"Equity Lost"

Felony Mortgage Fraud Prosecutions

By Dana M. Grimes, Esq.

The financial crisis continues, and we all know bad borrowers are not the only ones at fault; top banking officers approved of billions of dollars of loans with, at best, the reckless abandon commonly associated with drunken sailors.    The global economic crisis has revealed a large amount of white collar crime, including Ponzi schemes, investment fraud, and extensive mortgage fraud.

In this article, I will summarize the mortgage fraud cases we have been working on recently, with an emphasis on the types of fraud the U.S. Attorney's office is most interested in prosecuting.

False Statements

Fraudulent practices were so systemic in the mortgage industry, it would be impossible to charge everyone guilty of it.  Generally speaking, all mortgage fraud prosecutions allege some type of knowingly or recklessly made material misstatement relied upon by a bank to fund, purchase or insure a loan.  (Bank Fraud is codified at Title 18, U.S.C. Section 1344, and is often charged along with wire fraud and mail fraud, and in some cases, money laundering)

When it comes to bank fraud, prosecutors are more interested in perpetrators of fraud for profit than fraud for housing.  If your client, at the urging of her mortgage broker, overstated her income on a loan application to qualify for her dream home, which she then diligently made mortgage payments on but eventually lost to foreclosure when her A.R.M. adjusted, she will probably not be indicted.  However, if she bought 10 properties by providing false income information to banks, secured 100% financing, and then let the properties go into foreclosure, she is in trouble.

Often, the crime is a bit more complicated than that, involving straw buyers on the loan instruments and shell companies to launder the loan money through, but the fraud is still usually pretty easy to prove.  The prosecutors just compare the information provided to the lenders with with other documents (such as tax returns).    To prove which loan officers, real estate professionals, or other defendants aided and encouraged the borrowers in preparing and presenting the false information, the government obtains letters, faxes, emails, and any other documentation that will cooborate the testimony of their cooperating witnesses.

Property Flipping

The criminal version of property flipping is when a "flipper" purchases a property and artificially inflates its value through false appraisals.  The artificially valued properties are then sold to an associate of the flipper at a substantially inflated price.  Flipped properties then go into foreclosure and are ultimately repurchased for a fraction of what the bank loaned the flipper (who is long gone).

Law enforcement has developed new technology to detect this type of fraud.  For example, according to the FBI, someone at their Washington Field Office  designed an analytical computer application that detects the names of companies and people with patterns of property flipping.  Suspicious flippers are flagged for further criminal investigation.

In the Industry, the Fix Was In

Mortgage industry insiders, such as accountants, appraisers, brokers and attorneys, who overrode lending controls, are of interest to the Government.

Mortgage fraud prosecutions are often multi-defendant cases involving bank officers who falsely verified deposits in banks, escrow agents who lost their independence, and appraisers who inflated the value of homes to get a kick back.  Everyone, at every level of the fraud, got a piece of the pie when the loan funded.  The profitability and relative ease of committing mortgage fraud during the peak of the reat estate bubble has created unusual indictments (for example a case in federal court in San Diego where an accounting firm was charged with conspiring with members of a street gang)

Conspiracy charges are common in these situations.  Note: it is bad sign for your client when the FBI agent you are talking to starts referring to your client and her friends as an enterprise.

Boiler Room   

- he's been targeted by your employer Heavy advertizing for mortgages and refis was done with seminars, the internet, boiler rooms telemarketing, and with direct mail.  Many of the purchasers of these loans had very low credit scores - and mortgage brokers earned large commisions selling these people what the industry refers to as a liar loan (inflated stated income and assets), an exploding loan (the A.R.M. that will be adjusting - or exploding - over the next few years), or a ninja loan (no income, no job, no assets).

The illegal part involves falsifying the income to debt ratios, verifying assets or income that do not exist, and otherwise putting customers into houses you know they cannot  afford.  Agents and brokers who worked in jobs like this are of interest to the U.S. Attorney's office.  The indictments in these cases  include bank fraud, mail fraud, wire fraud, conspiracy, and in some cases, money laundering.

2008 - 2011: Mortgage Mitigation

A certain segment of the population  adapts with alarming ingenuity to the changing economy - now the same individuals who were talked into misstating their assets to banks or tricked into selling their credit are being contacted as their houses go into foreclosure.  Some companies (and some lawyers), promise consumers facing imminent home foreclosure that they can stop the foreclosure, regardless of the amount the consumer owes his or her lender.  These companies typically charge consumers an up-front fee of $1,500 to $2,500 but, the FTC alleges, do little or nothing to help people avoid foreclosure.  When colleagues ask us how to avoid getting in trouble in the mortgage mitigation business, we tell them it is easy, stay out of it.   In addiition to criminal prosecution of these  cases, the State Bar and the California Department of justice have been active in sueing attorneys involed in fraudulent mortgage mitigation.   In November, 2011, the State Supreme Court declined to hear the case of attorney Phillip Kramer of Calabasas, who was among the attorneys sued by the DOJ for allegedly defrauding thousands of homeowners by collecting up front fees of $3,500 to $10,000 for mortgage relief that was never provided.

Armed Accountants

Between 2007 and 2009, the FBI doubled the number of Special Agents assigned to investigate mortgage fraud.  The number of open investigations has tripled in the last three years.  Currently, according to FBI Director Robert Mueller, the FBI has more than 2,600 cases open, with most of them involving losses of over $1 million.  In the coming months, you may need to warn certain business clients who have been involved in the real estate industry that they may receive a call from the FBI, a grand jury subpoena, or, in some cases, a home or office visit from a group of federal agents with  guns, accounting degrees and a search warrant.

UPDATE - January 15, 2011:

The United States Department of Justice launched a nationwide program "Operation Stolen Dreams."  It is being implemented aggressively in San Diego, by the local US Attorney's office and FBI.  Dozens of defendants have been indicted in San Diego for mortgage fraud related federal crimes, including falsifying loan applications to defraud lenders as well as fraudulently selling loan modification services to homeowners who are delinquent on their mortgage payments.  After 9/11, there had been a reallocation of FBI agents from fraud cases to the investigation of leads in terrorism cases, but new FBI white collar positions have been created to deal with the mortgage fraud investigations.   In addition to assigning more assistant US Attorneys to the prosecution of white collar cases, the United States Department of Justice has emphasized its prosecution of individuals, such as CEOs, executives, and house counsel, in cases involving criminal activity by corporations.  When there is strong evidence against these individuals, it is hard to get cases against them dismissed by negotiating a plea of guilty by the corporation.

Update 6/5/2011-Short sale fraud-  Federal agents and prosecutors are investigating real estate brokers and agents suspected of short sale fraud. As many a s 40% of short sales that are sold for a profit within 6 months may involve criminal fraud.   In the typical fraud, the agent persuades a homeowner to sell to an investor who is in collusion with the agent.   The agent persuades the bank to authorize the short sale, concealing the relationship between the agent and the investor (and sometimes concealing the fact that sale to another end buyer has already been arranged at a much higher price than the short sale.     Meanwhile, even though  lenders are much stricter now than they were five years ago, as many as 33% of loans investigated post funding in 2010 involved some type of appraisal fraud or other misrepresentation.     There are going to be more real estate agents, loan officers, appraisers, etc. going to jail after the present wave of prosecutions from the days of the real estate bubble.

Update 11/27/2011- The US Attorney's office in San Diego continues to prosecute these cases agressively.    26 indicted defendants in one case alone were indicted in the case of United States v Berkenfield, et al.      Each new indictment leads to future indictmens, as some of the defendants in each case will enter into cooperation agreements with the government, in the hope of reducing the time they will spend in federal prison.   These cooperating defendants then tell the government everything they know about other people in the mortgage industry who engaged in illegal practices, and many of these people are caught up in the next wave of indictments.   These cases leave a paper trail, so the testimony of cooperating defendants can often be supported by documentary evidence 

SHORT SALE FRAUD (11/27/2011) The collapse of the housing market, which began torward the end of 2007, resulted in many thousand short sales, where the bank sells the home for less than than the mortgages on the home.  At the present time, approximately 13% of all sales of existing homes are short sales.      Widespread fraud has developed in these short sales, primarily by the real estate agents selling the properties.    Some of the same agents who were "flipping" overvalued properties from 2000 to 2007, are now "flopping" properties. They get offers from from business associates, family members, or straw buyers, and fail to disclose higher offers to the bank.   The bank will often forgive the balance owed on the mortgage, and the real estate agent and his coconspirator get house at much below market value.   Sometimes they keep these houses, but sometimes they "flip" the property as quickly as the same day, for a large profit.    In the next few years, we expect to see many indictments for short sale fraud

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