8/12/2019 The Avanti Law Group: Haste Clouds Long-Term Effort on Mortgage Fraud

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The Avanti Law Group: Haste Clouds Long-Term Effort on Mortgage Fraud

A report issued by the Justice Departments inspector general, Michael E. Horowitz, underscores thedanger of extolling short-term results when it comes to prosecuting white-collar crimes. The report

highlights how generating headlines seemed to take precedence over accurate figures in thegovernments fight against mortgage fraud.

In October 2012, less than a month before the presidential election, Attorney General Eric H. Holder Jr.called a news conference to trumpet the Justice Departments success in combating foreclosure fraudthrough a program called the Distressed Homeowner Initiative. The success of the DistressedHomeowner Initiative, and the developments we announce today, underscore our determination topursue these and other financial fraud criminals around the country, Mr. Holder said in a statement.

The claims of great success came during a time of persistent criticism that the Justice Department was nottaking stronger action to pursue fraud in the run-up to the financial crisis. The numbers offered by Mr.Holder for the first year of the initiative were impressive: charges filed against 530 defendants, including172 executives, from frauds that resulted in losses of more than $1 billion.

After questions from the news media about those claims, almost a year later the Justice Departmentrevised those figures significantly downward. The total number of defendants charged was 107, with noreference to any executives, and the loss from criminal activity was $95 million. In response to Mr.Horowitzs report, a Justice Department spokeswoman pointed out: In the time period in question, the

number of mortgage fraud indictments nearly doubled, and the number of convictions rose by more than100 percent.

An interesting question is whether accurate reporting of the results, like a 100 percent increase inconvictions, would have generated the kind of headlines the government seemed to want. Bringing thatmany more cases for a complex white-collar crime is a good result, but claiming to pursue severalcorporate executives gave the original numbers much more punch in light of accusations that the JusticeDepartment was being soft on Wall Street.

The inspector generals report pu ts much of the blame for the inflated figures on how the F.B.I. gatheredthe information for Mr. Holder. Mr. Horowitz noted that we found significant breakdowns in the processused to develop the results of the Distressed Homeowners Initiative. That occu rred at least in partbecause the F.B.I. had too little time and resources available to allow for vetting of the data.

The report does not give a reason for taking such a slapdash approach, but I think it is clear that there waspressure to announce the success of the initiative to demonstrate how the Justice Department was

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responding to public outcry over the lack of tangible evidence that prosecutors were taking a hard line.And so we have an example of act in haste, repent at leisure.

Intensifying the pressure to report robust results was additional money provided by Congress for

positions to be used to combat mortgage fraud after the financial crisis. Both the Justice Department andthe F.B.I. received millions of dollars for new employees, and that means showing the money was put togood use. But Mr. Horowitzs report states that mortgage fraud was not a high priority for the F.B.I., inpart because it was declining as lenders toughened their standards. In these days of tight budgets,however, no agency turns down an appropriation.

The government is fond of calling a new initiative an operation, which implies a sense of urgency andresolve. In 2010, before the Distressed Homeowner Initiative, the Justice Department started OperationStolen Dreams to take on a broad array of mortgage frauds. Less than three months after it started, Mr.Holder announced that prosecutors had brought cases involving 1,215 criminal defendants nationwide,

including 485 arrests, who are allegedly responsible for more than $2.3 billion in losses.

Those are impressive numbers for a white-collar crime, especially in such a short period, but their validitymay be open to question. Mr. Horowitzs report points out that his office did not audit these figures, andin light of t he other findings, he recommends that the Justice Department revisit the results.

Catching those engaged in mortgage fraud is not like operating a sobriety checkpoint or drug dragnetthat quickly yields arrests. Trumpeting initiatives for pursuing complex white-collar crimes whose successwill be reported in months rather than years runs the risk of offering results that dont grab the publicsattention or worse, makes them look like failures.

As an initial matter, just figuring out what the numbers are can be difficult. Mortgage fraud is not aseparate crime but a subset of federal offenses like bank fraud, mail fraud and wire fraud. So prosecutionsinvolving mortgages may not show up easily in government records.

A greater problem in announcing a c rackdown is that these types of cases often dont come to light untilmonths, or even years, after the transactions, and the fraud can take many different forms. During the

period when real estate values soared, there were schemes to inflate property values so that lenders weremaking loans for far more than houses were worth. Once the housing bubble burst around 2007,mortgage frauds morphed into schemes to defraud homeowners trying to avoid foreclosure.

Putting together a mortgage fraud case requires amassing a large volume of documents to trackownership, housing values and the transfer of money. Even figuring out where a fraud involving inflated

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housing values took place usually requires a bank or real estate company to report suspicious activity,which could come long after the scheme ended when the loan finally defaults.

For scams involving homeowners who face foreclosure, just identifying whether a crime took place is

difficult. Those in danger of losing their homes may grasp at straws in seeking help, with companiestaking advantage of them by doing just enough to make it appear they tried to help. Victims may notrecognize a fraud or have the time and energy to pursue a complaint in the face of losing their homes.

This type of scheme often involves modest sums taken from those who can least afford it. The JusticeDepartment tends not to pursue small cases, leaving them to local law enforcement, so any number ofviolations could easily fall through the cracks.

Mortgage fraud, like most white-collar crimes, requires painstaking investigation over a long period, sothere will never be a flood of cases. And even when the government commits resources to investigations,there will be some that do not pan out.

But that does not make headlines when the government paints itself into a corner by pursuing initiativesthat imply a promise of quick results.