Legal Winners and Losers in the Mortgage Crisis

Abstract

Trillions of dollars were lost when the mortgage and housing bubble burst in the late 2000s. Some of those losses fell squarely on lenders who otherwise had made good loans. But billions of dollars were also lost as a result of mortgage fraud, often the result of borrowers who allegedly made material misstatements on their loan applications. Not surprisingly, after the meltdown, banks and others sought to recoup those losses through civil and ancillary criminal proceedings against these borrowers. Courts have generally been sympathetic to such efforts. Borrowers adjudged guilty of mortgage fraud are often ordered to pay millions of dollars in criminal restitution payments to the banks to which they submitted fraudulent mortgage applications.

However, these restitution orders are not only typically unwarranted, but reward active participants in fraudulent conduct who have already handsomely profited from the underlying fraud. Given the presence of widespread mortgage securitization during the relevant period, lenders rarely lost money from even blatantly fraudulent mortgages. Instead, these lenders originated the underlying mortgages and promptly sold them to other market participants, thereby profiting - rather than losing money - from the fraud. Some downstream purchasers undoubtedly lost money when the housing market collapsed and the fraudulent mortgages went unpaid; but the restitution orders entered by courts invariably fail to direct restitution payments to the actual losers, and instead improperly award restitution to the lenders who made (and did not lose) money from the fraud.

This Article explores the pervasive securitization of mortgages during the relevant period and argues that in light of this practice, courts should not award criminal restitution absent evidentiary proof of direct losses by the actual lender itself. In the overwhelming majority of cases, no such evidence exists.

Keywords: mortgages, restitution, securitization, fraud