In the wake of the bursting home bubble and sub-prime mortgage crisis, Federal Authorities nationwide are conducting investigations and prosecutions. With over 20,000 foreclosures in Lee County, Florida alone, the FBI, Internal Revenue Service and Secret Service are inundated with complaints of massive mortgage fraud. After a decade of unregulated lending fueled by the unquenched appetite of investment bankers for bundled mortgages, things have finally come to a head. The search to "fix blame" is on and as usual those at the bottom will most likely suffer the consequences of criminal prosecution and incarceration.
WHAT CAUSED THE CRISIS?
The simple answer is greed. Foreign investors, searching for high returns with low risk turned to the investment bankers of Wall Street. What could be safer than investing in the home mortgages of the everyday American workers? After all, for 30 years, mortgage lending in America was regulated. We all remember the strict requirements of the banks and savings and loan associations. To secure a home mortgage, you needed a significant down payment, a job or verified history of earnings supported by tax returns and a legitimate appraisal demonstrating true value and equity in the property being acquired.
Ever since the Great Depression, for decades, actual regulation, oversight and enforcement created a secure investment product. In the last decade, however, Wall Street, in response to demand from foreign investors created a product based on the "bundled home mortgage" theory. These "bundled home mortgages" were quickly swallowed up by investors and soon, the demand exceeded the availability of good secured first mortgages. The lending institutions, with investors clamoring for home mortgages, began to lower their requirements for down payments, income verification and legitimate appraisals. The sub-prime mortgage market exploded fueled by the high return on the variable rate and negative amortization mortgages.
The explosion of available credit with little or no actual verification in turn fueled an ever-expanding real estate bubble market. In Lee and Collier County, real estate values literally doubled in a period of 24 months. This explosion of "inflated" value and false equity in turn further fueled an expansion in the home building industry with more jobs, more sales, more loans and so on. Ultimately, every day ordinary working families, sensing a false "bonanza" to be made in flipping homes, parlayed their inflated false equities with even further speculation. As the bubble grew, the final straw was the "stated income" loan. It became the standard and not the exception.
In a stated income loan, verification is almost non-existent. Mortgage brokers in the feeding frenzy created by the investment bankers in many instances encouraged prospective borrowers to falsely state or inflate their true income. In some instances, fictitious documentation was also created in the form of false tax returns, W-2's, bank accounts and investment portfolios. It was the perfect storm for mortgage fraud. The demand exceeded supply. Borrowers actually thought that their properties were really increasing in value. Everyone was taking out a home equity loan or refinancing and the real estate agents, the banks and mortgage bankers were earning obscene profits and then the bubble burst!
WHOSE IS TO BLAME?
As in all disasters or tragedies, we are compelled to fix blame. In this case there is more than enough for everyone. Throughout the history of this Country, however, criminal prosecution, true blame, often falls on the little man. Prosecution of the borrower (the little man) is by far the easiest and statistically efficient. The falsity of a "stated income" loan application is easily provable even for a prosecutor. Not so easily provable is the complicity of the mortgage broker and ultimately the lending institution and investment banker. Each has a great self-serving interest in blaming the borrower, the little man.
WHO GETS PROSECUTED?
Most mortgage fraud is pursued by Federal Authorities in Federal Court. The underlying investigation falls within the purview of the FBI, the IRS and the Secret Service. Often all three agencies work together under the umbrella of an Assistant United States Attorney and Grand Jury. Competent representation by an experienced Federal Criminal Defense Attorney is critical. Damaging admissions are often made in an initial interview by the unsuspecting, unwary borrower. A false statement on the loan application is a Federal violation punishable in most instances by imprisonment. A false statement to an Investigating Agent is a similarly prosecutable offense in Federal Court. Felony fraud convictions are life-altering experiences. Federal Arrests and Federal Convictions for professionals often result in the loss of a professional license, future income and in many instances, actual freedom.
Federal Prosecutors have the benefit of the Federal Sentencing Guidelines and have enormous discretion in bringing prosecutions before Federal Grand Juries. Target letters are often the first indication that an individual is under investigation. Under no circumstances should such a target letter be ignored. The Government has a multitude of charges including wire fraud, mail fraud, money laundering, tax evasion and false statement encompassing most mortgage fraud situations.
Any individual contacted by a Federal Agent should immediately seek counsel. In the blame game, you do not want to be the last one left holding the bag.
ABOUT THE AUTHOR
Peter D. Aiken of the Law Firm of Aiken, O'Halloran & Associates is a former Forensic Accountant and Criminal Investigator with the Intelligence Division of the U.S. Department of Treasury. As a former Prosecutor in the U. S. District Court in the Southern District of Florida with 30+ years as a veteran Federal Criminal Defense Attorney, he has represented Federal white-collar criminal defendants in numerous venues.
