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Saturday, November 20, 2010

Strategic Defaults: Criminal Bank Fraud?

Bank fraud today hurts all prospective borrowers tomorrow, and all bank depositors both today and tomorrow.  This is why Crime, Politics and Policy has a tiny box of tissues for that class of putative victim known as the strategic defaulter.  These professional deadbeats may be engaging in criminal activity which may warrant a close look by local authorities and perhaps even the Department of Justice.

The essence of mortgage fraud is a knowingly false or fraudulent representation by the borrower in order to induce the bank to hand over its money, either to purchase a property or cash out its equity.  The question with strategic defaulters like nationally-known foreclosure defense lawyer Peter Ticktin (in strategic default since December 2006, or four years ago, on a Boca Raton home he bought in 2004 for $650,000) is whether they lied to their bank about their true intent to pay in order to get a mortgage.  

Let's examine the similarity between a common type of mortgage fraud which, when discovered, is often prosecuted by your local United States Attorney's Office or county prosecutor.  The typical straw buyer fraud involves someone buying (or refinancing with a "cash out refinance") a house, using funds gotten from a bank under false pretenses -- the criminally, knowingly false or fraudulent representations in the mortgage application.  The essence of these lies is the representation that the buyer is going to live in the house and has both the ability and the intent to pay the mortgage -- to fulfill his part of the bargain.  The bank relies (at its own risk) on these representations to grant the loan. 

When the fraudulent straw buyer cashes out equity and vanishes, the bank is stuck with a nonpaying (and often nonexistent, totally phony borrower, thanks to fraudulent documents) buyer and collateral in the form of a house that often is actually worth far less than the appraised value of the house (the appraisal is often just as fraudulent, as it is prepared by an appraiser also in on the scam).  

The strategic defaulter does not lie about his ability to pay.  He may lie about his intent to pay.  Arguably, that is worse and more criminal, because this presents a homeowner who essentially declares, "I can pay you, but I'm just not going to.  Come and get me!"

The aforementioned Mr. Ticktin can use "changes in circumstances" and a two-and-a-half-year record of payment to explain that his ability to pay changed, and that his intent is not an issue. Others may not have so much luck explaining their strategic defaults as not involving some sort of nefarious intent to deceive or defraud their banks.
When you misrepresent or outright lie about your ability to pay back a loan in order to convince a bank to grant you a loan, that is a fairly clear case of bank fraud. It should be no different when the misrepresentation is not about the ability to pay a mortgage, but one's intent.

Eric Dixon is a New York lawyer who provides strategic analysis and litigation stress management consulting through his proprietary concern, Eric Dixon LLC. Mr. Dixon has been a lawyer since graduating from Yale Law School in 1994 and has substantial experience with complex business transactions, regulatory compliance and government and regulatory investigations. He may be reached for comment or consultation at and by phone at 917-696-2442.

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