Defrauding homeowners AND the IRS

Today’s Cleveland Plain Dealer has a sub-prime lender story written by Mark Gillispie detailing just how widespread mortgage fraud is in this country. They don’t mention any Wall Street banks or financial institutions that are exempt from having played a role in the mortgage fraud perpetrated by sub-prime lenders. In fact, in describing the scope of the mortgage fraud industry, the applicable term was “systemic.”

Systemic. That’s downright scary.

Why scary? The Plain Dealer cites the words of Anthony Accetta, a founder of a private investigation firm that specializes in finance, who is also a former federal prosecutor with a history of prosecuting mortgage fraud during the 1970’s, and who worked as a private attorney on behalf of investment banks in the years between his work as a federal prosecutor and his work in private investigations.

“This is a national catastrophe, and the perpetrators [on Wall Street] are not being prosecuted,” Accetta said. “It’s one of the easiest cases to prove because there are plenty of witnesses and plenty of evidence out there.”

So, why the failure to prosecute? Here’s the most chilling part:

Despite the FBI and SEC investigations, Accetta said he doesn’t think the U.S. Justice Department “has the stomach” to prosecute these companies, out of fear it would undermine confidence in those financial institutions and our capital structure.

“So you’re left with prosecuting individuals,” Accetta said. “This was systemic. It had nothing to do with this individual or that individual. There was no individual in any of the investment banks who could have stopped it even if they wanted to.”

Do you see why this is scary?


The Plain Dealer also put together this clever graphic to show how all the financial players fit together to perpetrate their particular aspect of mortgage fraud.

I noticed a puzzle piece that hadn’t been added in, and that’s the part about how companies write off losses from foreclosures when they file taxes with the IRS. Let me add some detail about my prior blog entry, “Sub-prime lender as tax evader.”

When the seller first bought the house (as a buyer), the seller went to a broker in Middleburg Heights who said it would be easy to get a loan at about 5.25%. The seller became furious when the loan that was offered was an Adjustable Rate Mortgage that in just three years would charge interest of over 13%. The seller demanded a fixed rate mortgage. The broker countered with a mortgage fixed at 7.5%. The seller accepted the mortgage offer, even though it was a far cry from the 5.25% the mortgage broker had cited at the outset. The original mortgage loan amount was $133,000.

The mortgage originator was Wilmington Financial, but almost immediately, Wilmington Financial sold the mortgage to JP Morgan Chase. Though JP Morgan Chase became owner of the loan, loan payments were processed by Lytton Loan Servicing. Lytton Loan Servicing claimed to be just a “middle man,” not the loan owner itself. After the seller experienced a precipitous drop in income and had difficulty making house payments, the seller declared bankruptcy, and JP Morgan Chase was the creditor who was owed the most. JP Morgan Chase also forged ahead with foreclosure proceedings. The seller listed the home for sale, and a buyer came forward to buy it. After negotiations between JP Morgan Chase and the buyer, a sale price was agreed upon at $129,000, which was just a few hundred dollars less than the principle still owed on the mortgage. Being that close, JP Morgan Chase graciously permitted that the mortgage would be shown as “paid-in-full,” and the culmination of foreclosure proceedings was averted. That was in 2006.

Fast forward to 2008. The seller is told by the IRS that thousands of dollars in taxes are owed dating back to 2006. The seller discovers that a 1099 form was submitted to the IRS imputing nearly $64,000 of income to the seller. This imputed income was represented as the amount charged off in a short-sale real estate transaction. The seller was never sent a copy of this 1099.

$64,000 was written off in the wake of a sale of $129,000, when the original mortgage amount was $133,000? Does that even pass the smell test?

JP Morgan Chase, the mortgage owner prior to the real estate transaction, was not the company that submitted the 1099 form. It was Lytton Loan Servicing. A quick check of the seller’s credit report also shows an EXISTING mortgage as delinquent, with the creditor listed as Lytton Loan Servicing, who was always represented as nothing more than a “middle man” that processed the payments on behalf of JP Morgan Chase.

The Mortgage Forgiveness Debt Relief Act of 2007 is now in effect to help sellers escape from getting smacked with 1099 income from charged-off amounts incurred in a short-sale of their home. Nevertheless, I still think cheating the IRS by vastly inflating write-offs, and playing shell games among companies (and, prior to the Act, a quick submission to the IRS of the 1099 with a failure to submit a 1099 to the seller in order to delay the onset of whistle-blowing), is an overlooked aspect of the sub-prime mortgage fraud crisis.

In addition to the FBI and the SEC, the IRS might want to do some investigating of its own.