This week I received a memo (see this) from an attorney who works for the Federal Public Defenders Office he in San Francisco. It appears to be a "heads up" that the U.S. Attorneys office for Northern California may be starting an initiative to prosecute more mortgage fraud cases. These have been vigorously prosecuted in some other districts: Charlotte, Dallas, Sacramento and Anchorage.
There was a recent (May 13, 2008) 9th Circuit Court of Appeals decision which sets the tone for these cases. That decisions had two aspects. In the "bad news" for the defendants department this case (US v. Crandall) regards what is a common defense in such cases and is called the Mens rea defense. Mens rea addresses not the facts of a case but the defendants state of mind. Generally the defense is that the individual did not intend to commit a crime but was actually pursuing some other purpose. This is the classic defense in tax protest cases when the individuals swear that they are pursuing some agenda aimed at a high minded purpose of setting straight the IRS which - in their view - is an unconstitutional construct. These folks will insist that they are not really cheating the IRS but upholding the real law. They are almost always found guilty.
In this particular case the defense wanted a mens rea jury instruction that required "knowing and conscious" engagement in "criminal wrongdoing" for a prosecution. The judge said "no" are required an "intent to defraud."
I will not even attempt to explain the rational behind mens rea and mortgage fraud but invite lawyers who read this to e-mail me with their explanations for follow up.
There are two good sources for what is happening in the world of mortgage fraud. This is a mortgage fraud blog. (http://www.mortgagefraud.org/journal/) and this is our friends at the FBI
There is a variety of types of mortgage fraud and the blog at http://www.mortgagefraud.org/journal/ covers them all but they fall into at least four different classes:
1) mortgage companies repeatedly funding loans with bogus income and assets documents. Sometimes this is a systematic corporate thing and sometimes just one of a small set of individuals in a company.
2) identity fraud and property theft cases where folks either misrepresent their ownership interest in the property or actually fraudulently gain title to property with bogus grant deeds.
3) foreclosure prevention scams. These are generated by public noticed of intent to foreclose and the typical scenario is one where someone who is slick on the phone calls the property owners and scams them out of $2,500 with a guarantee that they can prevent the foreclosure.
4) fake buyer transactions where the transaction looks like a sale but is really an attempt by the owner to suck all of the equity out of a property by "selling" it to cohorts at an inflated price and having said cohorts never intending to make a mortgage payment.
I do not see it as likely that individuals who overstated their income on "stated income" loans will get in trouble. There are "bigger fish to fry."
The good news for defendants in the 9th Circuit decision was that sentencing should be base on the net economic loss not the total amounts of the loans. The size of the loss can affect the sentence and persecutors were seeking sentences based on total loan amounts. The Court said "no way." The loss is the loan amount less what is recovered in a foreclosure sale - the real economic loss.
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