Will Obama’s New Federal Mortgage Fraud Unit Push the Investigation Too Far?

In his State of the Union address, President Obama announced that a new unit had been formed for the purpose of investigating mortgage fraud and other white collar crimes. The new unit — led by New York Attorney General Eric Schneiderman, known for taking a tough stand against mortgage lenders — will have 55 prosecutors, FBI agents, and analysts. Together, they will examine what exactly caused the “massive market failures” that led countless people to lose their homes to foreclosure.

The reasons behind the economic collapse that shook the world are almost too complex to sort out. But one basic storyline is as follows: Mortgage lenders began to engage in subprime lending, or lending to individuals with poor credit histories. They did so at a time when home values were rising quickly. It seemed like a win-win situation: mortgage lenders could reap huge profits while the borrowers could buy the house of their dreams. Often, mortgage lenders pushed “adjustable rate mortgages,” where the monthly mortgage payment started low, then eventually increased. When housing prices finally started to drop, borrowers found themselves with higher mortgage payments and unable to refinance to pay off the loan. Families everywhere could not make payments and mortgage lenders started to foreclose. To make matters worse, mortgage lenders had packaged loans together as “mortgage-backed securities” and sold them internationally. When the loans failed, the securities became worthless and many of the investment banks that bought them collapsed.

Today many people are still defaulting on their mortgage payments and mortgage lenders are foreclosing on their houses. Many claim that mortgage lenders are going so far as to commit mortgage fraud in order to swindle people out of their homes. Mortgage fraud is a federal crime that consists of a misstatement, misrepresentation, or omission that goes to the heart of the agreement. It isn’t just a small oversight — like saying the monthly payment is $995 when it is actually $1,000 — but a misrepresentation that intentionally led the borrower to believe something that wasn’t true, and to act on that belief. Mortgage lenders have been accused of falsifying information on home loan documents, without the borrowers’ knowledge, in order to make it easier for the borrower to get the loan, only to turn the tables once the borrower (inevitably) defaulted.

While the mortgage lending industry desperately needs to be kept honest, for its sake and that of the general public, we need to be careful not to assume that mortgage lenders are always dishonest and after your house. The unfortunate truth is that while there were unscrupulous lenders, there were people on both sides who believed the hype — that home prices would rise forever and ever and no loan bore too much risk. With hindsight, we can say that that attitude was foolish, that is still far different from peddling mortgages that the lender knew the borrower could not afford. It shouldn’t be a reason to hire a criminal defense attorney.

Furthermore, mortgage lenders often don’t want to foreclose upon a house. It often involves long months of litigation, while the mortgage goes unpaid. Then, when they try to sell the house, it goes for far below its original value. So while the new investigation unit is long overdue, one hopes that they are able to keep things in perspective — not lump the foolish in with the truly criminal.