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Not so fast there cowboy. There is more misinformation in the news reports than I can keep up with.
Irony-rich, salacious news about NY’s Attorney General broke: Having prosecuted Donald Trump for financial fraud, she now was facing a referral for prosecution for – more or less- the same thing, mortgage fraud.
As in the Trump prosecution, if they would call me as an expert witness, I could straighten out a few things in less than 5 minutes. That’s right – I said it. Most loan officers who view these two cases roll their eyes because of the grotesque inaccuracies in the news reporting, the actual charges and the hours of wasted time bantering back and forth with the judge, opposing counsel and anyone standing in the way of this flood of erroneous information.
A few subscribers pouted and left my newsletter subscribership over my post about the Trump case. One dude called it a “dumb marketing move.” Of course, I'm not marketing - I'm educating. Be smart or be dumb - your call.
You can read my quick analysis on the Trump case here.
On to the Letitia James mortgage fraud case. And, you can hold me to it – this is not political. I believe her case against Donald Trump was very flawed – actually prima facie not even a case - that the judge in the case was more than grossly ignorant, almost laughably so, so long as you’re not Donald Trump.
Even though there is “no love lost” from my part on the N.Y. financial fraud case prosecuted by Letitia James, I have to tell you, some of the alleged potential charges against her don’t pass the smell test amongst mortgage professionals. On the other hand, other referrals could be problematic for Ms. James. I would need to see more documents to assess it fully.
As of now, the full text of the criminal referral submitted by Federal Housing Finance Agency (FHFA) Director William Pulte to the U.S. Department of Justice regarding New York Attorney General Letitia James has not been publicly released. However, various media outlets have reported on the contents of the referral, which alleges that James may have committed mortgage fraud by misrepresenting information on loan applications.
This is a big deal because many mortgage companies and individual professionals have been severely fined, jailed or lost their licenses to originate mortgage loans, all over this thing called mortgage fraud.
The Three Main Allegations
From what I can tell, there are three main allegations.
You can find multiple reports of this. Here’s one.
I’ll treat them in chronological order.
1st Allegation.
1983. Being listed as her father's spouse on a mortgage document, which may have been used to secure financing terms available to married couples.
Pulte attached several documents also showing that James purchased another property with her father as a co-signer — but falsely listed the pair as “husband and wife” in 1983 and 2000.
These actions, if substantiated, could constitute violations of federal statutes, including wire fraud, bank fraud, and making false statements to financial institutions.
Roger Stone put out a video on the matter.
But, did Roger get it right?
Here’s what he got right and what he got wrong and whether or not it matters.
I wrote this to a friend in response to the Roger Stone video she sent me in which he echoed the referral’s claim that Letitia James represented her father as, instead, her spouse in the loan application or other documents; but – it should be noted - Stone also clarifies that the title (deed) lists them as father and daughter.
A New York Post article reported that “The director’s letter also included… information showing she was listed as her father’s “spouse” when they jointly purchased a residence in Queens 42 years ago.”
Here is my response:
He (Roger Stone) and others probably have one thing wrong. The official application [called a “10-03” which is Fannie Mae form 1003] has no field to indicate the relationship between borrower and co-borrower. There's nothing in the application form that asks if the co-borrower is spouse, husband, father, boyfriend, friend...nothing. There are no other loan application documents that require an identification of the relationship between borrower and co-borrower.
In most loan scenarios, the family relationship can matter if, for example, the borrower is receiving gift funds from someone. For example, if the downpayment or any other funds used to purchase a house are "gifted" from another individual, those funds must come from a family member; OR a non-family co-borrower could use their own separate funds for down payment, costs, etc.
But, gift funds can be given by family members and the donor is not required to be on the loan application as a borrower.
Moreover, the reports are that several documents show that the father-daughter duo were “falsely listed as husband and wife” could only refer to a deed (warranty deed received from the seller at closing). It would indicate who owns the property, after closing and their individual marital status; although it is not unheard of that two borrowers might be called “husband and wife” verses Letitia, a married woman; and, James, a married man.”
Even so, these designations in a deed are not party of an application wherein there is a claim that the two people are married to each other.
I predict this allegation will not get much traction so long as someone with a brain is in the courtroom. The judge doesn’t know these rules. The prosecutors don’t know these rules. Ms. James had best call me if she wants to deal a blow to this allegation.
At least for now, this one doesn’t pass the smell test.
2nd Allegation
2001. Misrepresenting a Brooklyn property as having four units instead of five, potentially to meet criteria for certain mortgage programs or to obtain better loan conditions. February 2001.
No one has enough information yet on this.
Mortgage financing facts:
The smell test. Certain facts, unknown to all of us at the time, would clarify whether there was blatant criminality. Like, a 4-unit property could be purchased as “owner occupied” – and thus, command a lower rate than if it is purchased as a rental property – so long as the purchaser moves into one of the units.
And, this is a pretty cool thing that home buyers with some entrepreneurship in their blood should know. With as little as 3.5% down (FHA) or 5% (conventional), a home buyer could effectively purchase a rental property at terms and an interest rate they would get for purchasing a primary (“owner occupied”) residence. That is, 75% of the 4-plex property could be rented out while buyer lives in one of the units. In fact, after several months (I advise one year although there is no hard and fast rule about this), the new owner could move OUT of the one unit they occupied, move on to another property, and rent out all 4 units. He would have obtained a rental property at primary occupancy rates (the best) with the only major provision that he lives in it for a reasonable period of time. The application only requires that declaration that the buyer “intends to occupy as their principal place of residence within 6 months of purchase date.” There is no declaration that states how long they intend to occupy as their principal place of residence – it’s front-loaded, not an endless promise. I wouldn’t advise being too loose with this, like moving in for a week or a month with the clear intention of moving out to another residence very shortly after the purchase.
I’ll just leave that there for now.
The point is, these rules apply for 1, 2, 3 or 4 unit properties. And, I am not aware of any allegation that Ms. James claimed that the property was going to be owner occupied or not. To claim primary residency when, in fact, there was no intent to occupy as primary residence…that’s the next allegation on an entirely different and other property – “occupancy fraud.”
There seems to be confusion about the property’s changing status – whether it was 1 unit, 2 units, 3 units, etc. at various times changing from one to the other. It feels like bureaucrats and unknowledgeable attorneys and a judge are gong to look at all the wrong things. What matters is the status of the property when Ms. James purchased it.
Seeming to defend herself, the Times Union stated “the attorney general has been clear in her financial filings that this is a (four)-unit, owner-occupied building,” her office said in a statement. “The previous certificate of occupancy from January 2001 that lists it as a (five)-unit building was filed by the previous owner before the attorney general owned the home.”
This is probably not the smartest thing to say because it tends to establish that at the time of purchase, the property was five units, not four. Ms. James could have sought to change the character of the property after she purchased it but if the “previous owner” filed it as a five-unit building, that may well have been what Ms. James purchased.
Another part of the smell test that catches my eye, or my nose, is that an appraisal – required in nearly every mortgage loan of this type - will establish and report how many units. The appraiser is the eyes and ears of the lender. And, most likely, the title work is going to identify how many units as a legal description would necessarily cite all addresses, each unit having its own address or at least be noted as a unit number.
So, if Ms. James committed fraud in declaring the property as 4-units rather than 5, she would have been joined in the fraud by the appraiser, the title examiner, AND the mortgage personnel - loan officer (who signs the application as well and is responsible for the accuracy of information) and the underwriter who reviews the appraisal and title work and everything about the property.
Maybe we will round up a 24-year-old cabal or conspiring scoundrels – not unheard of – in New York. But, it is unlikely that such a fraud would have been perpetrated successfully by only the applicant.
3rd Allegation
2023. Claiming a Virginia property as her primary residence while serving as New York's Attorney General, a position that requires her to reside in New York. This designation could have qualified her for more favorable loan terms.
As the New York Post puts it, “Ms. James was the sitting Attorney General of New York and is required by law to have her primary residence in the state of New York — even though her mortgage applications list her intent to have the Norfolk, VA, property as her primary home,” the letter stated.
“It appears Ms. James’ property and mortgage-related misrepresentations may have continued to her recent 2023 Norfolk, VA property purchase in order to secure a lower interest rate and more favorable loan terms.”
Here's my reaction:
This is potentially the most serious of all the allegations. This is a critical point because “occupancy fraud” is the most common mortgage fraud committed.
On the application, here is how the question is asked of the applicant.
“Do you intend to occupy the property as your primary residence within 60 days of closing?” Boxes for Yes or No.
Why would it matter to lenders and what advantages do Owner-Occupied properties (i.e., “primary residences,” OO) have over Non-Owner Occupied (i.e., investment or rental, NOO) properties when it comes to mortgages?
Primary Residences vs. Rental/Investment Properties in Mortgages
The basic differences between Primary Residences (i.e., Owner-Occupied properties and Rental/Investment Properties(i.e., Non-Owner Occupied) when it comes to mortgage financing are:
So, you can see why borrowers quickly see an advantage to purchasing a house as a “primary residence” - much lower interest rate, much lower down payment required with more loan options (including 2FHA which requires even smaller down-payments than conventional loans do).
Ms. James has responded that she was on the loan application with her niece who does live in the property as her primary place of residence. So long as the niece was occupying the property as her primary residence, her aunt (Letitia James) is perfectly allowed as a co-borrower without having to intend or declare to occupy the property as her primary residence. James, in such a case, would check “No” to the question, “Do you intend to occupy the property as your principal place of residence?” Those types of loan applications are done all the time.
The question, in that instance, is if Ms. James “took title” with her niece to the property, intending to be an investor (co-owner) of the property with the upside of selling in the future at a profit to James and her niece verses just the niece. It would also matter when the niece moved into the property. Was it within 60 days or was the property rented out immediately to another person?
Even so, it may not matter since James’ checking the box “yes” or “no” would have no effect on the loan approval or the terms of the loan – she would not receive less or more favorable terms on the loan, so long as the niece was occupying the property.
The non-mortgage issue related to Ms. James is the declaration of the house purchase seems to be that an intent to have a primary residence in Virginia would automatically result in her office as Attorney General of New York being vacated.
It would be a shame (to Ms. James) if it all came down to a check in a box - “yes” when it should have been “no,” the “no” adding no harmful element to her loan or its terms – making the determination of her office as AG of NY.
It would be a shame although it would be rich irony given Trump’s declaration of the value of his Mara Lago home was neither improper nor fraudulent. Gotta go back and read my article on that.
