Mortgage Fraud, Scope of Criminal Activity and Actual Loss

The end of the housing bubble and mortgage fraud induced economic downturn is giving birth to numerous prosecutions for mortgage fraud. The recent case of U.S. v. David McCloskey, 2013 U.S. Dist. Lexis 168220 (November 26, 2013), is indicative of the numerous issues guilty pleas or guilty verdicts in these cases preset. Issues of forged appraisals, engaging in mortgage brokering without a license, submitting fraudulent bank and asset information upon which mortgage qualification documents are based (this is fake W-2 forms, bank account statements, asset information) must be addressed head on with competent counsel.

The facts of these cases, when incorporated in a guilty plea or form the basis for a guilty verdict, significantly expand a potential base line sentence in accordance with the federal sentencing guidelines. Please review http://www.phila-criminal-lawyer.com/Publications/201031202-Hark.pdf, for my publication in the Legal Intelligencer discussing of the process of a federal sentencing.  This blog will discuss the major issues of scope of criminal activity and the resulting loss calculus.  A second blog will address secondary sentencing enhancements.

Sentencing enhancements are one of the major issues mortgage fraud cases confront. In accordance with the Guidelines, the first issue to be addressed controls the entire sentencing scheme: what is the scope of the criminal activity. The Guidelines define scope as a criminal plan, scheme, endeavor, or enterprise undertaken by the defendant in concert with others, whether or not charged as a conspiracy, for which “sentencing adjustments are determined by considering “all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity.” U.S. Sentencing Guidelines Manual § 1B1.3(a)(1)(B). The importance of this scope of criminal activity definition is that all losses associated with the scope of activity are then attributed to the defendant and for which the guidelines provide a sentencing enhancement.

The amount of loss is defined at in U.S. Sentencing Guidelines Manual § 2B1.1(b)(1). It is the government’s burdened by a preponderance of the evidence to establish scope of loss Once the government makes out a prima facie case about the amount of loss, the burden of production shifts to the defendant to provide evidence showing that the government’s evidence is incomplete or inaccurate.” The ultimate burden of persuasion, however, remains with the government. The court “need only make a reasonable estimate of the loss.” Id.; U.S.S.G. § 2B1.1 cmt. n.3(C).

The accordance with U.S.S.G. § 2B1.1 cmt. n.3(F)(v), “services were fraudulently rendered to the victim by persons falsely posing as licensed professionals[,] … loss shall include the amount paid for the property, services or goods transferred, rendered, or misrepresented, with no credit provided for the value of those services.” This amount includes fake mortgage service appraisal fees, broker fees, and attorney’s fees.

Objections to unearned or fake broker’s fees, sometimes amounting to millions of dollars, will not win. Case law indicates that: “A victim’s loss will count against the defendant at sentencing if it would not have occurred but for the fraud. In this context, but for the fraud’ means ‘had the defendant refrained from the conduct that gave rise to the fraud, not had the defendant engaged in such conduct but did so lawfully (rather than fraudulently).” Although a defendant and his bank could have earned these fees legally, the professional fees paid to borrowers will be appropriately considered loss under U.S.S.G. § 2B1.1 because the loans closed due to fraudulently inflated appraisals.

A second aspect of losses includes the amount of the bank’s losses due to default and mortgage foreclosure. The calculations also multiply each loss by the total number properties purchased in the scheme. Each house’s price and therefore loss calculus may be derived from the HUD-1 loan amount.

However, it benefits the defendant to use the value of the foreclosure judgment, excluding interest, finance charges, late fees and penalties. The guidelines specifically exclude interest, finance charges, late fees, and penalties from the loss calculation. U.S.S.G. § 2B1.1 cmt. n.3(D)(i). In one case, a court found the judgment amount to be a reasonable estimate of loss because the government did not include other expenses associated with foreclosure–such as closing costs, insurance payments, and management fees -in its loss calculation. This equation also must include mortgage payments made and foreclosure prices paid. This equation will produce the lowest possible figure in most cases.

Importantly, the courts have found that the government loss cannot be based upon a percentage of been appraised value. Typically, the property price or value will vary. The courts have held that with a variance this high, it cannot make a reasonable estimate of the principal amount at foreclosure from the appraised value alone. The court has stated “[T]he 80% formula value is not a reasonable estimate unless there is evidence to indicate that the relevant loan was for the purchase. As well the appraised value does not factor in specifically property sold at sheriff sale, money paid down, tax value, actual value, or a correct appraised value.

It fighting the scope of criminal activity and actual loss calculation, a defendant must contest every aspect of the government calculated loss. Consideration must be paid attention to the principal owed at the time of foreclosure, the foreclosure sales price which permits a credit to the lost value, the resale price after the foreclosure, and then the actual loss calculated. The issues as to brokerage fees and appraisal fees must also be addressed to come to ascertain the gross loss value. There, however, must be a balance so as to not loss any acceptance of responsibility deductions.

Please call to discuss your case.

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