Modesto real estate attorney indicted in alleged short-sale fraud

A federal grand jury has indicted a Modesto real estate attorney who is accused of orchestrating a short-sale fraud scheme by disguising his ownership of a company used to buy his own homes facing foreclosure.

Robert Farrace, 51, is charged with three counts of wire fraud in connection with the alleged short-sale scheme, according to federal prosecutors, who announced the indictment Thursday afternoon. If convicted, Farrace faces a maximum sentence of 20 years in federal prison and a $250,000 fine, according to the U.S. attorney’s office in Sacramento.

Farrace was a 2007 candidate for Modesto City Council but lost to Dave Lopez. He has served as a visiting editor at The Modesto Bee, writing columns on topics including real estate issues. Attempts by The Bee to speak with Farrace by phone Thursday afternoon were not successful.

Prosecutors said Farrace created an entity called Dignitas LLC that he controlled, but he used a friend’s name as the company’s registered agent to conceal his control. They allege that the defendant used “short sales” to trade a higher mortgage for a lower one by misleading lenders.

A short sale is an alternative to a foreclosure. The lender agrees that the current property owner can sell the property to a new owner at a price lower than the amount owed by the borrower.

Short sales can be financially beneficial to lenders, because they might receive more money in a short sale than they would by incurring foreclosure and holding costs that include the upkeep of a vacant home. Lenders also would have to deal with reselling the home, which could be difficult in a declining market.

Authorities say banks and mortgage businesses rarely, if ever, approve short sales where homeowners seek to purchase their own homes. Otherwise, homeowners would simply stop making their payments to get a lower mortgage. Lenders typically require that a new buyer in a proposed short sale have no connection to the current owner, which is frequently known as an “arms-length requirement.”

The Modesto properties that are the focus of the Farrace federal investigation are one home in the 1500 block of West Roseburg Avenue and another home in the 2300 block of Scenic Drive in Modesto.

Farrace bought the single-story, modest home on Roseburg with cash in November 2003. In January 2006, the defendant obtained a home equity loan and mortgage of about $200,000 for the property.

The prosecutors say Farrace failed to make mortgage payments, and the Roseburg home went into pre-foreclosure status. In early March 2010, the defendant was notified the home was heading into the foreclosure process.

Shortly after that notification, Farrace created Dignitas LLC. Federal prosecutors said the company’s principal purpose was to serve as a “straw buyer” for the Roseburg home. They also said the defendant recruited someone to act as the company’s “manager,” but Farrace remained in control of the business and financial affairs.

Farrace submitted misleading statements and documents to obtain authorization for the short sale for the Roseburg home, according to the prosecutors. The short sale was approved.

In January 2006, Farrace purchased the Scenic Drive property for about $679,000. Prosecutors said the defendant financed the purchase with a $543,000 loan and money he obtained by mortgaging the Roseburg home.

The Scenic home loan went into default in February 2010, and the foreclosure process began a few months later. Prosecutors said Farrace used Dignitas in July 2010 to make a short-sale offer for the Scenic home. But the proposed short sale was stopped when law enforcement officials notified the lenders of the alleged scheme.

This story was originally published June 18, 2015 at 4:23 PM with the headline "Modesto real estate attorney indicted in alleged short-sale fraud."