EDITOR’S COMMENT: I sat on this story for a while checking out some facts. Words alone can’t describe my reaction to this. They were called “liar’s loans” because the no-doc loans were intended to be approved regardless of actual income. Under TILA and industry standards for underwriting loans, the ultimate responsibility for the accuracy of the data and the viability of the loan is that of the lender. So here is this guy who gets attracted to do exactly what Wall Street wanted him to do —- sign papers regardless of the accuracy of the data.
Minimal due diligence would have and does reveal that the income stated on his application was inaccurate in terms of his true income but accurate in terms of justifying approval of the loan. In virtually all such cases, the mortgage broker makes the decision on the amount of income to state. With the full knowledge of Wall Street aggregators, who were using the money of investors, everything was inflated — stated income, property value, etc. This guy believing that the banks knew what they were doing and were “banking” on the value of the property which was fraudulently stated BY THE LENDER, signs the papers, like everyone else who did NO-DOC loans.
There was actual fraud here. It was the aggregators controlled by Wall Street investment banking firms, who lied to investors to get money on false pretenses. They then used the money to fund fees and yield spread premiums that were many times any amount ever earned on originating mortgages. Basically they got away with it. Settlements involving restitution of a small fraction of the gigantic stolen principal “donated” by investors was all that anyone was hit with.
BUT when it comes to the little guy who gets played by Wall Street into this scam, the U.S. Department of Justice has no problem prosecuting criminal claims against the borrower. I think it was Stalin who said that if you kill one person you’re a murderer, but if you kill millions, you are the head of state.
The defendant here was relying upon the appraisal to justify the deal. He had nothing to do with the amount reported as the appraised value. If he knew that the property was not worth the amount of the loan he would have no reason to proceed with the deal. The borrower thus gets defrauded by the same scheme that defrauded the investors. Yet, in another example of how bankers are controlling he story, it’s a borrower who goes to jail for signing a document that he — and everyone else involved — knew was false as to his income but which he did not know was false as to the property value. He was led to believe the deal would “work out” because of rising property values.
It was not this defendant who brought down the financial system or even all of the other liar loans. It was the people on Wall Street who needed those liar loans to move money and create “profit” and “fees” out of the fictitious transactions. Nobody knows more about underwriting securities and loans than Wall Street and the commercial banks. Any bank loaning their own money would never approve a liar loan with inflated appraisals. And that is why the investment banks ran away with market share. Any risk-averse banker knew that these loans were bad and so did the risk takers on Wall Street. They didn’t care because their goal was to make the trade without regard to outcome. They were churning investor money and houses and lives.
And yet, this guy goes to jail for 21 months. Innocence is not the issue here. Fairness and equal treatment is at issue. And punishment proportionate to the crime — $13 trillion PLUS versus whatever this guy did. How much time did Mozilo get? Adding salt to the wound, the man is ordered to pay restitution to whose company? — Mozilo’s Countrywide, now Bank of America.
In Prison for Taking a Liar Loan
By JOE NOCERA
A few weeks ago, when the Justice Department decided not to prosecute Angelo Mozilo, the former chief executive of Countrywide, I wrote a column lamenting the fact that none of the big fish were likely to go to prison for their roles in the financial crisis.
Soon after that column ran, I received an e-mail from a man named Richard Engle, who informed me that I was wrong. There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. It was his 48-year-old son, Charlie.
On Valentine’s Day, the elder Mr. Engle said, his son had entered a minimum-security prison in Beaver, W.Va., to begin serving a 21-month sentence for mortgage fraud. He then proceeded to tell me the tale of how federal agents nabbed his son — a tale he backed up with reams of documents and records that suggest, if nothing else, that when the federal government is truly motivated, there is no mountain it won’t move to prosecute someone it wants to nail. And it was definitely motivated to nail Charlie Engle.
Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?
No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.
“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)
Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars. Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned. Otherwise, he walked. Thus does the Justice Department display its priorities in the aftermath of the crisis.
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.
Lying on a stated-income loan is, without question, a crime, and one ought not to excuse it even though, as Mr. Engle says, “everybody was doing it” — usually with the eager encouragement of their brokers. But the Engle case raises questions not just about the government’s priorities, but about something even more basic: did he even commit the crimes he is accused of?
Partly, I concede, Mr. Engle is easy to root for. He is a personable, upbeat man who has conquered some serious demons. Part of his Sahara expedition was aimed at raising money for a charity to help bring clean water to Africa. “Every experience in life has the ability to teach lessons if I am open to them,” he wrote on a blog as he prepared to enter prison. How can you not like someone like that?
But the more I looked into it, the more I came to believe that the case against him was seriously weak. 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. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.
Perhaps anticipating that problem, when Mr. Nordlander finally arrested Mr. Engle in May 2010, he claims to have elicited a stronger, better confession while Mr. Engle was handcuffed in the back seat of his car. Mr. Engle fervently denies this. This second supposed confession, however, was never captured on tape.
As for the loans themselves, on one of them Mr. Engle claimed an income of $15,000 a month. As it turns out, his total income in 2005, according to his accountant, was $180,000, which amounts to … hmmm …$15,000 a month, though of course Mr. Engle didn’t have the kind of job that generated monthly income. (In addition to real estate speculation, Mr. Engle gave motivational speeches and earned around $50,000 a year as a producer on the hit show “Extreme Makeover: Home Edition.”)
The monthly income listed on the second loan was $32,500, an obviously absurd amount, especially since the loan itself was for only $300,000. It was a refinance of a property Mr. Engle already owned, allowing him to pull out $80,000 of the $215,000 in equity he had in the property.
Mr. Engle claims that he never saw that $32,500 claim and never signed the papers. Indeed, a handwriting analysis conducted by the government raised the distinct possibility that Mr. Engle’s signature and his initials in several places in the mortgage documents had been forged. As it happens, Mr. Engle’s broker for that loan, 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.
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.
Like many people, Mr. Engle’s biggest mistake was believing that housing prices could only go up. When the market collapsed, Mr. Engle defaulted on the two properties, which of course is not a crime. Although his accountant tried to persuade the banks to do a complicated refinancing, they refused and foreclosed on the properties. Like many Americans, Mr. Engle wound up being punished by the market for his mistake, losing all his remaining equity along with the properties themselves. Thanks to the government, though, his punishment was far more severe than most.
At his sentencing, Mr. Engle told the judge: “I can say with confidence that I can turn negatives into positives. I have no doubt I will make the best of it.” With his inspiring prison blog, Running in Place: A Blog About Surviving Adversity, he has already begun to do that.
Even when he emerges from prison, though, his ordeal will not be over. 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.
Angelo Mozilo ought to get a good chuckle out of that one.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud Tagged: | Bank of America, borrower, countrywide, disclosure, foreclosure, foreclosure defense, foreclosure offense, fraud, JOE NOCERA, Lender Liability, LIAR LOAN, Mozilo, Ny Times, predatory lending, rescission, securitization