Mortgage Fraud Prosecutions

Joe Nocera's Talking Business column today relates a very disturbing government prosecution of mortgage fraud. Read it. It's a very troubling story.

I have not looked at any of the documents from the case and am forming my opinions solely from Nocera's reporting.  As described, however, the convicted Mr. Engle is hardly a saint, whatever one believes about the disputed facts--he clearly knew that he was benefiting from a liar loan, whether or not he actually lied. But the entrapment by the IRS that Nocera describes is deeply disturbing, especially given the lack of prosecutions of financial executives and when paired with this other NYT article about GE not paying any taxes. Then again we've got a Treasury Secretary who wasn't paying his taxes. Hmmm. No prosecution there. I continue to be puzzled why the National Mall isn't turning into Tahrir Square and why there aren't riots in Phoenix and Las Vegas and other foreclosure hotbeds. 

I'm also puzzled how what Nocera describes could have been fraud, even assuming that Mr. Engle did state his income at $32,500/month. Common law fraud requires not just the intentional making of a material misrepresentation with the aim that the other party rely on it, but reasonable reliance by the other party. (Maybe the prosecution was under some special mortgage fraud statute with different elements.)

Did Countrywide actually rely on the stated income? Weren't they just lending against his FICO and property value? Do we really think that Countrywide wouldn't have made Mr. Engle a loan if he had lower income? Given that he could have lost his job the next day, etc. I think there's a good chance they would have done so regardless. Certainly during the housing bubble everybody knew what was going on and no one was really relying on stated income. Countrywide was as much part of the fraud as any of the borrowers--the patsies were the MBS investors.

Even if Countrywide did rely on the stated income, was such reliance reasonable? Is it ever reasonable for a lender to rely on a stated income loan? Congress doesn't think so. The Credit CARD Act seemed to require verification of ability to repay. The Fed gutted this requirement in its rulemaking by permitting lenders to underwrite via models, among other things. And section 1411 the Dodd-Frank Act requires income verification for mortgage loans (with an important safe-harbor in section 1412 for still-to-be-defined "qualified mortgages"--we'll see what magic the Fed works there...). I remained perplexed by this prosecution, but there might be more to this case than we know. 

Comments

[Amos]

The "more" is Mail & Wire Fraud.

You're right about how the tort of common law fraud works.

The crime of mail fraud (or its cousins wire, bank, and "honest services" fraud) is different. The crime is to "scheme or artifice to defraud" through the use of the federal mail or wires. That's why Engle was convicted of 12 counts -- twelve mailings or phone calls. It doesn't matter if the victim didn't rely, or if no-one gave up a penny, or even if the falsehood turned out to be true.

What matters is intent to defraud -- and the use of the mail or wires to do it.

Basically, the accusation is that Engle and his mortgage brokers were ripping off the bank together.

None of this is to defend the way the case was investigate or prosecuted, mind you -- its just an explanation of the legal principle.

My experience is that finance-types are easily misled by their experiences with pliant civil counsel into believing that if they have an argument that would be good in a civil case, then there's no way they could possibly be committing a crime. Don't work that way.

[Adam Levitin]

Thanks for the explanation Amos.

[Constant Diligence]

Hey Adam,

Always glad to see your posts!

It is acceptable, but sad, that the stupid and blind can't see or understand the implications of a Naked Emperor riding an Elephant in the same room.

As intelligent sighted people it is amazing that Americans are still missing the implications and continue to allow it to happen without comment while the guy cleaning up the poop left behind is arrested for having contraband elephant poop...

Hopefully Americans will see the truth and ask why the emperor is naked emperor and riding an elephant in the first place... please check out our Hey Adam,

Always glad to see your posts!

It is acceptable, but sad, that the stupid and blind can't see or understand the implications of a Naked Emperor riding an Elephant in the same room.

As intelligent sighted people it is amazing that Americans are still missing the implications and continue to allow it to happen without comment while the guy cleaning up the poop left behind is arrested for having contraband elephant poop...

Hopefully Americans will see the truth and ask why the emperor is naked emperor and riding an elephant in the first place... http://diligencegroupllc.net/

American Homeowner

-AH

American Homeowner

-AH

[intrinsic value]

This has been a complex issue for awhile now. not going to get fixed at this rate.

[Knute Rife]

Amos is right. We've created a Federal criminal system in which mens rea consists of intentionally getting out of bed in the morning (Don't get me started on an asbestos clean-up case I handled a few years back.). The difference in proof does not nullify your question, though. The securities laws have the same fraud standards. The banks charged significantly higher rates for stated-income loans than for doc loans (indicating the banks knew they were higher risk) and then turned around and used them as supposedly solid collateral for derivatives they marketed by the bushel. Given what must have been rampant securities fraud, why are we seeing no prosecutions? Other than Madoff and a few others who made the mistake of gaming the players, prosecutions have been an endless stream of little people. Meanwhile the banks are playing the victim when in reality they marketed bales of securities without even remotely conducting the due diligence we mere mortals would have to perform to keep the SEC or CFTC from landing on us like a load of bricks.