Dirty Deeds 

The Dorean Group promised hundreds of homeowners that their mortgages would go away. Guess what? They didn't.

When Kurt Johnson and Dale Scott Heineman set up the Dorean Group in late 2003, they promised homeowners that just by filing a few simple documents with the county they could completely wipe out hundreds of thousands of dollars in debt. Their theory was a gumbo of paranoid conspiracies and self-help gibberish based on an idea known as "vapor money."

According to this fantasy, which has a cult following, all electronically transferred money is inherently fraudulent, the Federal Reserve Bank is controlled by a secret bankers' cabal, and gold and silver are the only legal tender recognized by the Constitution. In spite of the delusional quality of this argument, hundreds of homeowners paid the two men millions of dollars to help eliminate their mortgage debt.

Johnson and Heineman allegedly amassed a fraudulent fortune from homeowners and lending institutions, depositing some of the funds in offshore accounts, according to documents assembled by the Federal Bureau of Investigation. On the blog where he has railed for months about his fight with the feds, Johnson himself estimated that he and Heineman made close to $5 million through their Union City operation. Even while he was a fugitive from the law, Johnson published rambling, almost-daily manifestos defending his scheme and declaring himself a servant of the Lord working to thwart the agents of darkness.

Federal law enforcement officials, some of the agents of darkness Johnson had in mind, say the two men presided over one of the most ambitious national real-estate frauds in years. The officials claim that the Dorean Group concocted an arcane, almost delusional racket to fraudulently erase the mortgages of up to 574 homes around the country, defrauding lenders of more than $94 million. Johnson and Heineman have been charged with 68 counts of conspiracy, bank fraud, mail fraud, and contempt of court. After six months in custody, the men are finally approaching their day in court. And if a recent preliminary hearing is any indication, it should be a colorful affair.

On February 17, in the Oakland courtroom of U.S. District Judge Lowell Jensen, Johnson and Heineman were dressed in blue jumpsuits with "Alameda County Jail" stenciled on the backs. Heineman, a skinny young man who looked to be in his thirties, wore his hair in long, curly brown locks; Johnson was fortyish, stocky, and bald. The men had decided to represent themselves, and the judge was about to schedule a hearing to make sure they understood how complicated that would be. That's when Heineman declared that his and Johnson's purpose in court was to expose the sinister secrets of American justice.

As Johnson stood quietly to the side, Heineman claimed that Jensen's court was a "supercilious, Machiavellian" star chamber that carried out the orders of a mysterious, extralegal cabal. Judge Jensen, however, still had a chance to reclaim his honor if he would open his heart to "Christ Jesus."

Jensen briefly humored Heineman. "I think it's a matter of individual choice," he said. "We're here on a matter of civil law, under civil authority."

"The agency exists for you to administer justice under righteousness," Heineman retorted.

As Jensen soldiered onward, and outlined the next step in the trial, Heineman had another point to make. "You also mentioned that we're human beings, and I wanted to verify that," he said. The government, he explained, had declared its intent to prosecute the fictitious entity known as the Dorean Group, as well as Heineman and Johnson. Yet Heineman and Johnson weren't fictitious entities, but human beings. Heineman suggested the government, in some kind of grand existential blunder, had indicted two abstractions. "I don't believe the flesh and blood human beings standing here are being tried or indicted," he concluded.

In court, Heineman and Johnson seemed like colorful fanatics, but as mortgage-elimination gurus, countless otherwise normal American families went along with them anyway. They convinced hundreds of homeowners that they could wipe out their mortgages with just a few signatures on some fancy legal paperwork. Such is the superheated housing market that hundreds of formerly law-abiding citizens were offered an allegedly illegal scam to defraud their banks and said yes, even though some will certainly lose their homes as a result.

Thanks to the surreal housing market, and an explosion of new forms of credit, real-estate fraud has become a quiet epidemic. The FBI recorded more than 21,000 cases of fraud last year — 600 percent more than in 1999 — but since two-thirds of the nation's mortgage lenders didn't report the cases they discovered, the real number may be as high as 60,000. At least $1 billion was stolen from borrowers and lenders in 2005, and just this month the Mortgage Bankers Association urged Congress to commit millions of dollars to a new effort to prosecute mortgage fraud.

But there's more to the story than greedy crooks and unsophisticated borrowers. As the housing market reaches unprecedented levels, members of the middle-class "ownership society" so celebrated by a certain president are choosing to become crooks. When homes were worth $100,000, there wasn't as much incentive to welch on the mortgage. Now that East Bay homes are worth about five times that amount, more homeowners are tempted to imperil their futures on even the most transparent cons.

"We're seeing more real-estate fraud because we're seeing more real-estate activity," says Rachel Dollar, a Marin County attorney and specialist in mortgage-fraud litigation. "More and more borrowers are experiencing payment stress, and that's when it happens."

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