California Real Estate Investors Convicted of Rigging Foreclosure Auctions

The mortgage crisis meltdown of the late 2000’s is growing smaller in the rearview mirror, but the legal implications of it are still being felt. While much media attention focused on the role lenders and investment banks had in securitizing subprime debt leading to the real estate bubble, one lesser discussed area of concern is the manner in which properties were auctioned during a foreclosure. The FBI has in fact been investigating parties who rigged foreclosure auctions at the expense of property owners and lenders for years, and in December four real estate investors were convicted on criminal charges in a federal court for rigging foreclosure auctions. Another 50 individuals in California alone have pled guilty for similar violations.

How Foreclosure Auctions Work

For those unfamiliar with the mechanics of foreclosure, when a homeowner fails to make payments on a mortgage property for some period of
time, the holder of the mortgage (usually a bank) can foreclose on that property. Through a foreclosure action, a court can rule that the mortgaged property be sold at a public auction. The proceeds of the auction (the price paid by the highest bidder) will then be used to pay, in this order: 1) the costs of the auction; 2) the balance of the remaining amount owed on the mortgage; and 3) the owner, if there are any proceeds left after the mortgage balance is paid in full. If the mortgage is not paid in full, the homeowner may still owe the remaining balance to the bank in a deficiency judgment.

Most jurisdictions enforce requirements on how a public auction should be held, such as giving publishing notice of the auction and giving potential investors a certain amount of notice. The purpose of these requirements is, at least in part, to make sure that the home is sold at a fair price to honor the interests of both the mortgage holder and homeowner.

How the Rigging Benefited the Defendants

What the four convicted defendants did in the Bay Area case – and the many others around the country who have pled guilty to bid rigging – was to conspire to submit artificially low bids at the public auction, and then pay each other kickbacks in return for keeping the bid low.

Take for example a foreclosed home that has a reasonable market value of $500,000 of which there is $400,000 still owed on the mortgage. Bid riggers might conspire that none of them are going to submit a bid higher than $250,000, and so the house is sold to one bid rigger for the $250,000 amount. That means the bank will only get paid $250,000 (minus auction costs), the owner will get nothing, and the bank will have to after the homeowner for the remaining $150,000 in a deficiency action, when a fair auction should have netted a price closer to $500,000 which would have benefitted both the mortgage holder and the homeowner. Meanwhile, the winning bidder now owns a property worth $500,000 that he only paid $250,000 for, and so he is happy to throw $50,000 at his co-conspirator bid riggers for keeping the bids low, and maybe next auction he will be the one submitting a low bid and getting a kickback from a different winning bid rigger.

Such actions are, of course, illegal real estate fraud, and may be the subject of a civil claim by the affected parties as well as a criminal action.

Work with a Los Angeles Real Estate Fraud Attorney

If you find yourself the victim of real estate fraud in Los Angeles, choose attorneys who have the experience and know-how to successfully prosecute your lawsuit. The attorneys at Wagenseller Law Firm will listen to your claim, thoroughly investigate the facts and pursue your lawsuit with tenacity.