Mortgage Fraud

DEFENDING MORTGAGE FRAUD DEFENDANTS

To help in the defense of mortgage fraud charges, there needs to be a thorough understanding of the loan documents that are the subject of the allegations. Therefore, each subject mortgage loan file must be analyzed.

The various documents that will appear in the loan file include the mortgage application or Form 1003. This should be an attestation of the borrower’s assets and liabilities, the borrower’s income, a description of the property to be purchased or refinanced and the signature of the borrower. The expert needs to determine what supporting documents actually exist in the files. Questions such as “Did the borrower actually sign the Form 1003?” or “Did the loan officer prepare it and sign for the borrower?” need to be asked and answered.

There should be federal income tax returns in the file if it was a fully documented loan. Confirm that the borrower signed IRS Form 4506 agreeing to the release of signed filed copies of tax returns and transcripts from the IRS. This is to validate the tax returns submitted.

Check to see if the property is in the borrower’s name or does the loan file reveal the existence of a straw buyer. A straw buyer is a person whose profile is used to serve as a cover for a transaction. Straw buyers can be willing participants in the scheme who are paid for providing their names and credit information to make a false purchase. Straw buyers can also be victims whose identity is being used without their permission (such as in ID theft).

Answer the following questions:

Does the loan file contain a credit report?
Is the credit report in the name of the borrower or of a straw buyer?
Do the social security number reconcile with the various documents?
Is the FICO score high for the borrower’s income and debt?
Was there an appraisal in the file?
Was the appraiser credentialed and associated with a large organization?
Do the names and addresses on the appraisal agree with the loan documents?
How recent is the appraisal?
Are values increasing or decreasing in the area?
Are the comparables real?

In defense of the defendants, it is vitally important to understand the loan file, its contents and what each document means. Just as important is to know who prepared each of the documents within the mortgage fraud organization. The expert for the defense will need to know the role of mortgage defendants and what part they played in each of the loan documents, as well as what happened to the loan after it was funded. The propriety of the mortgage loan documents must be known in order to assist the defense. As there are voluminous documents associated with each mortgage loan file, the validity and accuracy of each document must be determined. The defense cannot just accept a plaintiff’s submission of documents in loan files.

MINIMIZING SENTENCING TIME

Once mortgage fraud liability has been concluded, the economic damages as a result of the fraud must be calculated. This is critical since the fine for mortgage fraud in criminal matters is based on guidelines. So, the amount of the loss will be a factor in determining the sentence. The economic loss or damage must be determined through the culmination of the loan transaction. Therefore, tracing is required from the inception of the loan through the ultimate sale of the property. The net assets need to be computed in the calculation of damages. Net assets (as referred to in federal sentencing guidelines) are the “assets remaining after payment of all legitimate claims against assets by known innocent bona fide creditors.”

In order to reduce sentencing time, the expert needs to be able to minimize the economic loss, as the two are directly related. I will share an actual case in which the computation of damages was key in the judge’s determination of the sentence:

The defendant was convicted of mortgage fraud in the origination of approximately 50 loans. These loans were fully documented so that there were credit reports, appraisals, loan applications and tax returns in the loan files. The loans were purportedly suitable to be purchased by Fannie Mae. In fact, Fannie Mae did purchase them from the lender. The fraud occurred in the quality of the documents, which were altered so that they would qualify to meet Fannie Mae standards.

Upon conviction, the defendant was offered a plea bargain of a sentence of 5 years, which was turned down. The criminal defense attorney did not accept the alleged loss by the prosecution. Instead, he chose to have an expert compute the actual loss, which is critical in a mortgage fraud case. The value of the homes that have been foreclosed must be evaluated extensively to determine whether the bank/lender/investor is actually damaged by the amount they alleged. Remember the bank/lender/investor is using the government to go after what it believes is the criminal that tricked them into the loan application process. A federal criminal defense attorney will have the ability to hire experts, accountants and investigators to get the monetary loss down to a minimum. The lower the monetary loss the lower the exposure to prison time under United States Sentencing Guidelines.

In advance of the sentencing hearing, I was hired by the defendant’s attorney to compute the loss and to testify at the sentencing hearing. I attempted to compute the actual loss on each loan and used an Excel spreadsheet to summarize the findings. Factors used in the computation were the principal amount of the loans, interest rates promised to the investor, time period from the purchase of the loan to the date of foreclosure, appraised values at time of loan and appraised values of each property after the foreclosure or what the properties ultimately realized. In some cases, there were actual gains to the investor in the foreclosures as property values had increased which more than offset any loss in interest or principal. The loan losses were summarized on a net basis to arrive at a total economic loss, which was testified to and presented, to the Court. While the prosecution had its own expert to compute the loss, the final ruling was a much lower loss than alleged. Whereas the prosecution was seeking a sentence of 12 years, the judge ultimately ruled for a sentence of 3 years. The criminal defense attorney and the client were pleased since the sentence was less than that which was offered in a plea bargain.

CONCLUSION

This scenario will play out more and more as the indictments continue in mortgage fraud cases. Trials will naturally follow. As the federal government has earmarked millions of dollars in the prosecution of mortgage fraud, the defense of those charged is creating an unfortunate growth industry.

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George R. Levie is a member of Levie-Opper, LLC, a mortgage fraud litigation support firm. He has over 40 years experience as a Certified Public Accountant. He holds the ABV (Accredited in Business Valuation) credential from the American Institute of Certified Public Accountants. He has been qualified as an expert witness and has provided testimony in hundreds of cases in bankruptcy and federal courts and various circuit courts in the state of Florida. Levie was President of a national mortgage lender. Levie holds a BBA degree from Emory University and an MBA from Northwestern University. Mr. Levie is available to speak to your group. Please contact him to arrange a speech for your event. He may be reached at (954) 384-4557, fax: (954) 384-5483, or e‑mail: George@Levie-Opper.com.