Mortgage Fraud and the Financial Crisis

April 24, 2011

Mortgage Fraud and the Financial Crisis

In Oregon and across the country, the fallout from the subprime mortgage collapse and the ensuing financial meltdown has still not ended.

This fallout does not only include depressed housing values and the seemingly endless waves of foreclosures that have affected so many lives. It also includes the unfairness of bringing mortgage fraud cases against people who were rank-and-file players in the deregulated mortgage industry.

Mortgage fraud is a serious charge that often requires a vigorous federal criminal defense.

Systemic Problems in a Deregulated Mortgage Market

The collapse of the U.S. housing market beginning in 2006-2007 led to unprecedented levels of home mortgage distress and foreclosures. By August of 2008, 9.2% of all U.S. mortgages were either delinquent or in foreclosure. By September of 2008, this figure had risen to 14.4%.

This collapse was further compounded by the extent of the earlier drop in interest rates and expansion of access to credit. Sub-prime loans to riskier borrowers had exploded. Riskier loan packages such as Adjustable Rate, Interest only or "Balloon" mortgages became more widespread.

In the over-heated market that prevailed before 2007, traditional underwriting practices were systematically cast aside by banks and mortgage brokerage companies of all sizes. Homeowners themselves got in on the frenzy. Between 2000 and 2006, housing prices nearly doubled. Home ownership was now widely seen as a financial investment, and one subject to speculation. Homeowners repeatedly borrowed against "equity" in their properties as paper values increased. Homes were purchased and sold at a profit before construction was even finished.

The entire financial system -- right up to and emanating from Wall Street -- was complicit in this. Dubious subprime loans were packaged into fancy financial instruments, which were then sold as "credit default swaps" or other speculative financial instruments backed in part or whole by risky mortgage loans.

Congress was complicit as well, in relaxing lending standards and allowing banks to engage in such risky business. Just as in the Savings and Loan debacle two decades ago, the get-rich-quick mindset and a loosening of regulatory safeguards led to a boom that wasn't sustainable -- and to a crash that should have been foreseeable.

The Financial Crisis Inquiry Commission has issued a 600-page report documenting how many of the problems were built right into the deregulated system. It shows how years of bank deregulation allowed commercial banks to morph into mortgage companies. These large banks and mortgage companies took on excessive risk, bundling subprime loans into derivatives and other financial products that could be resold. The Commission concluded that many mortgage lenders took borrowers' credentials on faith, often with a willful disregard of their ultimate ability to pay.

Pressure on Rank and File Brokers to Sell, Sell, Sell

In this type of out-of-control system, there was intense pressure on low-level mortgage lenders and brokers to sell and approve loans even to people without the income to repay the loan. Traditional underwriting standards had insisted on proper documentation of income. In the go-go days of subprime, however, that was no longer required. In fact, regional managers of the large companies pressured employees to sell, sell, sell -- no matter what. Smaller mortgage brokerage firms even engaged in fraudulent practices themselves -- often with the actual borrowers unaware -- through such schemes as inflating income figures on the paperwork to assure that the loans went through and they received their commission.

In such a warped financial system, a mortgage lender or broker could make a million dollar loan with no documents almost as standard practice. The managers at big banks and loan companies were at best willfully blind to such practices and often encouraged them. But when these loans were exposed as "toxic assets," it almost brought the entire financial system down.

After the Fall

Once the housing bubble burst, and the flood of foreclosures hit, the extent of the fraud became painfully evident. Today, while the big bank and larger mortgage company executives have largely avoided criminal prosecution, this is not true for the small investor, developer, contractor or homeowner.

Many of the end-of-the-line borrowers are now facing mortgage fraud prosecutions for making allegedly false statements on mortgage or construction loan applications. Such statements often relate to income or primary residency requirements. Homesellers, developers, contractors and appraisers have also been indicted in allegedly fraudulent schemes involving equity manipulation, or cash-back transactions. In these cash-back deals, a purchase price was artificially inflated and money (cash back) was illicitly returned to the home buyer, who was to use that money to make initial mortgage payments until the house could be flipped and sold again at a profit.

When such schemes are brought to prosecution many questions remain about who knew what and when. Who made the allegedly false representations? Why were they made? Who knew about them? Who profited? These are among the questions that must be untangled in discerning whether a mortgage fraud case is properly brought or not. Mortgage fraud cases also involve extremely tricky "loss calculations." A burning question in many may resolve around whether or not the ultimate foreclosure of the property itself was proper or legal.

Conclusion

If you or someone you love is facing prosecution in a mortgage fraud related case, you need an experienced lawyer at your side.

Article provided by Raivio, Kohlmetz & Steen PC
Visit us at www.rkslawyers.com