Friday, May 14, 2010

MORTGAGE FRAUD: UNFORTUNATE GROWTH INDUSTRY –Defending the Mortgage Fraud Defendant and Minimizing Sentencing Time - Part 2


Once mortgage fraud liability has been concluded, the economic damages as a result of the fraud must be calculated. This is critical since the fine for mortgage fraud in criminal matters is based on guidelines. So, the amount of the loss will be a factor in determining the sentence. The economic loss or damage must be determined through the culmination of the loan transaction. Therefore, tracing is required from the inception of the loan through the ultimate sale of the property. The net assets need to be computed in the calculation of damages. Net assets (as referred to in federal sentencing guidelines) are the “assets remaining after payment of all legitimate claims against assets by known innocent bona fide creditors.”

In order to reduce sentencing time, the expert needs to be able to minimize the economic loss, as the two are directly related. I will share an actual case in which the computation of damages was key in the judge’s determination of the sentence:

The defendant was convicted of mortgage fraud in the origination of approximately 50 loans. These loans were fully documented so that there were credit reports, appraisals, loan applications and tax returns in the loan files. The loans were purportedly suitable to be purchased by Fannie Mae. In fact, Fannie Mae did purchase them from the lender. The fraud occurred in the quality of the documents, which were altered so that they would qualify to meet Fannie Mae standards.

Upon conviction, the defendant was offered a plea bargain of a sentence of 5 years, which was turned down. The criminal defense attorney did not accept the alleged loss by the prosecution. Instead, he chose to have an expert compute the actual loss, which is critical in a mortgage fraud case. The value of the homes that have been foreclosed must be evaluated extensively to determine whether the bank/lender/investor is actually damaged by the amount they alleged. Remember the bank/lender/investor is using the government to go after what it believes is the criminal that tricked them into the loan application process. A federal criminal defense attorney will have the ability to hire experts, accountants and investigators to get the monetary loss down to a minimum. The lower the monetary loss the lower the exposure to prison time under United States Sentencing Guidelines.

In advance of the sentencing hearing, I was hired by the defendant’s attorney to compute the loss and to testify at the sentencing hearing. I attempted to compute the actual loss on each loan and used an Excel spreadsheet to summarize the findings. Factors used in the computation were the principal amount of the loans, interest rates promised to the investor, time period from the purchase of the loan to the date of foreclosure, appraised values at time of loan and appraised values of each property after the foreclosure or what the properties ultimately realized. In some cases, there were actual gains to the investor in the foreclosures as property values had increased which more than offset any loss in interest or principal. The loan losses were summarized on a net basis to arrive at a total economic loss, which was testified to and presented, to the Court. While the prosecution had its own expert to compute the loss, the final ruling was a much lower loss than alleged. Whereas the prosecution was seeking a sentence of 12 years, the judge ultimately ruled for a sentence of 3 years. The criminal defense attorney and the client were pleased since the sentence was less than that which was offered in a plea bargain.


This scenario will play out more and more as the indictments continue in mortgage fraud cases. Trials will naturally follow. As the federal government has earmarked millions of dollars in the prosecution of mortgage fraud, the defense of those charged is creating an unfortunate growth industry.

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