Twenty five professionals in the mortgage, banking and even the legal fields were charged this week with

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mortgage fraud.  At stake is over $100 million dollars in stolen money.  The AFG Financial Group, based out of Manhattan, is responsible for finding gullible buyers with excellent credit ratings and then pairing these buyers with distressed properties while telling the buyer it was good for the community and guaranteeing a high return on their investment.  The group approached other lenders and banks to sell the mortgage to, all the while keeping all the funds associated with the successful closing of the loan for their own personal use.

Some of these properties were nothing but vacant lots.  By bringing in unethical appraisers to “appraise” the phantom houses, they were able to get incredibly high values on nothing more than weeded lots, which, of course, validated the loan amounts.  One Manhattan District Attorney, Robert Morgenthau, said “This kind of activity is what led to the mortgage crisis.”  It’s being called the largest mortgage fraud ever in New York City.

Turns out, these buyers weren’t even required to be employed, so long as their credit was good.  During the investigation, W-2s, bank statements and other documents along with fake paychecks were forged and submitted to the lenders and even some banks that weren’t in on the fraudulent activity.  An excellent financial report, high credit ratings and appraisals for houses that didn’t exist was the formula that allowed these millions to be swindled over a several year period.

Now the buyers, who thought they were agreeing to a community improvement project are now looking at bad credit, foreclosures and federal investigators down their throats.  In a few cases, some buyers are doubly betrayed since the fraudsters would often retain second mortgages in a not-as-strict sub-prime market without the buyer’s knowledge.

The defendants, who were arraigned on Wednesday, were charged with enterprise corruption and each is facing twenty-plus years in prison if they’re found guilty.

Twelve percent is the number of American homeowners who are facing foreclosure right this minute.  Now, though, the House has approved a plan that would allow options for lowering payments and/or interest rates through bankruptcy.  It now must survive a tough beating from the Senate.  Not surprising, voting fell along party lines with the vast majority of Republicans vehemently opposing this bill. 

Bankruptcy courts have long since had the authority to modify loan terms for automobiles and even student loans.  It’s now this much closer to being able to modify home mortgages, including interest rate changes without the approval of banks or mortgage companies.  Many say this will be a great incentive for these same banks and mortgage companies to negotiate with homeowners before their loans are flagged for foreclosure. 

Still, there are those who are convinced this will overwhelm bankruptcy courts by hopeless homeowners who have no more options.  Further, it’s been suggested this will ultimately raise interest rates for new home purchases as a way to offset the forced lowering of interest rates by the courts. 

Another interesting facet of this proposal allows bankruptcy judges to determine if homeowners were victims of aggressive and perhaps illegal mortgage companies’ tactics.  It’s believed the bill itself will have many subprime mortgage companies scrambling to extend modified agreements with current homeowners to avoid the scrutiny of a bankruptcy court. 

Of course, there are always those peculiar happenings that leave us wondering about the motives of some of the politicians who sponsor or support these bills.  CitiGroup has already made a deal with a group of Democrats that will allow it to bypass some of the rules, should this be passed into law.  CitiGroup has agreed to begin enacting this yet-to-be-passed law with some restrictions and far less input from bankruptcy judges.  Another motive of some politicians includes inclusion of only subprime mortgage companies, which means the bigger lenders such as Wells Fargo, CitiGroup and even Wachovia will be exempt from the law altogether.

Ah, but then there’s yet another angle.  The scrutiny this bill will set into motion, should it be passed into law, will include repercussions for those who knowingly lied on their mortgage applications.  Many, during the height of the subprime golden days, were allowed to “state” their income with absolutely no verification by employers; the same rules applied to their bank balances as well.  With no verification from their banks, potential homeowners “stated” their bank balances.  With 100% financing offered the vast majority of the time, most subprime loans required no down-payments either. 

Clearly this bill has the potential to uncover a lot of less than honest deals.  The Senate is expected to vote in the coming months.