In Mortgage Fraud Case, Offset Value Based on Cash Recouped in Foreclosure Sale

By Joe Forward, Legal Writer, State Bar of Wisconsin

Sept. 17, 2012 – Federal appeals courts have split on whether restitution for mortgage fraud victims should be based on the fair market value of the real estate collateral in the hands of a victim, or the amount recouped when the victim sells the real estate in foreclosure.

In United States v. Robers, No. 10-3794 (Sept. 15, 2012) the U.S. Court of Appeals for the Seventh Circuit sided with other circuits concluding that offset values under the Mandatory Victims Restitution Act (MVRA) are based on the amount recouped upon sale of the real estate.

A court ordered defendant Benjamin Robers and others to pay $218,952 in restitution to a mortgage lender and a mortgage insurer after defrauding the companies to obtain loans. Robers defaulted, and the real estate was later resold at foreclosure prices.

Under the MVRA, courts must order defendants to pay restitution by returning property or paying the greater of the property’s value on the date of loss or the date of sentencing, less the “offset value.” The offset value is the value of any property returned as of the date of return.

Robers argued that the offset value should be based on the fair market value of the subject real estate on the date the victims obtained title to it. The government argued that offset values under the MVRA are determined on eventual cash proceeds.

At least three circuits determine offset value based on Robers view. But a three-judge panel for the Seventh Circuit Appeals Court adopted the view of three other circuits that don’t.

“Today we join the view of the Third, Eighth, and Tenth Circuits – that the offset value is the eventual cash proceeds recouped following a foreclosure sale,” wrote Judge Daniel Manion.

The panel reasoned that the property stolen was cash, not real estate.

“Accordingly, the property stolen is only returned upon the resale of the collateral real estate and it is at that point that the offset value should be determined by the part of the cash recouped at the foreclosure sale,” Judge Manion explained.

Fraud not Crash Caused Loss

Robers and others carried out a scheme to submit fraudulent mortgage loan applications in Walworth County, inflating income, assets, and falsely claiming the intent to use the homes as a primary residence. Eventually, Robers pleaded guilty to conspiracy to commit wire fraud. For his role in the conspiracy, Robers received $500 per fraudulent loan application.

He appealed when the court ordered all co-conspirators to pay restitution of $218,952 with joint and several liability. Unfortunately for the co-conspirators, the real estate crash devalued the real estate properties at issue, increasing the amount of restitution to be paid upon sale. For example, one home had a mortgage note of $330,000 but sold at a loss of $166,000.

The panel rejected Robers’ argument that a poor real estate market caused the loss, not his fraud. “Absent his fraudulent loan applications, the victim lenders would not have loaned the money in the first place,” Judge Manion wrote. “And the banks would not have had to foreclose on and then resell the real estate in a declining market at a greatly reduced value.”

The circuit split sets up a potential case for the U.S. Supreme Court to decide whether the MVRA requires a court to determine restitution based on the fair market value of collateral real estate on the date it is returned to a victim of mortgage fraud, or the cash value upon foreclosure sale. For now, the Seventh Circuit Appeals Court requires the latter.