Mortgages and Madness

Mark Kellogg's hot-dog stand sits at Broadway and Fleet Avenue, the main intersection of Slavic Village, a traditional working-class neighborhood in Cleveland. It's midday on a Wednesday, and the place is deserted except for a new metallic-blue VW convertible in the lot, blaring rap music. A towering sign advertises DRIVE THRU SERVICE and hot dogs WITH ALL THE TRIMMINGS. The kitchen door is open, and a well-groomed young man wearing an apron, a baseball cap and a Bluetooth in his ear emerges. When a reporter asks if the man knows Kellogg, he says, "That's me." But Kellogg quickly turns very unfriendly, especially for a restaurateur. "I want you off my premises," he barks when he learns the purpose of the visit. "Do I have to call the police?

Kellogg's surliness is no surprise. He knows we haven't come to talk about hot dogs but about his other business, mortgages. In particular, why his name appears so often in Cuyahoga County records as the broker on failed mortgages that have left many of his clients and associates broke. In the neighborhoods surrounding Kellogg Hot Dogs are scores of boarded-up, abandoned homes—ramshackle hulks that have turned otherwise peaceful neighborhoods into slums. True, these old working-class shotgun houses—lovingly nicknamed because you could fire a shotgun at one end and the pellets would go straight through—were never going to make the pages of Better Homes and Gardens. But at least they once had local owners or tenants who fixed the walks, painted the trim and worried over the monthly mortgage payments, aided by a city revitalization program.

Now the houses sit empty in legal limbo, foreclosed on by lenders that don't want them, or traded on eBay by buyers from as far away as San Diego and Tulsa, Okla. Some homes have been boarded up for so many months that a local artist, Chuck Gliha, has begun painting ghostly blue portraits on the plywood in the windows to "freshen things up." Vandals regularly comb the neighborhood, sometimes setting fires. In many houses the aluminum siding is ripped away, the copper wiring yanked out, because with a building boom overseas, demand for nonferrous metal is huge. One vacant house that Kellogg is listed as broker on is littered with the remains of its last tenant family: inside, against the living-room wall, a teddy bear and an African-American doll lie side by side on a bier of ripped chunks of drywall and paint chips.

This was once the sort of "product" that dazzled Wall Street, feeding the subprime-mortgage bubble. How did it all start? How did distressed properties like these become "collateral" for loans that were bundled into high-priced securities, then bought by huge banks and pension funds around the world? How did Slavic Village contribute to a global credit crunch? Now, hundreds of lenders, securitizers and brokers like Kellogg are being investigated by the FBI, IRS, state attorneys general and county authorities nationwide for their respective roles in this global confidence game, which authorities are just beginning to piece together. Kellogg has not been charged with any wrongdoing, and it's not known how many mortgages he might have brokered that are still viable. But Cuyahoga County prosecutor Bill Mason tells NEWSWEEK that Kellogg, who is still licensed as a loan officer in Cleveland, is "a target" of a state task force on alleged mortgage fraud that is expected to return numerous indictments in the next few months. Kellogg, reached on his cell phone Friday, said, "I already talked to you," and hung up.

According to county records obtained by NEWSWEEK, Kellogg was the broker of record for the purchase of 71 houses in Slavic Village from 2003 to 2006—during the height of the subprime investment boom. All of them went into foreclosure within a year or two. In each case, mortgages were issued for Kellogg's houses—by well-known nationwide lenders, such as Argent Mortgage and New Century—for multiple times the value of what the home had been purchased for, often only months before, the records show. Local Councilman Tony Brancatelli, who first passed on information about Kellogg to county prosecutors, says the prices were so inflated beyond the house's actual value that any income gained from rent or resale could not possibly pay off the huge mortgage, and the borrowers quickly defaulted. In one instance, a house purchased for $14,000 on Feb. 9, 2005, was sold three months later, on May 9, 2005, with Kellogg acting as broker, for $84,000; it went into foreclosure a year later, on May 31, 2006.

In transactions with what Mason's office describes as artificially inflated home prices—courtesy of a friendly appraiser—the brokers would get up to 8 percent of the total in fees (the maximum allowed by law), and they often split much of the loan proceeds with the seller and other parties, perhaps anywhere from $10,000 to $50,000. (Kellogg's appraiser on most deals, Bruce Hoover, was disciplined by the Ohio Department of Commerce on May 9 for failing to report, on another appraisal, that a home had been previously sold for much less; he did not respond to numerous phone calls asking for comment.) Some purchasers of record who are in foreclosure claim they were set up by Kellogg as "straw" buyers—neighborhood acquaintances who say he paid them a few thousand dollars to sign their names as the owner of record.

Some buyers say they didn't comprehend what they were signing at the time, but discovered they were left legally and financially accountable—their credit destroyed—as the lenders foreclosed. "He ruined my life," says Lakiesha Williams, a mother of two girls who was working as a nursing assistant when she says she was approached by Kellogg, who persuaded her to invest in 11 homes and take on tenants. But Williams found the properties were in worse condition than she thought and, when the tenants left, she couldn't keep up with the mortgage payments. "I'm broke. I've got nothing," she says.

While no hard numbers exist yet, officials say fraudulently inflated values and other schemes figured in a huge percentage of subprime loans that were turned into securities during the boom—possibly at least 50 percent nationwide, according to county and state officials as well as real-estate experts interviewed around the country. One piece of evidence: during the height of the bubble it became standard practice to solicit borrowers by giving them "no document" loans, known in the industry as "liars' loans," in which all the borrower must put down to qualify is "stated income" (write anything you want; no one will be checking). Stated income was once a little-used perk that banks granted to trusted wealthy borrowers who paid large down payments. But by 2006, 44.7 percent of all securitized subprime mortgages in the country were stated income or no-document loans, according to Patrick Madigan, an Iowa assistant attorney general. "There's only one reason for that high number, and that's fraud," says Madigan, who helped to negotiate a $325 million settlement in 2006 over alleged abuses by Ameriquest, the nation's largest subprime lender. (Ameriquest spokesman Chris Orlando said the company admitted no wrongdoing.)