U.S. Supreme Court Rewrites Restitution Rules in 9th Circuit Mortgage Fraud Cases

After the collapse of the residential real estate market some years ago, Oregon state and federal prosecutors began ramping up mortgage and wire fraud case prosecutions. Most prosecutions focused on home purchasers and real estate and lending professionals. Many individuals, with the assistance of complicit lenders and agents, took advantage of extremely lax and aggressively marketed lending programs for home loans. Buyers would typically submit residential loan applications with inflated income and asset figures to secure the best loan package. Sometimes the home's value was overstated, generating "false equity" to be kicked-back to the participants outside the closing process. Often, multiple homes were purchased in this fashion with the purchaser falsely claiming each residence was intended to be used as a primary residence.

When the bottom fell out, many of these home purchasers saw the property values drop precipitously. Many homes were quickly foreclosed upon. However, because the market continued to drop and because of the glut of recently built homes, many of these properties lingered on the market for months or years before the lenders could resell them, often at a tremendously discounted price.

As federal mortgage fraud prosecutions progressed, thorny issues arose as to how to properly calculate loss and restitution figures for purposes of sentencing. In Oregon, the calculation of restitution in federal mortgage fraud cases was very different from the process of calculating loss figures. The calculation of loss involved determining the financial harm caused by the defendant whereas the calculation of restitution involved determining how much was needed to "make the victim whole" again - to put the victim back to where they were before the defendant's fraud. Loss is most easily thought of as the difference between the outstanding balance of the loan and the amount received when the property is sold after foreclosure. Restitution however was defined as the difference between the outstanding balance of the loan and the fair market value of the property when the lender took control of it from the defaulted buyer. As the real estate market continued to fall, loss figures typically rose while krestitution figures from the same cases fell. This was due to the fact that after the bank took title to the property, the property continued to fall in value until it was ultimately sold to a third party. This result often and greatly benefitted mortgage fraud defendants. It also engendered much litigation on the issue of what the "fair market value" actually was when the banks retook control.

On May 5, 2014, in Robers v. U.S., the Supreme Court put much of this litigation to rest and brought some uniformity to loss and restitution calculations. Basing its decision on the simple fact that the loan itself was the property stolen rather than the collateral (home), the Court easily found that the proper way to calculate restitution is to simply deduct the amount received from the sale of the property after foreclosure from the outstanding principal of the loan.

It took the Supreme Court a number of years to settle the seemingly basic question of how to determine restitution in a mortgage fraud case. Many thorny and complex issues remain unsettled. If you have been charged with mortgage fraud, you need an experienced and knowledgeable attorney to help ensure your rights to a fair determination of your case are protected.