Courthouse notebook | Mortgage fraud cases may be tougher to prosecute

The mortgage-backed securities that led to the collapse of the nation’s real estate market could also make it difficult for prosecutors to bring justice to the real estate agents, mortgage brokers and others who made billions of dollars nationwide by gaming the system during last decade’s housing boom.

Those securities made their way to so many investors, pension funds, 401(k) plans and others that it might be impossible to pin down a single victim – much less a specific dollar amount of loss – in mortgage fraud cases where banks bundled their home loans into the toxic investments.

At least that’s the theory behind a novel sentencing defense in a mortgage fraud case involving a Grand Strand home.

Myrtle Beach resident Joseph Guernsey and Benedict “Gus” Olberding – a Charlotte, N.C., mortgage broker – pleaded guilty last year to one felony charge apiece of bank fraud related to the sale of a Murrells Inlet home once owned by Olberding’s wife.

A third person – Melissa Butterworth, who was Guernsey’s girlfriend at the time of the home sale – has entered into a pre-trial intervention program and will not be prosecuted.

Guernsey and Olberding are awaiting sentencing. The two men admit they included false information on a loan application to help sell the house. But Olberding denies the bank that lent the money lost anything on the deal. It’s not clear whether Guernsey will join his co-defendant in that defense strategy.

Federal sentencing guidelines in mortgage fraud cases are based largely on the dollar amount of loss to the victim. In other words, the bigger the loss, the longer the prison sentence.

In a court document filed last week, Olberding argues that there was no loss in at least one of the three loans he, Guernsey and Butterworth obtained in the scheme. That’s because lender Countrywide Financial Corp. immediately packaged the loan – a $760,000 first mortgage on the home – into a security that was sold to investors, thereby recouping its money.

Bank of America, which acquired Countrywide in 2008, is listed by prosecutors as a victim in this mortgage deal. However, Bank of America cannot find the original mortgage note that makes up the biggest part of the case, according to last week’s court filing.

Joseph McCulloch, a Columbia lawyer representing Olberding, said in the filing that he has given Bank of America documents showing how the loan was sold into the secondary market. McCulloch said those documents prove there was no loss to the bank.

“Currently, the defense is working with Bank of America counsel to determine whether Bank of America can agree with defense on the issue of loss,” McCulloch said in the filing, adding that a decision is expected this week.

McCulloch is laying the groundwork for an objection to the government’s pre-sentence report, which claims Olberding is responsible for a $760,000 loss to the bank.

Olberding could be looking at a sentence of probation if prosecutors can’t prove the bank lost any money, according to sentencing guidelines. Otherwise, the guidelines call for Olberding to receive a sentence of about two years in prison.

Bank of America spokeswoman Nicole Nastacie said she has no comment on Olberding’s contention that banks do not lose money when mortgages are securitized and sold to investors. McCulloch and Morgan Martin, a Conway lawyer representing Guernsey, did not respond to telephone messages left for them by The Sun News.

The argument that banks suffered no losses when they sold mortgages into the secondary market is “very valid and legitimate,” according to Richard Lovelace, a Conway lawyer who specializes in real estate and banking law. Lovelace does not represent any parties in the federal mortgage fraud case.

Loss, however, is just one of the considerations at sentencing, he said.

“There is also the need to deter others from doing the same thing,” Lovelace said. “The deterrence factor is more significant here because of the havoc that was wreaked on the market. It’s not as if the loss was isolated to the bank. It affected the whole economy.”

During the height of the real estate boom, large banks packaged hundreds of mortgages together into single securities, selling the bundle of loans to investors, including pension funds and others. The banks recouped their loan money from the sale of the securities. Those who bought the securities were supposed to make their money as the mortgages were repaid over time.

The banks used money from the sale of mortgage-backed securities to make new loans, which were packaged into more and more securities until the loan quality finally grew so weak that the investments – and the nation’s real estate market – imploded.

As mortgage defaults spread throughout the country, investment firms, insurance companies and individuals – including those whose pension or mutual funds contained the securities – saw their investments plummet.

Bill Day, the assistant U.S. attorney who is prosecuting the case, said the identity of a victim – or potentially thousands of victims – is not as important as showing that money was fraudulently obtained on the front end of a mortgage deal.

“I don’t see that it matters who the ultimate loser was,” he said. “Whoever bought the paper was expecting to get paid.”

But if a judge buys into the argument that Olberding has posed, it could force investigators in mortgage fraud cases to spend countless hours poring over thousands of pages of documents trying to connect the dots between the issuer of a mortgage-backed security and all of those who lost money by purchasing that security.

It would be a daunting task for federal agents who already spend years trying to build mortgage fraud cases that are largely dependent on piles of paperwork to begin with.

“I’m hoping that doesn’t happen,” Day said. “We’ll find out at sentencing.”

Russell Mace, a criminal defense lawyer in Myrtle Beach, said prosecutors face an uphill climb in proving the loss.

“It’s going to be hard for the government to prove the amount of loss without the bank showing something,” said Mace, who is not representing anyone in the case. “He [Olberding] has a good basis for the objection.”

However, there could be a catch: Olberding signed a plea agreement that stated the loss amount at $760,000 for the one count of the indictment to which he pleaded guilty. Disputing that amount now could void his agreement, allowing the government to go after him for all three unpaid loans and seek a maximum sentence.

Mace said Olberding’s case would be stronger if the loss amount hadn’t been included in the plea agreement – “When you plead guilty, you’re pleading guilty to the loss amount as well,” he said – but the hearing could go either way depending on how the judge views the evidence – or lack of evidence.

Federal investigators say Guernsey, Olberding and Butterworth devised a scheme in March 2007 to sell the home Olberding’s wife had purchased 16 months earlier to Butterworth. Court documents allege the trio lied on three loan applications to obtain mortgages totaling $1 million against the home. The loans were never repaid and the home wound up in foreclosure.

The home sale, which was completed in April 2007, netted the Olberdings a nearly $400,000 profit, according to property records. Prosecutors say Olberding agreed to pay $183,000 to Guernsey from the loan proceeds because Guernsey had arranged for his then-girlfriend Butterworth to buy the home.

One of the three loans was a $95,000 line of credit issued by Countrywide, which was doing business as America’s Wholesale Lender. Another loan was a $145,000 line of credit issued by SunTrust Bank.

The third, and largest, loan was a $760,000 first mortgage on the property issued by Countrywide.

That loan – along with 1,488 others, all totaling $1 billion – was packaged into a security called CHL Mortgage Pass Through Trust 2007-4 and sold to investors.

Video gambling nets 13 months

A Little River man who operated an illegal video game business across the state line in North Carolina received a 13-month prison sentence last week after pleading guilty to one felony charge of federal income tax evasion.

Jerry Huene submitted tax returns for 2004 and 2005 showing zero taxable income for his business, which was being operated as Jerry’s Furniture Refinishing but actually was a video gambling parlor.

Federal prosecutors said Huene made $202,920 in 2004 and $266,388 in 2005 from his gambling business and that he owed income tax totaling $146,410.

Huene pled guilty to one tax evasion charge in September and prosecutors dropped a second charge against him in exchange for the guilty plea. Huene also will be on two years of supervised release following his prison term.