WaMu loaned millions to California home flippers convicted in fraud scheme

In July 2007, Vijay and Supriti Soni of Corona del Mar, Calif., paid $440,000 for a home at 2129 W. Civic Center Drive in Santa Ana.

Five weeks later, they resold the house to Javier Hernandez, the family gardener and handyman, for $660,000. That's a 50 percent gain in 38 days — at a time when real-estate prices in Santa Ana were plunging.

But the lender that financed both mortgages, Washington Mutual, took a bath. Last March, Hernandez's loan went into default and in July the bank foreclosed. On the trustee's deed, the bank listed the home's value at $377,137 — $220,000 less than the outstanding loan.

Records show WaMu, America's largest savings and loan, financed at least 43 mortgages worth $24.5 million on properties bought and sold by members of the Soni family since 2007.

Of the 22 homes sold in that period, at least six have become problems for WaMu: Four were foreclosed, one received a notice of default and another was listed for sale at a $260,000 loss. Total value of WaMu's mortgages on the troubled properties: $2.7 million.

The Seattle-based thrift's lending practices resembled those of many other institutions that have run into trouble. They all offered complex adjustable-rate and subprime mortgages, approving many with limited scrutiny.

WaMu's $310 billion in assets, its diverse loan portfolio, its large base of depositors and conservative risk management were supposed to protect the thrift from collapse. Now it appears to be the next domino in the row.

WaMu said it is investigating the Soni deals as part of a fraud scheme and maintained that those loans are not a symptom of larger problems.

"We have extensive controls in place to protect the integrity of our portfolio and loan processes," spokeswoman Sara Gaugl said. "We are continually enhancing our efforts to identify and prevent any potential illegal activity."

But lending analysts said the Soni case raises questions about standards at WaMu, which could face a federal takeover if it can't find a new source of credit. The distressed properties would then belong to the taxpayers.

"This is a quality-control problem," said Paul Leonard of the Center for Responsible Lending's California office. "It certainly is curious WaMu's fraud-detection system didn't pick this up. It looks very bad and it is bad. The question is how widespread it is."

Leonard and others said the Sonis' deals probably escaped notice because WaMu, like many other lenders:

• Allowed financing of property flips that occur less than 90 days after purchase. The Federal Housing Administration banned financing 90-day flips in 2006. It also required a second appraisal for homes sold at a 100 percent gain less than 180 days after purchase.

• Relied heavily on imperfect fraud-detection software. Computers are good at flagging things like unrealistic income statements but can be deceived by determined insiders.

• Did not check criminal backgrounds. The Sonis had been convicted in 2003 of numerous felonies for a real-estate-fraud scheme. WaMu checks criminal backgrounds of loan originators, such as outside mortgage brokers, but not borrowers.

Last month, District Attorney investigators raided the family's homes and business offices.

"Unfortunately, we are back looking at these characters again," said Doug Brannan, the deputy Orange County District attorney who prosecuted the Sonis in 2003.

WaMu declined to answer questions about the Soni case.

"This is an active investigation and we are fully cooperating with local law enforcement regarding this matter," Gaugl said.

The Soni family's transactions with WaMu indicate it continued making risky loans long after its underwriting standards were supposedly tightened in mid-2007, said James Barth, a senior finance fellow at the Milken Institute in Santa Monica.

"Lending institutions had an obligation to do due diligence to make sure the borrower can repay the loan, especially in 2007 and 2008 when they knew there was a mortgage meltdown taking place," Barth said.

Santa Ana home prices peaked in 2006 and have slid more than 40 percent since.

While those prices were plummeting, members of the Sonis family never sold for a loss. A Register analysis of 22 Santa Ana properties flipped by the family in the past two years shows a total gain on sale of $3.7 million.

Average gain: 48 percent. Average time between purchase and sale: 92 days.

Todd Lackner, a San Diego mortgage-fraud investigator who has examined the transaction records, said the common thread of WaMu funding makes the Sonis' transactions even more disturbing. "Any idiot can see these sale prices are excessive," he said.

The FBI says mortgage-fraud reports increased 31 percent nationally in fiscal 2007. "During declining markets, mortgage-fraud perpetrators may take advantage of industry personnel attempting to generate loans to maintain current standards of living," the FBI's annual fraud report said.

In the past two years, Soni family members took out a total 14 mortgages with various other lenders, but WaMu was their preferred one, with triple that number of loans.

In August 2003, an Orange County Superior Court jury found Vijay and Supriti Soni guilty of forgery, falsifying real-estate documents, identity theft and grand theft. Vijay Soni was sentenced to a year in jail. He also surrendered his real-estate license. Supriti Soni was sentenced to three years in prison.

Brannan said their scheme "took advantage of their clients' trust when they exploited the unsuspecting customers' information for their own financial gain. They left these families with large financial liabilities, goods and property purchased in their name without their knowledge, many hidden costs, and a huge amount of grief to clean up their credit."

Last month, investigators from the Orange County District Attorney's office and state Franchise Tax Board served search warrants on nine locations, including the homes of the Sonis, her mother, Sushama Lohia, and the family of her sister Suniti Shah plus four family companies. They carted out 154 cardboard boxes and 40 computers filled with evidence.

Family members declined to comment for this story, citing the advice of attorneys.

"I'm confident that the facts will reveal that Mr. Soni has not engaged in any wrongdoing," said Vincent LaBarbera, Vijay Soni's attorney.

In the past two years, the Soni family essentially created their own market in Santa Ana by flipping enough homes in a small area, said Lackner, the appraisal-fraud specialist. In at least three cases, homes flipped from one family member to another — sales later used by appraisers to give credibility to high asking prices for other properties.

One example: Lohia bought the bank-owned house at 827 S. Flower for $249,500 on Jan. 4. She sold it 20 days later for $575,000 to her daughter, Suniti Shah, who financed the purchase with a $488,750 WaMu mortgage.

"Selling to each other, that's something an appraiser should definitely discover," said Mike Sanders, a Laguna Beach real-estate appraiser. "If the appraiser finds all the same people's names on transactions, then that's something suspicious."

In an interview with the India Journal in Southern California, Vijay Soni provided another clue to his success at selling homes in a falling market: He said his company made the down payments for the buyers.

Soni said his "liquidation company" bought foreclosed properties in Santa Ana, Riverside and Corona and sold them by offering "10 percent down free money to any qualified buyer. With this big burden out of the way, they only have to worry about coming up with their monthly mortgage."

That would be the equivalent of 100 percent financing, experts said. If loan documents do not fully disclose who made the down payment, it would misrepresent the purchaser's stake in the property and potentially is a form of criminal fraud or theft, said Ann Fulmer, vice president for Interthinx, an Agoura Hills fraud detection company used by lenders.

"Unfortunately, the bank doesn't know it's 100 percent financing," she added.

Documents show that all of the family's sales through Washington Mutual indicated that the buyer paid a down payment of 10 to 20 percent.

But Elijio Servin Rojas said he never made a down payment on the home he bought in November for $640,000 from Sushama Lohia. Records show he paid at least $64,200 before closing.

Servin Rojas said he was renting when Lohia persuaded him to buy last year. He said he has fallen behind on payments on WaMu's $575,800 mortgage. He received a notice of default in July.

The Sonis were positioned to escape detection if in fact no money changed hands — because Lohia, a licensed real-estate broker, also served as escrow agent.