Political U.S. Attorneys and Mortgage Fraud

Buy low, sell high, go directly to jail.

Major newspapers around the country repeatedly regurgitate the Justice Department’s mortgage-fraud story dressed up to look like investigative reporting.

The Kansas City Star rediscovers the horrors of mortgage fraud every couple of weeks or so. It did it again on Sunday's front page in a story headlined "Real Estate and Mortgage Ventures; Deal Maker Cuts a Path of Financial Anguish."

What they don't tell their readers is the other side of the Bush Administration’s ballyhooed mortgage-fraud crusade and its costly implications for ordinary homeowners hoping to someday realize a profit on the sale of their homes.

First, some lenders routinely portrayed as victims in mortgage-fraud stories were more like collaborators with loan originators who ended up going to prison. Most problems leading to fraud convictions could have been eliminated had lenders conducted appraisal reviews and checked (underwritten) loan applications before approving them.

Appraisal reviews are relatively cheap, only $100 or so. Sub-prime lenders routinely use them to insure appraisals haven't been falsely “inflated.” Major lending companies apparently rely instead on federal agents and prosecutors acting as strong-armed collectors after loans fail. Criminal prosecutions typically result in property seizures and restitution, which effectively make carelessly approved loans far less risky...at least for lenders.

One “victim lender” in some recent mortgage fraud cases around the country (ABN Amro of

Holland

) was fined $41 million in 2005 after acknowledging its employees had forged underwriters’ signatures to thousands of loan documents in four states. Any underwriting lapses in the other 46 states were forgiven as part of the settlement. Neither Amro nor the employees involved in the forgeries was criminally prosecuted.

Truth is, lots of lenders were looking the other way and making shaky loans in the hot markets of the late 1990s and beyond for the same reason loan originators were cutting corners and pushing loans: to make lots of money.

Yet only the mortgage brokers, appraisers, real estate agents and closing attorneys have incurred the wrath of awesomely powerful federal agents and prosecutors.

As an aside, most Americans might be stunned to learn how agents and prosecutors use the draconian federal sentencing guidelines and other built-in advantages to make wrongly accused and even innocent “targets” of fraud prosecutions eager to sign plea agreements.

The stakes are terrifyingly high. Federal agents can plausibly threaten virtually every “target” with three or more decades in prison if they don’t “cooperate.” And it's not unusual for targets who end up with home detention or prison sentences of a year or less to have signed plea agreements as an alternative to threats of virtual life sentences.

Legal expenses are ruinous for all but the wealthiest defendants. Fighting the government in a complicated fraud trial typically costs upwards of a half million dollars. And the straight-arrow reputation federal agents and prosecutors enjoyed until recently made going to trial look like an impossibly steep mountain climb.

It helps explain why about 96 percent of mortgage fraud cases are settled out of court. It also makes a sinister farce of the Justice Department’s ratings of U.S. Attorneys based on the number of prosecutions and convictions they achieve.

Targets of fraud charges subjected to the modern equivalent of rubber-hose beatings by agents and prosecutors are then effectively silenced by a plea-agreement clause threatening further punishment for failing to “accept responsibility for the crime.” Presumably that’s why Martha Stewart ultimately went quietly to prison for, in effect, lying to a bureaucrat about a stock trade.

It’s worth remembering, too, the mortgage fraud crusade was a Bush initiative to divert media attention from his own white-collar troubles: his close financial and personal ties to former ENRON CEO Ken Lay and his dumping of Harken Energy stock two weeks before the company tanked. As such, the mortgage-fraud crusade stands as a politically inspired prosecution effort virtually all U.S. Attorneys eagerly embraced.

To be sure, the crusade has taken down some operators who were knowingly committing serious crimes. But the Justice Department's wide, tight net has almost certainly netted as many ordinary business people "working gray areas" or "doing business as usual" as it has actual criminals.

For average home owners, the upshot of sweeping serial prosecutions of nearly everyone engaged in significant property-selling networks in virtually every metropolitan area in the nation could be the loss of thousands of dollars when it comes time to sell.

Appraisers have been thoroughly spooked. So more and more sellers must accept less money for their homes than buyers are willing to pay as appraisals fall short of asking prices.