A lawyer and title company owner and two of his employees were indicted Wednesday in a $4 million mortgage fraud scheme.
Each faces a maximum of 20 years in prison on eight counts of mail fraud and four counts of wire fraud for a Ponzi-like scheme that involved delaying payments to banks in real estate closings and refinancing mortgages on employees’ homes without paying back the loans.
“As a general matter these sorts of schemes always fall apart in the end. It’s like a Ponzi scheme — the money’s going to run out and the bills will be due and there won’t be money to pay them,” said U.S. Attorney Rod. J. Rosenstein.
According to the 12-count indictment, attorney Stephen J. Troese Sr. of Davidsonville, who owned or controlled multiple title companies, began to develop a “substantial shortfall” in 2004 in an escrow account shared by two of his companies. The escrow account was meant to disburse funds following real estate closings.
Because of the shortfall, which continued into 2008, Troese Title Services Inc. in Camp Springs and Troese/Hughes Title Services Inc. in Greenbelt allegedly delayed making payments to lenders, at first for three to five days, and later for three weeks or more after closings.
The title companies used funds coming in from later closings to pay off lenders from the transactions that had already closed.
The shortfall allegedly stemmed from mistakes made during closings that required “costly payouts to resolve” and also from “large and long-undetected thefts” by employees, according to the indictment.
Troese’s firms acted as agents for Chicago Title Co., selling its title insurance policies and receiving a portion of the premiums on the policies.
Under the firms’ agreements, Chicago Title was required to foot the bill for any losses resulting from unknown defects in the title of the property, while Troese’s companies had to pay Chicago Title for any losses involving fraud, dishonesty or theft.
However Troese, 71, and his employees, James Kevin Hughes, 52, and Brenda Lukenich, 60, — who were also indicted Wednesday — failed to disclose the escrow shortfall to Chicago Title.
Troese refinanced his home twice to generate cash to cover a portion of the shortfall. He used Troese Title as the title company and withheld notice of the refinancing to Citibank and GMAC, who held the original loans.
But instead of using the money to pay off those old mortgages, he allegedly kept the money in the escrow account to cover the shortfall.
In order to keep the original lenders from knowing his home had been refinanced, Troese allegedly continued to make monthly mortgage payments.
Since Citibank and GMAC were never paid off, the new lender for the property never received a first lien on the home to ensure repayment.
But that scheme did not cover the entire shortfall, leading other Troese employees, including Hughes, to refinance their homes under similar schemes.
Chicago Title did not know about the escrow shortfall, but decided to end its relationship with Troese Title and Troese/Hughes in spring 2008 because of numerous mistakes made by Troese’s employees, which resulted in claims filed against Chicago Title and made the relationship unprofitable.
The two Troese companies were $1.5 million behind in paying off closed mortgage transactions, and without new closings, Troese knew that the scheme would be revealed, according to the indictment.
Chicago Title had agreed to continue to work with other Troese companies, including Troese/Prestige. After meeting with his employees to hatch a plan to repay the debts, Troese decided the Troese Title and Troese/Hughes would continue to do work, but under the name of Troese/Prestige without informing Chicago Title.
The entire scheme cost Chicago Title $4 million. The indictment does not indicate how or if Chicago Title discovered the scheme.
Rosenstein said he did not know how the scheme unraveled in this case, but said his office had seen numerous similar cases.
“I think the message this sends is sooner or later you will be caught,” he said.
Rosenstein also could not say whether Troese is still a practicing attorney or if any of his title companies still exist.
Troese declined to comment and referred all questions to his attorney, whom he declined to name. No attorney’s name is listed in the indictment.
Troese and Hughes are scheduled for their initial court appearances on Jan. 28 and Lukenich is scheduled to appear on Feb. 4. All three will appear in U.S. District Court in Baltimore.