Sept. 13, 2013 – One Wisconsin couple escaped, another did not in a pair of recent mortgage fraud rulings relating to loans peddled by the same scamming mortgage broker, accepted by the same unethical bank, and obtained with false statements.

In both cases decided by the U.S. Court of Appeals for the Seventh Circuit, applicants made false statements on applications for stated-income loans, so-called “liar loans.”

These loans allowed applicants to inflate gross monthly income, among other things, with no verification process by banks, to purchase homes they could not afford.

In both cases, scammer Brian Bowling brokered the ill-fated mortgage loans through the same bank, Fremont Investment & Loan. Bowling later testified against the four Wisconsin defendants to shave a 51-month prison sentence. Fremont folded.

In one case, Judge Richard Posner noted that mortgage fraud charges “have mushroomed in the wake of the collapse of the housing and credit bubbles.”

Posner, in U.S. v. Phillips, No. 11-3822 (Sept. 4, 2013) said stated-income loans “played a significant role in the financial collapse of September 2008 – the doleful consequences of which continue to plague the U.S. and world economies.”

But in Phillips, the en banc (11-judge) court spared (for the time being) Lacey Phillips and Erin Hall, an unmarried couple who sought and received a loan they could not afford in 2006.

They were convicted for mortgage fraud and conspiracy to commit mortgage fraud, sentenced to two months in prison and ordered to pay $90,000 in restitution. Now, the couple will get a new trial to determine whether they knowingly made false statements.

However, in U.S. v. Johnson, No. 11-3006 (Sept. 6, 2013), a three-judge panel upheld mortgage fraud and conspiracy to commit mortgage fraud convictions against borrower Traci Gray and co-borrower Samantha Johnson, of Prairie du Sac.

“[T]he jury had enough evidence to conclude that Gray and Johnson conspired with their mortgage broker to submit a loan application that included statements they knew to be false in order to influence the lender’s decision,” wrote Judge Ann Claire Williams.

U.S. v. Phillips

In 2006, Phillips and Hall, a hairdresser and a barber, respectively, sought to mortgage loan of more than $200,000 – hoping to buy a $250,000 home – with a joint monthly income of $3,800. Associated Bank declined their application.

After this, the couple turned to a mortgage broker, Brian Bowling, who directed the couple to Fremont Investment & Loan. There is no indication, Judge Posner explained, that the couple knew Bowling was a crook who brokered fraudulent loans.

Bowling peddled stated-income loans, which required the borrower to state their income. Fremont approved these loans without verification, no questions asked.

“Many of the loans were repackaged by the buyers into ill-fated mortgage-backed securities whose holders lost their shirts,” Judge Posner wrote for the en banc court. “This was musical-chairs financing. Fremont went broke when the music stopped in 2008.”

The terms of Fremont’s subprime, adjustable rate mortgage loans were likely to cause default, and the defendants obtained second jobs to keep up. But they lost the home.

The couple was later charged and convicted, under 18 U.S.C. § 1014, with knowingly making a false statement to influence the bank’s decision to approve the mortgage.

The couple had allowed false statements to be made. But the three-judge appeals panel explained that there was evidence, excluded at trial, which may have convinced the jury that those false statements were not made knowingly, a required element of the crime.

Bowling had told the couple, who were not married, that only Phillips should serve as the applicant because she had good credit history and Hall’s credit was poor.

And he told them that “borrower’s income” included the income of someone who lived with an applicant in a committed relationship, married or not. This wasn’t true, of course. But they had allowed Bowling, based on his explanation, to include both incomes.

“Had they been allowed to testify to what Bowling had told them the phrase ‘borrower’s income’ meant, the jury might well have concluded that the couple had believed that combining their income on the ‘borrower’s income’ line of the loan application was precisely what the application called for,” wrote Judge Posner.

The en banc court reversed the convictions because the district judge prevented the defendants from testifying as to what Bowling told them. Phillips had allowed Bowling to inflate Phillips’s job title too, and signed off on it. That will be another issue for trial.

U.S. v. Johnson

In 2006, legal secretary Traci Gray and her boyfriend, Vince Anderson, wanted to buy a $322,000 home in Prairie du Sac. The couple had children together, and Anderson planned to pay half the mortgage. They enlisted the help of Brian Bowling.

At first, the couple did not qualify for a mortgage because Anderson had bad credit. Gray tried again with her brother as co-signer, and that was unsuccessful. Then Gray’s friend Samantha Johnson agreed to be a co-borrower. Bowling said this would work.

Bowling sent the owner-occupy stated-income loan application to Fremont Investment & Loan. Fremont was federally insured and specialized in stated income loans.

The loan application, signed by Gray and Johnson, contained false statements. Among them was an inflation of gross monthly income, by $6,000 per month. The application also stated that both Johnson and Gray would be living in the home and contributing to the mortgage. But Johnson did not intend to live there or contribute to the mortgage.

Investigated for mortgage fraud, Bowling admitted to submitting false loan applications with inflated income, exaggerated assets, false job titles, and understated debts. He also admitted to forging signatures and making other misrepresentations.

Charges and convictions against Gray and Johnson followed, also under 18 U.S.C. § 1014. Gray received a two-month prison sentence. Johnson was ordered to serve one day of jail time. Both women were ordered to pay $66,377 in restitution. They appealed.

They said the evidence was insufficient to support a conspiracy charge, and the district court was wrong to exclude evidence that Bowling tricked other innocent borrowers.

The three-judge appeals panel was not convinced, citing Bowling’s testimony and the government’s evidence that both Gray and Johnson knowingly participated in the scam.

“The most important piece of evidence was the loan application containing numerous false statements which Gray and Johnson initialed and signed in the presence of Bowling and others at the closing,” wrote Judge Williams, affirming the convictions.