The same real estate boom and bust that delivered a devastating body blow to the U.S. economy also brought an enormous wave of failed and allegedly fraudulent investment schemes.

There are plenty of reasons besides fraud and bad faith that real estate deals failed in recent months. Falling prices and lenders' wholesale retreat from the market killed countless legitimate transactions. Unscrupulous opportunists only made matters worse.Veteran white-collar investigators and prosecutors say they haven't seen this many similar questionable acts since the savings and loan scandal of the 1980s. Now, law enforcement and the courts are trying to clean up the mess while victims pay for their costly mistakes.

From Portland to Albany to Bend and beyond, Oregonians hoping to cash in on the boom have instead suffered major financial setbacks in real estate deals gone awry.

There was the disabled veteran and his wife in Linn County who borrowed on their credit cards to put $50,000 into a failed Willamette Valley land deal. There was the single mother in Bend whose builder/developer ran out of money, leaving her and about 40 others with uncompleted homes and thousands of dollars in debt owed to banks and unpaid subcontractors. No criminal charges have been filed in either of the schemes.

Today's wave of dubious deals is more pervasive and grass-roots in nature than the S&L debacle, which primarily involved thrift executives and their borrowers. Developers, mortgage brokers, appraisers, bankers and borrowers alike are under the microscope of state securities regulators and federal prosecutors.

"We've always had people fudging the numbers on their loan application to buy the home they wanted to live in," said Joe Boyer, supervisory special agent for the FBI in Portland. "During the boom, we had people trying to do 50 homes. It was all about the real estate appreciation."

Boyer is a key member of a mortgage fraud working group in Portland formed among local, state and federal investigators to combat real estate and mortgage fraud.

A key factor behind the boom and its frightening aftermath is the pervasive human desire to make easy money. This decade's real estate debacle started to form just months after the collapse of an earlier investment bubble.

The 2001 collapse of the dot-com Internet companies cost the economy an estimated $5 trillion. Countless starry-eyed investors came to rue the day they bet their hard-earned cash on the latest dot-com pet retailer or online grocer.

Two years later, Internet stock promoters were supplanted by another generation of boosters who said real estate was the new can't-miss opportunity. They were enabled by a lending industry that lost its bearings and started making loans to unqualified buyers and ignoring signs of rampant duplicity.

Mortgage fraud emerged as the trademark crime of the boom. Unscrupulous brokers worked through straw buyers to obtain bank loans, pocketing thousands of dollars for themselves from the loan proceeds while the "buyer" often never made a single payment.

But the ever-rising tide of escalating real estate prices hid the problem.

"The underlying premise was that real estate values would always go up," said Karin Immergut, U.S. attorney in Portland. "If they got into trouble, they could always sell it. If the bank had to repossess it, they could put it on the market and make money.

"Now, we're seeing the whole house of cards crumble."

Indeed, just like New York financier Bernard Madoff's alleged $50 billion Ponzi scheme, the real estate bubble has popped. Individual investors, some of whom went into hock to grab a piece of the real estate gold, now face foreclosure and financial ruin.

The feds were well aware of the mortgage industry issues before the house fell down.

Chris Swecker, former assistant director of the FBI in Washington, D.C., warned in the boom year 2004 of widespread fraud in the industry. Swecker, now retired, predicted bogus home loans could cause multibillion-dollar losses to financial institutions.

Swecker's prescient warnings were wrong in only aspect: He vastly underestimated the losses and the impact on the broader economy.

But the feds didn't intervene in a more forceful way in part because much of the FBI's resources were diverted to combat terrorism. Besides, rising real estate prices kept losses to a relatively low level -- at least until 2006 and 2007.

Federal sentencing guidelines are based on provable financial losses. Absent a large tangible loss, perpetrators are unlikely to get much of a sentence beyond probation, which gave prosecutors little motive to push mortgage or real estate cases.

Even the most bogus mortgage deal didn't lose much money as long as homes continued to appreciate in value -- which they did in Oregon until mid-2007.

Now, only time and the courts will determine whether the cases addressed here are bad luck, bad faith, or worse.



-- Jeff Manning: jmanning@news.oregonian.com





Big plan 'all made sense ... but it was all a lie'

Albany-based Willamette Development Services started small in 2006, but with a big idea: building homes and small commercial projects the length of the Willamette Valley.

With few resources of its own, the company used other people's money, raising $6 million from about 40 investors. In 2006, at the height of Oregon's land rush, dozens of people jumped at the opportunity. Some said they took out second mortgages on their homes or borrowed on their credit cards to come up with the $25,000 minimum investment.

The company's pedigree was modest. No history, no track record of success. It was the brainchild of Joe LaCoste, a former Oregon State University running back who left his high school teaching job in 1996 to enter the mortgage and real estate business.

He formed several companies, some of which earned the attention of state securities regulators. In one example of problems, regulators in 2006 entered a cease and desist order against one of those companies, Lunceford & LaCoste, for brokering mortgages without a license.

But with Willamette Development Services, LaCoste and the rest of his management team were convincing. Investors said they ere promised 13 percent interest annually.

"It all made sense," said Rebecca Lu, a Corvallis real estate agent who invested $200,000 herself and persuaded her elderly parents to invest $25,000. "They hired architects and engineers. But it was all a lie."

The company started 11 projects, including a residential subdivision in Santa Clara, near Eugene, and a minimart in McMinnville. It failed to complete even one.

"Our homes weren't getting built, we were spending too much money," LaCoste said. "I wasn't quite sure why all this was happening."

Investors stopped getting interest payments in November 2007.

LaCoste's partners, led by his brother-in-law, Medford mortgage broker Craig Sweet, ousted him in January 2008. The company became inactive within a few months.

LaCoste blames Sweet and others in his management team, who he said failed to perform. Sweet declined to comment.

Investors have filed two lawsuits against the company, LaCoste and other partners. They claim the company lied to investors and used their money to pay off other investors -- the classic definition of a Ponzi scheme.

Several investors told The Oregonian they had been interviewed by the FBI. LaCoste says he has not talked to anyone at the FBI, and no criminal charges have been filed. LaCoste said he's been made the fall guy for the failures of other partners and the downturn of the market.

"We were in a real tough real estate market," he said. "We were doing the wrong thing at the wrong time. So were about 10 million other developers around the country."

"They couldn't build a single home in 18 months," said Jay Mutschler of Corvallis, who lost his $50,000 investment. "WDS was so mismanaged, it's ridiculous. The question is: Was Joe just so inept that he couldn't manage it right, or was it a Ponzi scheme?"

LaCoste and his wife have formed a new consulting company, Witham Investments, which he said helps other real estate developers through financing and operational challenges. "Our company puts honesty, integrity and compassionate capitalism above all other business priorities," Witham's Web site says.

-- Jeff Manning



Dreamers wake up to big losses in central Oregon







Joanie Krehbiel wanted in on the real estate action.

The Bend woman, a single mother of a toddler, knew she needed another business to complement her seasonal bicycle rental operation. Central Oregon's real estate boom offered an opportunity, she figured.

In 2006, Krehbiel hooked up with Don Loyd, a longtime central Oregon developer who said he liked teaching amateurs how to prosper at the real estate game. The deal was simple: Loyd's investors would contribute $5,000 of their own money and obtain a construction loan to cover the cost of building a house. Loyd's company, Aspen Tree Homes, would serve as general contractor.

Loyd's investor could then move in to the completed house, sell it or rent it out. "Don was the ringleader, the Pied Piper," Krehbiel said. "We were supposed to make $20,000 to $40,000 per home."

So confident was Krehbiel, and so hot was the market, she signed up to do two deals with Loyd and got 11 friends and family members involved in Loyd projects.

In all, Loyd estimates, he built homes for 100 people, launching projects from Crook to Klamath counties. For some of those investors, the dreams of real estate riches failed to pan out. Loyd admits that he walked away from about 40 projects when he ran out of money.

Today, some of Loyd's investors owe thousands of dollars on bank loans but have only partly built homes or bare lots to show for it. Many have lost their good credit after missing payments. They face thousands of dollars in construction liens filed by subcontractors who weren't able to get their money from Loyd.

Four participants in Loyd's plan have sued him, his son Kevin Loyd and Aspen Tree Homes. They also sued West Coast Bank, the Lake Oswego lender that funded many of their loans. They claim West Coast gave Loyd access to the borrowers' construction loan proceeds without proper authorization from the borrowers.

A lawyer for West Coast declined to comment.

This marks the second time West Coast Bank has been caught up in a questionable homebuilding deal in central Oregon. West Coast also funded several mortgages to former employees of Desert Sun Development, another failed real estate firm that allegedly falsified employees' loan applications and accessed their loan proceeds without authorization.

Loyd says he's done nothing wrong, adding that he's a victim himself of the real estate crash. He blames his problems on West Coast Bank for not advancing him construction loan proceeds in a timely manner. He says he spent $300,000 of his own money to pay subcontractors after West Coast Bank refused to release loan proceeds.

"I am not a rip-off artist," Loyd said. "I worked in Bend for 35 years. I had a good reputation. One major burp in the economy and that reputation is gone."

One piece of Loyd's investment operation illustrates on a micro-level how the prevalence of investors hoping for a quick profit skewed the real estate market.

Twelve of Loyd's projects were in the tiny town of Chiloquin, which is between Bend and Klamath Falls and one of the poorest communities in Oregon.

In the best of times, it would have been difficult for Chiloquin to absorb the Loyd homes, which were expensive by local standards. But similar to one-time boomtowns like Las Vegas and Sacramento, the presence of so many real estate flippers looking for a hefty profit worsened the real estate bust when it finally came.

"It's the nicest subdivision in Chiloquin," said Terry Nash, a Klamath Falls Realtor who listed the Loyd homes. "We started at $289,000 and got down to $220,000. I've had one offer, a very low offer."

Federal and state investigators are looking into Aspen Tree Homes, alerted to the case by Darren Goodding, a Lake Oswego private investigator hired by one of the participants.

Krehbiel said she is trying to hang on financially. She figures she's spent $50,000, most of it from a $40,000 equity line of credit on her own home, trying to salvage her investment with Loyd, whom she wants held accountable.

"He needs to never do this to anyone again," she said. "And he needs to be punished."

-- Jeff Manning

Vegas deal slams even Oregon's big players

It wasn't just real estate amateurs who got burned in the crash.

A disastrous Las Vegas condo conversion launched by Portland developer Terry Bean resulted in claims of fraud and securities law violations by his investors, who read like a who's who of Portland power brokers.

In 2006 and 2007, Bean raised $7.3 million for his company, Orchid Investors LLC. Among the investors were companies and trusts affiliated with Frank Dulcich, head of Pacific Seafoods, the nation's largest seafood processor; Robert Philip, head of Schnitzer Investments, a business arm of the wealthy Schnitzer family; Gerry Bidwell, a prominent former Portland stockbroker; and Richard Akerman, a Lake Oswego businessman and member of the Lake Oswego school board.

Orchid proposed to buy a 280-unit apartment complex, renovate it, and sell the units as condos. Bean made his name with dozens of similar projects in Portland.

Though the displaced renters disliked the process, the goal was to generate fat profits for Bean and his backers. But he made the ill-fated decision to go ahead with the Orchid project just as Sin City's once red-hot market cratered into one of the worst sinkholes of mortgage defaults and foreclosures in the nation.

Orchid defaulted in February 2008 on a $27 million loan from Bank of America. That same month, two of Bean's investors in Orchid, Dulcich and Akerman, sued Bean and David Gifford, Bean's partner in the deal.

They claim that in a 2005 appraisal of the property, Bean withheld crucial information about falling home prices and rising inventories of unsold homes in the neighborhood. They also allege Bean failed to disclose that he tried to buy the same apartment complex for $19.2 million in October 2004. Less than a year later, Bean's company bought the property for more than $35 million.

"I think any reasonable investor would want to know that the property had doubled in price," said Mike Esler, a Portland attorney representing Dulcich and Akerman.

Dulcich and Akerman are seeking repayment of the $2 million and $1.1 million, respectively, they invested.

John Parsons, Bean's lawyer, said Orchid was killed by the "demise of the national real estate market."

"The irony is that most of Terry's business partners have made millions of dollars over the years," Parsons said. "This project goes bad, and all of a sudden it's about an alleged failure to disclose rather than the reality of the national economy."

Since the lawsuit was filed in February, the Orchid drama has gotten more tangled.

Bank of America sued Orchid in April, demanding immediate repayment of the $27 million. Bean had personally guaranteed more than $20 million of the debt.

The bank ultimately settled with Bean, repossessing the property and forcing him to repay about $3.5 million in cash.

Bean has filed a counterclaim against Dulcich and Akerman, accusing them of reneging on their obligation to help Bean pay off the bank. Bean sued Philip on the same grounds.

"The bottom line is, it was a partnership," Bean said. "We signed personal guarantees. I was the only one who stepped up to the plate."

-- Jeff Manning