FHA fraud scheme ends with guilty verdict

A Chicago-area loan originator was found guilty of five fraud counts for a scheme that cheated businesses out of millions.

A federal jury convicted Kevin Smith in September for running a scam that deceived lending companies into improperly originating Federal Housing Administration-backed mortgages to real estate investors. Property value losses resulting from the crimes totaled almost $2.6 million and involved 14 residences, according to the U.S. Attorney's Office in the Northern District of Illinois.

A grand jury filed charges in late 2019, and the case was prosecuted by federal lawyers representing the Justice Department, as well as the Department of Housing and Urban Development and the Department of Veterans Affairs.

"Smith abused his position of trust as a gatekeeper of FHA-insured mortgage loans and used his real estate knowledge to circumvent the rules to secure his own self-interest," said Machelle L. Jindra, special agent-in-charge of HUD's Office of Inspector General in Chicago. 

During the scheme, which lasted from mid 2011 to 2013, Smith targeted aspiring real estate investment entrepreneurs at seminars held in Chicago-area churches and hotels, convincing them to falsely claim their sources of down payment and intent to reside in the properties they  purchased. He also instructed them to not seek legal advice for the transactions. 

In reality, Smith helped provide the down payments to originate the FHA purchase mortgages. After loans closed, Smith would make what he described as "grants" of as much as $20,000 to the buyers, while keeping seller payments for himself without notifying HUD or lenders involved. 

During the period in which the crimes occurred, Smith was a loan originator working with Grand Bank and Mortgage Services III, both among the defrauded, according to the grand jury indictment. He also sought to involve other mortgage companies in the scheme to help finance investor purchases, including 360 Mortgage Group, which was identified in one of the counts as a victim. 

Policies governing single-family mortgages FHA guarantees mandates borrowers use them to fund a primary residence. Instances of fraud typically require the originator to repurchase the loan. 

"Loan originators and other mortgage professionals are entrusted with protecting the integrity of the government-backed mortgage program," added Acting U.S. Attorney Morris Pasqual. "Our office will continue to hold accountable any individual who violates that trust to line their own pockets."

Smith faces up to 30 years in prison for each guilty count. Sentencing is scheduled for Dec. 17. 

He previously moved, but failed, to get charges dismissed for various reasons, citing the court's lack of jurisdiction, noncompliance with criminal procedures and violations of the Privacy Act. He also called his indictment "multiplicitous" for charging a single offense as separate counts, thereby violating the Fifth Amendment's Double Jeopardy clause. 

Earlier this year, four conspirators pleaded guilty in a different federal fraud case involving FHA originations in California. In that filing, the defendants were charged for their roles that contributed to more than 100 loans being issued to unqualified borrowers. Total value of the mortgages was more than $55 million, and foreclosures on some of the properties guaranteed by the FHA led to almost $500,000 in losses for the agency.