Mortgage Fraud In Depth

MORTGAGE FRAUD: CRIM DU JOUR

Terry W. Yates

Mortgage Loans written in the last two years will be more scrutinized for fraud than anytime in the past. This is no doubt due to the fact that the financial industry is in dire straits. The government will investigate all aspects of the industry in order to hold those responsible for this crisis.

In the 1980’s, questionable lending practices led to a devastating impact on the Savings & Loan industry. As the S&L crisis unraveled, many of those involved became criminal defendants primarily in federal court. The scandals played out, but the lessons have apparently been forgotten.

In the new century, another crisis threatens lending institutions. This time, allegations of fraud surrounding mortgage lenders and those involved in the procurement and processing of mortgage loans. The mortgage fraud scandal is yet to be fully written-indeed, we are in the early chapters. The ending, however, is likely to be tragic for many.

WHAT IS MORTGAGE FRAUD AND HOW SERIOUS IS IT?

Mortgage fraud is the making of any material misrepresentation to get a loan to purchase a home. Lying on a home loan application – even white lies – is considered mortgage fraud. Some examples of the most common mortgage fraud schemes are:

• Undisclosed kickbacks (Deals between the buyer and seller in which the seller agrees to pay the buyer some amount after closing).
• Silent second mortgages (Buyer borrows the down payment from seller without the lender’s knowledge).
• Falsifying employment income; Non-owner occupant claming occupancy; Falsifying deposits.
• Inflated purchase price (Using inflated appraisals to obtain a loan amount which exceeds the value of the property).

In federal court, there is not a statute called “Mortgage Fraud.” Instead, the Government may use a variety of statutes to prosecute mortgage fraud cases. 18 USC § 1344 prohibits bank fraud while 18 USC §§ 1341 and 1343 prohibit mail and wire fraud. There is also a statute, 18 USC § 1014, which makes it a crime to make a false statement on a loan application. All of these statutes carry a possible punishment of up to 30 years in prison. In addition, a conviction under any of these statutes does not allow for a sentence of probation.

To determine a sentence, federal judges must consider the United States Sentencing Guidelines. The guidelines – formerly mandatory – are primarily driven by the amount of loss a person’s conduct creates. In most cases, loss is the amount of the loan less the fair market value of the property which, in all likelihood, the bank now owns. For example, if the amount of a fraudulently obtained loan is $500,000 and the bank, after default, is able to sell the property for $400,000, then the amount of the loss for federal sentencing guidelines purpose should be $100,000.

In ballpark numbers and knowing that federal sentences are affected by more factors than simply the amount of the loss, a case involving a $100,000 loss will result in a sentence of around two years in prison. A $1,000,000 loss results in a sentence of around five years in prison.

Sentences in Texas state courts are not governed by sentencing guidelines. Juries and Judges sentence defendants within an enormously wide range of punishment and with unfettered discretion. The seriousness of a state court mortgage fraud case is determined by the amount of the loan (not the amount of the loss as it is in federal court). Loans procured by fraud in a cumulative amount greater than $200,000 (which is the vast majority of cases) is a first-degree felony – outside of capital murder the most serious degree of a felony. The punishment for a first-degree felony is anywhere between five years in prison up to life in prison. If convicted, Juries or Judges sentence defendants (it is the defendant’s choice) and there are no sentencing guidelines to focus their discretion. Any sentence within the five-to-life range is perfectly legal. In the last quarter of 2007, Harris County juries handed down three 25-year sentences and one 40-year sentence in mortgage fraud cases.

WHAT CAN CRIMINAL DEFENSE COUNSEL DO?

Experienced criminal defense counsel can be helpful in a variety of ways. Counsel must first consider the following factors: (1) the role the client played in the cases (i.e., a totally innocent straw borrower who borrowed money on only one property or a mortgage who falsified dozens of loan application packets); (2) the quality and strength of the government’s evidence; (3) the likelihood of the client becoming current on the loan; (4) the size of the alleged scheme – law enforcement is more interested in prosecuting extensive cases which involve a lot of money; (5) the number of individuals and whether law enforcement has begun investigating those people; (6) the quality of the defense.

The quality of the defense is worth expanding on. The defense to mortgage fraud is that the person either believed that the representations he made were, indeed, true (even though they were not) or the person was unaware of making a false statement. For example, a mortgage broker meets with the loan applicant and gathers information about the applicant the broker later includes on a loan application. Assuming the broker believed the information about the applicant was true then the broker has not committed mortgage fraud. Another example is a common one: a person, let’s call him Mr. Straw, is approached by an apparently successful real estate professional who persuades Mr. Straw to borrow money to purchase a house. Mr. Straw unwittingly signs a stack of papers without carefully reading them. One of the papers states that Mr. Straw intends to live in the newly purchased home but Mr. Straw has no intent to live in the house. Though Mr. Straw made a false representation on a loan application, he nevertheless has not violated the law because he did not make the false statement knowingly.

Once counsel considers and weighs the above factors, the question becomes: does the client (a) dig in his heels, tell the government to get lost and begin preparing for an inevitable trial; or (b) say/do nothing, jump in a fox home and hope the government’s missiles land elsewhere; or (c) begin cooperating with the government in an effort to get a lower sentence? The decision can only be made with the counsel of an experienced criminal defense attorney.