Expect further investigation, crackdown on fraud violations

More than 95,000 Minnesota homes have gone through foreclosure since 2007, and tens of thousands more are expected over the next couple of years.

Outrage over the mortgage foreclosure crisis created a public clamor to punish mortgage bankers, brokers and others involved in the meltdown. In Hennepin County, dozens of people have been convicted of mortgage fraud and related violations, and more cases are likely.

Hennepin County Attorney Mike Freeman, Minnesota Department of Commerce Commissioner Mike Rothman and Barry McLaughlin of the U.S. Department of Housing and Urban Development's Inspector General's office will hold a news conference Wednesday to outline charges in a mortgage fraud scheme. According to Freeman's office, the case involves recent sales of foreclosed Twin Cities properties and tens of millions of dollars in federally-guaranteed mortgage loans.

In the most recent case, a jury late last week convicted two Twin Cities men of racketeering in one of Hennepin County's bigger mortgage fraud cases. The defendants were part of the Minnetonka-based National Investment Group.

Burton Joseph and Richardt Fleischmann each face up to six years in prison, and could be forced to pay restitution.

The jury found the two guilty of conspiring to lie to investors and lenders to get financing to buy 133 mostly-suburban Twin Cities homes, said Amber Hawkins, the assistant Hennepin County attorney who tried the case.

The complex and costly investigation was started four years ago by Minnetonka police, Hawkins said. "Seven individuals that we charged as part of this scheme and there were five companies as well, so that was twelve defendants," Hawkins said. "This case has been percolating since about 2007 between the investigators and our office."

Three others charged in the NIG case pleaded guilty. Two additional defendants are South African and escaped to that country before their cases reached court.

Hennepin County Attorney Mike Freeman says since 2007, as the foreclosure crisis was accelerating, the ten lawyers in his office handling mortgage fraud cases have convicted 37 people and companies on various mortgage fraud charges.

Sentences range from 20 months to more than 16 years.

Freeman says his office has up to 10 attorneys working on mortgage fraud cases. A $400,000 federal grant is helping pay some of the expenses. That money runs out next March. Freeman worries that a projected $1 billion cut in federal money for local law enforcement may affect his office's ability to prosecute new cases.

The other big player in prosecuting criminal mortgage fraud is the U.S. Attorney's office in Minnesota.

Assistant U.S. Attorney Joe Dixon said the dozen attorneys investigating mortgage fraud brought cases against 36 Minnesotans during four months in 2010. So far this year, the U.S. Attorney's office has charged 12 people with mortgage fraud and related offenses.

Some of the sentences for those convicted exceed 20 years in prison.

At the national level, mortgage fraud criminal cases are much less common.

That frustrates those who point to the bosses of the country's biggest banks as architects of the mortgage meltdown.

Instead, enforcement officials more often pursue fines and civil suits which require a lower threshold of proof.

One of the biggest sanctions is last year's Securities and Exchange Commission $550 million fine against Goldman Sachs for misleading investors about the quality of subprime mortgages. Also last year, the SEC fined Angelo Mozilo, the former CEO of Countrywide, the giant mortgage lender. The fine was $73 million, of which Mozilo paid a portion.

Attorney Peter Henning doesn't consider that an effective punishment for Mozilo.

"He made hundreds of millions of dollars on his stock," Henning said. "So in the rough justice category, that's not very satisfying."

Henning worked in enforcement for the Securities and Exchange Commission, and then in the Justice Department prosecuting mortgage fraud cases. He's now a law professor at Wayne State University.

Proving the alleged architects of the mortgage meltdown committed a crime is difficult, Henning said.

"What the Wall Street firms and the banks showed is they can burn through a lot of money without necessarily engaging in criminal conduct. The visceral reaction that someone has to be punished is going to bump into the reality that for an individual prosecutor if you want to bring a case, you have to have evidence showing what was going on in that defendant's mind," Henning said. "It's not enough to say you made bad decisions. There has to be proof that you knew you were engaging in illegal conduct."

There does not appear to be a comprehensive list of every mortgage fraud prosecution in the country. A review of news accounts shows dozens of mortgage fraud criminal cases around the country, mostly at the local level.

The 2010 annual summary from the U.S. Attorney's office in Minnesota gives a sense of the scale of the effort to prosecute mortgage fraud.

"Presently, 65 federal mortgage fraud task forces are at work in the U.S., investigating possible fraud in the home mortgage business," the report reads. "Three dozen people appeared in federal court in Minnesota on mortgage fraud charges," as part of Operation Stolen Dreams, the 2010 nationwide initiative created by the president's inter-agency Financial Fraud Enforcement Task Force that targeted mortgage fraudsters across the country.

Sentences included hundreds of thousands of dollars in restitution with those convicted facing up to 20 years in prison. Minnesota regulators have also filed lawsuits, assessed fines and revoked licenses of people involved in the mortgage meltdown.

Since 2008, Minnesota Attorney General Lori Swanson has sued 20 companies, winning judgements against 18, for mortgage fraud and related offenses.

State Commerce Department records show nearly 700 people have lost mortgage broker, appraiser or real estate licenses since 2000.

Fines range from $50 to $75,000, and some people have been barred for life from these activities.

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