DOJ Diligent in Pursuing Mortgage Fraud

March 26th, 2011
in econ_news

 Charlie Engle Econintersect:  Many have criticized the government for lack of diligence in pursuing mortgage fraud.  An article in The New York Times gives details about just how extraordinarily diligent the DOJ (U.S. Dept. of Justice) can be.  The story involves how a multi-year and expensive investigation brought to trial a perpetrator of so-called "liar loan" fraud.  This fraud produced mortgages with improperly documented incomes.  To be more blunt, mortgage applications were submitted that were alleged to declare incomes that did not exist.  The trial which followed from the investigation resulted in a prison term for the exposed felon.

Follow up:

The felon is the ultra-marathoner and reformed drug addict Charlie Engle, whose picture (from The New York Times) appears with this article.  And Engle was responsible for two loans, unlike former Countrywide Financial CEO Angelo Mozilo who paid a fine and went free after running a scheme that produced tens of thousands, if not hundreds of thousands, of liar loans.

GEI News Editorial Comment:  Yes, what Engle did was wrong, but the question must be asked about equitable justice.  Engle received in two liar loans and is serving a 21-month sentence as a convicted felon.  Mozilo paid a fine amounting to about 20% of his personal gains as Countrywide CEO and settled without any finding or admission of wrongdoing.  If Countrywide produced just 10,000 liar loans and Mozilo was found just 1% responsible, a proportional punishment would have been a felony conviction with a 2100-month sentence.  That would be 87 1/2 years and that would be proportional justice.

From The New York Times:

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. Although Mr. Engle took out the two stated-income loans, as liar loans are more formally called, in late 2005 and early 2006, it wasn’t until three years later that his troubles began.

As a young man, Mr. Engle had been a serious drug addict, but after he got clean, he became an ultra-marathoner, one of the best in the world. In the fall of 2006, he and two other ultra-marathoners took on an almost unimaginable challenge: they ran across the Sahara Desert, something that had never been done before. The run took 111 days, and was documented in a film financed by Matt Damon, who served as executive producer and narrator. Mr. Engle received $30,000 for his participation.

The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.)

Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly.

In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments.

After acknowledging that he had been speculating in real estate during the bubble to help support his running, he said, according to Mr. Nordlander’s grand jury testimony, “I had a couple of good liar loans out there, you know, which my mortgage broker didn’t mind writing down, you know, that I was making four hundred thousand grand a year when he knew I wasn’t.”

Mr. Engle added, “Everybody was doing it because it was simply the way it was done. That doesn’t make me proud of the fact that I am at least a small part of the problem.”

Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire.

Other parts of The New York Times article details a number of irregualrities in the case:

  • On one of the two applications in question (in 2005), Engle stated income of $15,000 a month.  His tax accounting records show his income in 2005 as $180,000, which averages $15,000 a month but was not received in monthly payments.
  • The second application in 2006 was for refinancing the mortgage on a second property Engle owned.  That application stated an income 0f $32,500 a month which is an obvious over statement.  However, the refi balance was for $300,000 and there would have been no need to have declared such a large amount of income.
  • Engle claims he never signed the paperwork for the refi and was unaware of the $32,500 claim.
  • The broker for the refi, John J. Hellman, recently pleaded guilty to mortgage fraud for playing fast and loose with a number of mortgage applications. Mr. Hellman testified in court that Mr. Engle had signed the mortgage application.
  • Early this week, Mr. Hellman received a reduced sentence of 10 months, less than half of Mr. Engle’s sentence, in no small part because of his willingness to testify against Mr. Engle.
  • The purported Engle signature appears to be a forgery. 
  • Even the jurors seemed confused about how to think about Mr. Engle’s supposed crime. When it came time to pronounce a verdict, the jury found him not guilty of providing false information to the bank, which would seem to be the only fraud he could possibly have committed. Yet it still found him guilty of mortgage fraud. “I think the prosecution convinced the jury that I was guilty of something but they weren’t sure what,” Mr. Engle wrote in an e-mail.
  • As part of his sentence, Mr. Engle was ordered to pay $262,500 in restitution to the owner of his mortgages. And what institution might that be? You guessed it: Countrywide, now owned by Bank of America.
  • No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale.
  • Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well.
  • The “confession” to Ms. Burrows really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.   

GEI News Editorial comment:This is a sad story for Charles Engle.  But it is an even sadder story if it truly represents the priorities of the U.S. Dept. of Justice. 

Source:  The New York Times 

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