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How the ordinary mortgage borrower became a criminal

In some areas of the country, substantial numbers of single family homes fell into foreclosure. In other markets, large numbers of condominiums suffered wholesale foreclosures. People purchased homes for inflated prices borrowing up to 95 to 97 percent of the purchase price, acquiring creative mortgages with low teaser rates or balloon mortgages. In a booming real estate market buyers felt confident their purchase could be sold within a year or two for a profit. With the collapse of the real estate market, large scale mortgage foreclosures put many banks under or near the brink. As auditors and investigators began examining the loan documents, they found many cases of borrower fraud. Real estate fraud gained top priority in the Department of Justice following the fall in the real estate market.

A mortgage fraud investigation begins by focusing on the mortgage application, a form known as the Fannie Mae Form 1003 (Uniform Residential Loan Application) a standard form for all banks. It presents the borrower’s financial statement and informs the bank of the borrower’s income, assets and liabilities. When properties fell into wholesale foreclosures, auditors and investigators poured over mortgage applications finding inflated numbers. Mortgage fraud investigations found inflated income or in some cases non-existent jobs and income. Fraudulent application might show a nonexistent bank account. In some cases a borrower might falsely state the house would be the borrower’s primary residence, thus qualifying for a lower interest rate and seen as a safer risk. The false financial information in the 1003 Form was important to the bank’s decision to lend money to a borrower, leading the bank to conclude the borrower qualified for the loan. This made it a federal crime because it is federal crime to present materially false information to an FDIC insured institution.

Banks did not escape blame. Accusations were made that banks’ lending practices facilitated fraudulent loans. Some banks offered no documentation loans which did not require backup documents, commonly tagged “liar loans.” Accusations against bank officers claimed they turned a blind eye to obvious fraudulent borrowers by not carefully verifying the financial information submitted in a loan. While the bank practices do not excuse the crime of making false statements to a bank, the booming real estate market and the easy money, created a fertile soil for rampant fraud. As a result, ordinary law abiding citizens turned into criminals.