The bill will come due

A recent edition of Massachusetts Lawyers Weekly (subscription only) contains an opinion piece by attorney Michael Collora who predicts that the collapse of the subprime market is likely to lead to state and federal criminal investigations of a number of attorneys, mortgage brokers, buyers and sellers.

Anyone who was around during the real estate collapse of the early 1990s is familiar with what can happen.

Back then, the indictable offense was hidden second mortgages. In the days before 100 percent financing, the parties would sidestep the down payment requirement by signing all the “official” paperwork (including an affidavit certifying there was no additional financing) but would then execute a second mortgage back to the seller/developer in the amount of the asserted down payment.

This practice was so common that many never realized they were committing bank fraud. The U.S. Attorney took a different view and a number of real estate professionals went to jail.

The coming round of prosecutions will involve income and employment fictions used to obtain “no doc” loans. Since performing loans rarely attract attention, today’s elevated rate of foreclosures will likely result in greater prosecutorial scrutiny.