I think that while I am certainly a conservative/libertarian ideologue, my allegiance is to a set of ideas and not a political party.
There are several Democrats (adverse to my political philosophy) currently in hot water for mortgage fraud. I am one of those legal purists who “loves the law” for what it is intended to be, and I find it deeply troubling when it is abused for political purposes. The Anglo-American common law, combined with our constitutional and legislative systems, has created a beautiful symbiosis of cognitive purity that I absolutely revere, respect, and appreciate. Of course, this admiration derives from how the law is honestly practiced and adjudicated—not from how it is too often twisted and abused.
Following constitutional principles, legislatures make laws, and the sole role of courts is to objectively carry out legislative intent. I think of the law as a marble edifice, a work of art—like Michelangelo’s David. When prosecutors stray from their solemn duties and use their offices as political weapons, they might as well be swinging a sledgehammer at the Pietà. When haughty judges substitute their opinions for those of the legislature and assume powers they do not possess, they engage in judicial terrorism. The reason we are rich, prosperous, and enjoy more liberties than any other society in history is because of our unique constitutional structure. We must not only protect it—we must revere it for all its glorious beauty.
Agencies of the federal government are investigating Letitia James, Adam Schiff and Lisa Cook for mortgage fraud. Among other infractions, all three allegedly stated on mortgage applications that a particular property would be their primary residence when it clearly was not and never intended to be.
My “unfairness meter” went off when these announcements were first made. I’m quite sure this type of mortgage fraud happens with great regularity. Is this selective prosecution? Or do public officials—especially high-ranking ones entrusted with our legal and financial systems—deserve greater scrutiny? A U.S. Senator, an Attorney General of New York, and a Federal Reserve Board member are not small players. It has always been a legitimate use of prosecutorial discretion to go after “big fish” in order to deter “small fish.” Nevertheless, I feel a little dishonest rooting for their prosecution if there are a million people who have done the same thing but have never been charged.
The big picture is the federalization of the banking system. Today, 85% of residential mortgages are sold to Government-Sponsored Enterprises (GSEs)—mammoth entities created by Congress to facilitate home ownership, namely Fannie Mae, Freddie Mac, and Ginnie Mae. In 2008, the federal government bailed out Fannie and Freddie to the tune of $400 billion and placed them in conservatorship, where they remain to this day. Big government creates too many rules; thus, mortgage fraud of the sort described above is a federal crime.
Feeling it has been my duty, I have reported white-collar crime to the feds on a number of occasions—fraud, embezzlement, misappropriation—always involving millions of dollars. The response: “You are absolutely right, these are crimes, but we don’t have the resources to prosecute.” My radar goes off. If the feds don’t prosecute major fraud, they certainly aren’t prosecuting smaller ones.
The advice I’ve always given clients—even when I suspected a borrower’s true intent was to convert a property into a rental—has been: You need to move into the house. You need to change your mailing address, establish the hallmarks of a permanent residence, and have a plausible story as to why you wanted to live there. You need to gather evidence of living there. And when you move out, you need a believable story as to why. Using these parameters, almost anyone can escape culpability for this type of mortgage fraud. People move out of their houses all the time and keep them as rentals. Many move for the simplest of reasons, such as not liking their new house or neighborhood. It is very easy to comply with the primary-residence rule, but still convert the residence to a rental.
Now, let’s take a deeper dive. Letitia James allegedly claimed her father was her husband on one of her mortgage applications—obviously to use his credit. She also allegedly lied about the number of rental units she owned in her Brooklyn apartment building, claiming it was four units when it was five, thus giving her a lower rate and better terms. The most egregious misrepresentation was her claim that she planned to live in a ramshackle house in Norfolk, Virginia, while serving as Attorney General of New York—a position that required her to reside in New York, where she had sworn under oath that she lived.
Schiff allegedly did likewise. He claimed a Maryland house was his primary residence even though he had previously represented a California house as his primary residence. Just like James, he is required to be a resident of his state—California—in order to serve as a U.S. Senator, and he too had sworn under penalty of perjury that he was.
Cook is not a politician, but as a Federal Reserve Board member, she oversees banking regulations and their enforcement. Her alleged actions are particularly troubling. She bought two houses within two weeks of one another—one in Atlanta and one in Ann Arbor, Michigan—claiming both as her personal residence. In disclosure forms submitted to the Fed, she listed the Atlanta property as her residence, even though evidence suggests she was renting it out. She also failed to disclose rental income to the Fed, perhaps to conceal the fact that it was not her residence.
So, what are the economics of this type of mortgage fraud? The difference in interest rates and underwriting standards is significant between a loan for a primary residence and one for an investment property. An investment-property loan generally carries an interest rate 1–2 percentage points higher, requires a 20% down payment instead of as little as 3% for a primary residence, and often has less favorable terms. On a $600,000 mortgage, the investment borrower will pay an additional $5,000–$10,000 per year in interest, plus at least $6,000 in upfront points. Over 30 years, saving $10,000 annually is an enormous financial advantage. GSEs effectively guarantee mortgages, allowing lenders to charge less, so ultimately, the federal government is being defrauded.
So, dear reader, I’ll let you be the jury on this issue. Regardless of your decision—which I will respect—I must leave you with these thoughts:
These cases are emblematic of those who run our bloated state and federal systems, who smugly think they can get away with anything and that laws are just for the “little people.” Oh, the hubris! If a state attorney general, a U.S. senator, and a Federal Reserve Board member have no fidelity to the law in such a simple matter, what other crimes and malfeasance might they have committed? What else are they capable of? One would hope that those in such lofty positions would want, for the sake of their own integrity and responsibility to the institutions they serve to comply with such an easy law-abiding task.
I guess not.
