about $3.7 million to Walsh Securities. Most of the participants in the Asbury Park scheme have been tried and convicted or pleaded guilty. Others packed up and headed to nearby Essex County, New Jersey, where they found more distressed properties waiting to be flipped. When the schemes were shut down, the communities affected eventually started to recover. They benefitted from a targeted program of recovery involving state-sponsored help to victims of the fraud scheme and local nonprofits who helped implement the program in the town's neighborhoods. (2)

A local newspaper, the "Asbury Park Press," won the 1998 Batten Award from the Pew Center for Civil Journalism for its excellent investigative series on the mortgage fraud ring called "House of Cards" and "What Ails Asbury?" So while Asbury Park and its neighbors might be the epitome of the blight of mortgage fraud and flipping (and perhaps raising the question of whether securitization encourages irresponsible lending), they also are an example that offers hope to other communities in an unusual pulling-together of government, media, nonprofits, and human resources to help the people who were used as pawns by the scheme's perpetrators.

APPRAISERS: Richard Calanni, John R. Brown, Roland Pierson, Thomas Brodo, Richard DiBeneditto named in cases over the Kane-Grieser scheme.