The Use of Experts In Criminal Mortgage Fraud Cases
Since the housing market meltdown, the Department of Justice has made mortgage fraud investigations and prosecutions a priority. There has been a crash, and someone must take the blame – but who? The homeowner, who perhaps, while not intending to lie, was not completely forthcoming on his mortgage application; the mortgage broker who was urged to sell volume over quality and may not have verified each and every statement made by the homeowner on the mortgage application; the banking or financial institution, who like every other industry entity, agreed initially to underwrite mortgages but knew that the obligations would be sold to investment banks; the well intentioned investment banks who securitized the mortgages into complex instruments and sold them to investors; and/or the rating agencies whose clients were the investment banks and who actually believed favorable ratings were in order for complex mortgage instruments. There are always a huge cast of other characters in the process that may be the target of any given U.S. Attorney’s office – so-called straw purchasers; title agencies; property flippers. Obviously, each step of this process generates reams and reams of paper, ripe for analysis.
At the outset of the case, it is important to discover what sort of mortgage fraud is alleged and what position a potential client supposedly played in the activities under investigation. There are many types of potential fraud schemes which prosecutors investigate. If you don’t know the nature of the scheme being alleged, you can’t begin to understand the role the prosecution claims a client had in the whole process. Without a true understanding of a client’s role, you cannot begin to determine a client’s potential downside risk. Sometimes, a client can tell you exactly what the nature of the transactions at issue are, but often, especially in a pre-indictment situation, we must figure things out on our own. That is why it is critical to retain an experenced fraud and mortgage fraud attorney.
If you are in a pre-indictment posture the prosecutor or regulator involved may, at first, not know as much as a good defense lawyer. Indeed, in a pre-indictment, pre-charge investigative situation an attorney may not want to surface to discuss the alleged scheme with the government because you may not want to alert them to your client’s existence.
On the other hand, if an attorney does not immediately understand the scheme and the potential approximate scope of the loss, a client cannot begin to decide whether it makes sense to approach the prosecutors early or hold off and view the case in an adversarial, trial oriented manner. If your attorney does not get a handle on the law and the probable loss figure, you make an informed decision as to how to proceed. Thus, it is imperative that you and your attorney understand not only the nature of the scheme but the potential scope of the loss. At Charles A. Ross and Associates we are experienced in all stages of mortage fraud cases.
To that end, a mortgage fraud defense attorney should always try to hire an expert. No matter what stage the mortgage fraud case is in, an expert on mortgage fraud can be helpful — if not critically necessary — to proper preparation. Not only can forensic accounting experts with experience in mortgage fraud investigations help counsel understand the nature of the scenario, but they can assist in the process of evaluating where all the money went. Since fraud loss calculation under the Sentencing Guidelines is complex, a forensic expert can often provide assistance in reducing the loss calculation or presenting potential offsets to the alleged fraud.
It is particularly important to consider retaining an accounting expert in advance of a charge decision. Perhaps an expert can be utilized to help convince the U.S. Attorney’s Office not to bring an indictment because they are targeting the wrong person; or to make a case to defer prosecution or to plea bargain as to the amount of loss attributable to the client. An expert may also be helpful in a trial posture, to demonstrate that liability does not lie with the client. Certainly at sentencing, where the critical factor is likely to be the loss calculation, an expert can be called to demonstrate that the amount of loss attributable to a client is lower than that alleged by the prosecution.
There is no mortgage fraud statute as such –these cases are prosecuted with a now familiar arsenal — the mail and wire fraud statutes (18 U.S.C. 1341 & 1343); the conspiracy statute (18 U.S.C. §§ 371 and 1349); and the false statements statute (18 U.S.C. § 1001). The district courts look to advisory Sentencing Guideline § 2B1.1 for guidance prior to imposing sentence. The amount of loss attributable to a client under §2B1.1 (b) (1) of the guidelines can make a significant difference in the sentence imposed and it is here where an expert can have great impact. The Commentary to § 2B1.1 (b) (1) provides that “[t]he court need only make a reasonable estimate of the loss," U.S.S.G. § 2B1.1, cmt. n.3(C), and that the loss is the greater of “actual loss" or “intended loss" less the credits against the loss. See U.S.S.G. § 2B1.1, cmt. n.3 (A). Actual loss is defined as the “reasonably foreseeable pecuniary harm that resulted from the offense," U.S.S.G. § 2B1.1, cmt. n.3 (A)(i), while intended loss is defined as “the pecuniary harm that was intended to result from the offense," including such harm that would have been impossible or unlikely to occur such as harm that resulted in a government sting operation. See U.S.S.G. § 2B1.1, cmt. n.3 (A)(ii).
Excluded from the loss calculation is “interest of any kind, finance charges, late fees, penalties, amounts based on an agreed-upon return or rate of return, or other similar costs," and the “[c]osts to the government of, and costs incurred by the victims primarily to aid the government in, the prosecution and criminal investigation of an offense." See U.S.S.G. § 2B1.1, cmt. n.3(D)(i) and (ii).
Of particular interest in the mortgage fraud cases, is the credit against loss for collateral. The commentary to the Guidelines instructs that loss shall be reduced by “the amount the victim has recovered at the time of sentencing from disposition of the collateral, or if the collateral has not been disposed of by that time, the fair market value of the collateral at the time of sentencing." See U.S.S.G. § 2B1.1, cmt. n.3 (E) (ii).
Another potentially important role an expert could play is to assist counsel to identify the possible victims of an alleged mortgage fraud scheme. In United States v. Mancini, 624 F.3d 879 (8th Circuit 2010), the Eighth Circuit held that not only was a particular lending institution a victim of a fraudulent mortgage application but the insurer was a victim as well. If counsel can get a handle on the law and the number of victims, the type of victims, and any potential offsets of victim loss at the outset of the case, more accurate and helpful advice may be given to a client.
Indeed, in one recent case, the immediate surrounding community in an alleged property flipping mortgage fraud scheme, hired an expert real estate/accounting firm and argued under the Victim and Witness Protection Act, and the Mandatory Victim Restitution Act, that their geographic community was a compensable victim of the wide-ranging scheme. In United States v. Bold, 412 F.Supp.2d 818 (S.D. Ohio 2006), the sentencing proceeding involved an elaborate presentation by counsel for a local nonprofit group as to why the scheme depressed property values and therefore the client should be required to pay restitution to the “victim community." While the district court denied the group’s restitution claim, a defense expert is necessary to counter third party applications, which are increasingly common.
Often, the government will allege a scheme involving inflated appraisals of real estate parcels, as was the case in United States v. Curtis,–F.3d –, 2011 WL 846703 (5th Circuit, March 11, 2011). There, the entire straw-purchaser type scheme allegation was completely dependant upon an inflated appraisal. An expert retained early could determine whether there is an arguable issue regarding the legitimacy of the appraisals in a purported mortgage fraud case. As the above examples demonstrate, the ways to utilize an expert in a mortgage fraud case are as varied as each individual case.
Thus, an expert retained early, could at least assess a current value on a particular portfolio of real estate and provide crucial information about the potential for collateral offset, should a client be interested in an early plea. Certainly, no expert has a crystal ball to determine the direction of value in a rising or falling real estate market. But since case law overwhelmingly supports collateral offset valuation at the time of sentence, an expert retained early can provide a snapshot of what might be possible regarding an effective argument to lower any given loss calculation.
Perhaps in valuing the collateral yet to be sold, the expert may be of the greatest assistance in disputing the amount the purported victim bank and/or investors claim to have been harmed. Valuing loss may be thorny when several mortgage loans are at issue and the loans have taken a complicated journey. An expert will trace such loans from their formation through securitization and disposition of collateral or the fair market value of the collateral.
The government appreciates the complicated issues presented by mortgage fraud cases and has often engaged its own experts. A defense attorney should engage an expert at the earliest stages of representation so that the attorney may, at the very least, understand the loans at issue; the loss attributable to his/her client and be able to counter the government’s experts.