When the FBI Comes Calling…®
MORTGAGE FRAUD (Continued)
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1010 (2007) (HUD & FHA Fraud)
18 U.S.C. § 1010 (2007).
The Crime
It is a crime for a person
- for the purpose of obtaining any loan or advance of credit from any person, partnership, association, or corporation
- with the intent that such loan or advance of credit shall be offered to or accepted by the Department of Housing and Urban Development for insurance, or
- for the purpose of obtaining any extension or renewal of any loan, advance of credit, or mortgage insured by such Department, or the acceptance, release, or substitution of any security on such a loan, advance of credit, or
- for the purpose of influencing in any way the action of such Department,
- make, pass, utter, or publish any statement, knowing the same to be false, or
- alter, forge, or counterfeit any instrument, paper, or document, or
- utter, publish, or pass as true any instrument, paper, or document, knowing it to have been altered, forged, or counterfeited, or
- willfully overvalue any security, asset, or income.
The Punishment
The punishment under this section is
- a fine, imprisonment for not more than two years, or both.
Case Law Interpreting Section 1010
United States v. McLean, 131 Fed. Appx. 34 (4th Cir. 2005).
In McLean, the defendant was charged and convicted on 66 counts, one of which was "making and passing false mortgage notes to influence HUD in violation of 18 U.S.C. § 1010." McLean at *8.
The scheme in this case involved officers and owners of a mortgage company which qualified as a Federal Housing Administration (hereinafter, FHA) lender which direct endorsement authority. Id. at *2. This means that the mortgage company had the authority to approve mortgage loans for FHA insurance, which are "readily saleable" on the secondary mortgage market. Id. The mortgage company was also an approved Fannie Mae lender, which meant that the mortgage company could originate a mortgage loan with the borrower, which would be immediately bought on the secondary market by Fannie Mae who would do its own underwriting evaluation. Id.
The mortgage company also created a subsidiary company, which was in the business of building modular homes financed by the parent mortgage company. Id. at *2-*3. To obtain funds for the home-builder to build homes, the officers of the parent mortgage company recruited individuals, most friends and relatives, to sign mortgage loan notes "purporting to secure funds advanced by [the mortgage company] for homes that, in fact, did not exist or were owned by someone other than the 'borrower' on the note." Id. at *3. The officers induced the individuals to sign the notes by paying them money to participate in "investment" opportunities and representing that, by signing the notes, the "investors" did not actually incur any repayment obligation. Id. The officers also signed similar fictitious notes themselves. Id. No one who signed the documents ever acquired or possess an ownership interest in the properties listed on the notes. Id.
These instruments were then sold to Fannie Mae on the secondary market, "representing by the terms of the note that the borrower signing the note had an ownership interest in the listed property, that [the mortgage company] had a security interest in the property, and that the property was of sufficient value to protect the lender" or any secondary purchaser of the loan, such as Fannie Mae. Id. at *3-*4. Because the mortgage company was an approved Fannie Mae lender, it could transfer its loans to Fannie Mae without having to submit the loans to any underwriting review process by Fannie Mae; in essence, the mortgage company was making underwriting decisions on behalf of Fannie Mae. Id. at *4.
When Fannie Mae began to notice irregularities in the mortgage company's underwriting practices, it conducted an audit of the loans it had purchased and found that many of the properties were either vacant lots or partially completed houses. Id. One of the defendants, when faced with the collapse of the Fannie Mae scheme, agreed to repurchase the loans, and he secured funds to do so by conducting the same kind of scheme with Ginnie Mae. Id. at *5. Ginnie Mae is owned by HUD. Id. Eventually, the schemes fell apart and the defendants were charged in a 66-count indictment.
Section 1010 comes into play in McLean when the defendants challenged the district court's refusal to give a "good faith" instruction on the counts alleging the passing of false mortgage instruments to HUD under § 1010. Id. at *13. The judge did so for the other counts, and the defendants felt they were entitled to a good faith instruction "because they held a good faith belief that they were participating in a lawful investor program." Id. at § 14.
The court disagreed. "On the knowledge element, the district court charged that the Government was required to prove defendants 'knew that the mortgage notes were actually false or counterfeited' and that they 'knew [the notes] would be offered for some purpose to HUD.'" Id. There is no element of the offense which would allow a good faith defense; "[a]s long as defendants knew the information on the documents they procured was false and that the documents were headed to HUD (i.e., Ginnie Mae), defendant's belief that the scheme was lawful, even if true was not a defense." Id.
United States v. Koehn, 74 F.3d 199 (10th Cir. 1996).
The defendant in this case pleaded guilty to one count of wire fraud and "one count of making a false statement to the Department of Housing and Urban Development," under section 1010. Koehn at 200. In 1991, the defendant was the president of a mortgage company which was engaged in "originating and refinancing residential mortgages and selling them on the secondary market." Id. He also controlled an escrow services company which he used to close mortgages originated by his mortgage company. Id. Typically, the mortgage company would originate and sell a secured residential loan to a mortgage servicing company, and if that company decided to buy the mortgage loan from the defendant's mortgage company, it would deliver funds to the defendant's escrow services company. Id. The funds were intended to be held in escrow and disbursed to pay off existing mortgages, and when "the existing mortgages were satisfied, new notes and related papers were forwarded to the buyer." Id. In mid-1991, the defendant telephoned a mortgage trader located in Florida, and offered to sell that trader thirteen FHA and VA insured residential mortgage loans. Id. The trader's company agreed to purchase all thirteen loan packages, and pursuant to the defendant's instructions, it wired $882,550.76 to the defendant's escrow services company's account; the funds were purported to pay off the existing mortgages on the thirteen loans the trader's company had agreed to buy. Id. However, that same say the defendant "misappropriated about $725,000 of these funds for the purpose of satisfying unrelated and independent obligations of [the defendant's mortgage company]." Id. By the end of that month, the defendant had misappropriated the remaining funds, and he "never delivered the thirteen loan packages to [the trader's company]. In fact, he sold the same loan packages to another mortgage servicing company. As a result of [the defendant's] fraud, [the trader's company] was driven out of business." Id.
United States v. Austin, 1992 U.S. App. LEXIS 30121 (10th Cir. 1992) (Nos. 92-1046, 92-1047).
The defendants were convicted on various counts including mail fraud, wire fraud, and making false statements in connection with this scheme. Austin at *1. "The essence of the scheme was to purchase properties from legitimate sellers and then divide each property into single family residences." Id. The defendants recruited a number of "strawmen buyers" who secured mortgages from a mortgage company which was insured by the department of Housing and Urban Development (hereinafter, HUD). Id. HUD requires that each purchase be funded with a minimum of 15% down payment by the purchaser, but "no such investment was made by the strawman." Id. Closing documents, however, were drawn up which falsely stated that down payments had been made. Id. at *1-*2. The defendants would then pay each strawman $1,000 for each of the transactions in which they participated. Id. at *2. Furthermore, the defendants assured the straw borrowers that the defendants would be responsible for the payment of the loans on the properties, but no payments were made, and the properties when into foreclosure. Id.
The defendants also incorporated an escrow service company which they used to give the transactions an air of legitimacy. Id. The escrow service company's appearance as an independent entity convinced loan closers on the strawmen purchases to believe that down payments were paid by the purchasers in cash or certified funds. Id. Since the defendants arranged for all loans to be handled through the same mortgage company, which was able to charge high interest rates because the purchasers had no real interest in the property, the loans were attractive to secondary lenders because of the high interest rates and prospect of HUD insurance. Id. Eventually, the loans that went into default ended up losing the victims of the scheme more than $20,000,000. Id. at *3.
On appeal, the defendants argued that there was insufficient evidence to prove their guilt under section 1010 "which prohibits, among other things, the making of a false statement in connection with a credit transaction offered to HUD for insurance." Id. at *5. The government focused on line 303 of the HUD-1 form, which is "prepared and submitted in connection with the closing upon real estate transactions," that showed the purchaser made a case down payment, but no such payment was actually made. Id.