On Friday the FBI announced that the sub prime mortgage mess is going to lead to an uptick in mortgage fraud prosecutions.
Now what that translates to is that everyone who did something to help homeowners buy houses that they could not afford will be prosecuted, while the banks that profited all those years will pretend that they were unaware of the rampant fraud in the marketing of mortgages so that they can get as much of their money back while little players go to Federal prison.
I know that many of you are confused by the sub-prime mortgage mess. In a nutshell, the banks lent money to homeowners and buyers without requiring that they have any equity in the house. Now the mortgagor (the owner) can no longer afford the mortgage and has no equity (a reason to keep the house as an investment) in the home so he walks away from the debt leaving the bank holding the mortgage and the house.
Now why can't the bank just sell the house? Because it is worth less than the amount owed on it and so the bank will take a loss. Do that over and over again, and voile you got a mess of banks going belly up. The most recent failure was at Bear Sterns (hereinafter BS, for so many reasons).
Well, you may say, "sounds like they made bad investments. They should have to pay for using bad judgment." Yeah Right. They completely screwed up and yet you should see how they were rewarded before they went under. Lets look at some of the principal players at BS:
Alan Schwartz: is the CEO, President and basically the chief honcho.
Sam Molinaro Jr.: is the COO and the CFO and is basically the number 2 guy
Mike Minikes: is the treasurer of B/S
Mr. Michael S. Solender: is the attorney.
A fast review of their recent (last 6 months) trading of their options (which they received gratis as part of their "salaries") goes like this:
Schwartz made Six Million Dollars on the sale of his options of stock on Dec. 21 2007.
Molinaro made 2.5 Million Dollars on his sale the same day (he sold less).
Minikes made 2.3 Million Dollars on his sale.
Solender made 185 Thousand Dollars on his sale of options.
This is all in addition to multi Million Dollars salary and benefit packages they get!!
So the government is going to get these guys to give back the money right?? WRONG. They are going to get to keep the spoils of being horrible business people who cost their little shareholders millions.
So who is the government looking for? The favorite scapegoat... the little guys.
You see, BS is pretending that they never heard of inflating an income or an appraisal in their lives. ("I'm shocked, shocked to find that gambling is going on in (Casablanca)!)
For years BS (and others, I am not just picking on Bear Sterns they are just one example) made a fortune on the lies of brokers and homeowners. They knew of them, and allowed them to continue to lie about income and equity, until the bottom of the market hit like the end of a Ponzi scheme. Only difference is that the company was left holding the bag along with a lot of people who are or are going to be homeless.
You may be asking how this means homeowners are going to jail. Here is the answer:
Many (if not most) homeowners over the last 10-15 years have been playing a game that allows them to get the equity out of their homes and use the homes like an asset. By refinancing they recieved 100% equity and sometimes more. They used phony appraisals (which would "convince" the banks that the home was worth more than it was) and over estimated their incomes (to "convince" the bank they could pay the monthly payment.)
In other words, they lied on application documents. These banks have federal funding and insurance... Hence you have a federal case. Thanks to the advent of the US Sentencing Guidelines, prison is always an option. Now the government doesn't really want to put all that many people in prison. Just enough to scare the bejesus out of everyone so that they begin to tell on their partners in this venture, the appraisers and the mortgage brokers.
Now let's face it. When a homeowner went to the broker, he wanted more money than he had equity. The broker who could get the loan for him was going to get the business and make a commission. Now the broker didn't want the mortgagor to go bankrupt. He usually thought the homeowner could afford the mortgage. Why did he think that? Beause the Mortgagor was lying about his income. Usually not a big lie, often under 50 thousand dollars, just to make sure that they could qualify for the loan. After all a person can over-estimate a little, no?
So the Broker needs to find an appraiser who will fudge the numbers a little. It isn't hard. The appraiser wasn't making much for his work. So the Mortgage broker found a few who needed extra money and offered them a piece of any deal they helped get for the broker. Often the homeowner "tipped" the guy as well. After all a person can over estimate a little, no?
Then the broker goes to the hungry loan officer with a bunch of these loans and the loan officer sees a big commission check coming and he takes on a bunch of seemingly good loans and a few bad ones cause after all a person can be off a little, no?
Now to "get" the people who made money here, the government needs to make the case against them from the bottom up. First they will go to anybody who over-estimated their income and look to turn him against the broker and the appraiser.
It will work like this:
They will send an investigator to the door of some home in say Queens, Nassau or Suffolk County. He/she will ask if you are the homeowner and they will then question you without giving you Miranda rights. This is legal. You only get Miranda card readings when you are under arrest and questioned.
They won't tell you you need a lawyer, they will only tell you how much trouble you're in. They may even threaten to arrest you if you do not speak to them. DON'T DO IT. They are going to arrest you anyway.
Then they will offer to let you off easy if you will implicate the broker. After all you're not smart enough to over-estimate your income. The Broker told you what to write down RIGHT??
The Broker got the Appraiser right? The appraiser told you he could make the appraisal look good for you for a little "tip" right?
Now "tell them what they get for trying to own a home on Long Island Johnny." "Well Bob they get to hire a Criminal Defense Lawyer who is going to cost them 25 thousand dollars or more, AND they get to implicate the people who helped them afford a home in Queens, Nassau or Suffolk County, maybe even a relative or friend who was a mortgage broker or appraiser, and face a criminal fraud conviction and the possibility of Three year vacation in a Federal Prison!!!"
"Hold it! Hold it! Hold it" you say. "I am paying my mortgage. I have nothing to worry about."
WRONG. When the FBI gets the names of the brokers from the lenders, they will look to see what loans were generated by those guys. Did they use the same appraiser each time (usually they do)? Then they will look at those applications. Check the information in the apps against what they have on file for you (you know, your IRS Form where you tried to limit your income) IF (When) they find discrepancies, they will come for you too, to get the people who sold loans.
In fact, if you are still in your beautiful Long Island residence and haven't defaulted, you are easier to get. You don't already have a lawyer (so now there is none of that ugly "statement suppression" issue) and they know where to look for you (your not homeless yet.)
So you testify against your friend or loved one and then one of them turns on the others and in the end of the game you all have to pay "restitution" to the "defrauded" banks and the guys who knew all of this, and who profited from it the most, keep their millions. You on the other hand have a criminal record, have to hire a lawyer and lost your house and maybe met some new friend in prison named Bubba.
Don't let this happen to you. If you are a Mortgage Broker, Appraiser, or Homeowner/mortgagor, get to a Criminal Defense Lawyer now. Even if you are sure you will not be a target of an investigation, it is smart to get a lawyer and let him speak to whomever he thinks will help you to win the day. Let whoever comes knocking on your door from the federal government know that you have a lawyer on retainer. CALL YOUR LAWYER as soon as the investigators come to the door. Do not say anything to them without your lawyer being with you.
If you follow these simple steps you will be able to sleep through much of this crisis, and you will continue to enjoy the simple life of a homeowner on Long Island.
Although I focused on Long Island and specifically the counties of Queens NY, Nassau NY, and Suffolk NY, the scenerio and advice is good throughout the country.
You have been warned, heed the warning.
Hattip: ABA JOURNAL NEWS
For more information on Mortgage Fraud, see the FBI's Mortgage Fraud Page