Over the past few months, I found myself in a world that had previously meant very little to me: Mortgages.  For those of us who do white collar defense, start boning up now because this is going to be big.

Mortgages lenders and originators are crashing and burning all over the place.  American Home Mortgage, a huge mortgage house, whose CEO is a really nice guy named Mike Strauss, collapsed.  This made big news.  A lot of smaller mortgage houses have fallen in the past few weeks as well, though they may not have made the ticker.  It doesn’t matter.  The point is that they are failing in a way that has never been seen before.  The closest analogy is the collapse of savings and loans.  And just like the S&Ls, the next step is the federal investigations into criminal practices that is going to results in prosecutions.

Already, the fallout is happening.  The feds are busy investigating lending practices and scams that were pervasive in the good old days of rising real estate values and easy money.  Prosecutions are coming.  As I began to quickly learn, this business was far dirtier than I had ever imagined.

Remember the “no income verification” loans?  Well, that gave rise to the straw buyer, used to shift mortgages back and forth, monetize flips immediately and leave the investors (like hedge funds) who put up the money to finance these loans (and ultimately hold the paper) in the hole. 

When people thought real estate could never stagnate, no less decline, it really didn’t matter.  They were happy to be had, with scam appraisals that would overvalue property so that a guy could buy property for half a million today, sell it to a straw buyer tomorrow or a million, and pull 110% out of that $500k property.   The mortgage people knew all about the scams, and were often in for a piece themselves.  There was so much money to be made that it was crazy to let it just sit on the sidelines.

But when the boom stopped, and the mortgage had to be paid, and the hedge funds pulled their funding out fearing that there would be no more easy money, the house of cards collapsed.  Nothing new about pyramid schemes, but these were real companies with tons of money behind them involved.

And so this looks to be the new areas for criminal defense.  There will be the big names of CEOs and CFOs, and the little names of the guys at the bottom of the food chain, but the investigations will involve them all. 

I spend the past weekend in Philly for a wedding.  In the early morning on Sunday, I went outside for some air and met an old friend of my sister’s whose brother had done very well for himself.  He was CFO for a mortgage bank.  She told me he was scared.  His company was soon to close. He knew it.  The collapse was just a matter of time.  What he hadn’t thought about yet was the day after the collapse.  The day that the federal agents would go in the door and start seizing files to see where all that good clean money went.  The day they were going to scrutinize who knew what and when did they know it.  How many heads were stuck in the sand while all that money disappeared?

Like all fertile white collar areas, it will take some studying to learn the industry.  It will take a deal of cynicism to appreciate why your defendants profess total ignorance of any wrongdoing, as it swirled around them.  The feds will see criminals under every stone.  Ambitious AUSAs will never believe that every person in the shop isn’t filthy dirty.  Sometimes, the AUSAs will be right. 

Get ready, this is already in the works and it will be coming fast.  And if you’re a mortgage broker or executive, today would be a good day to line up the best criminal defense lawyer you can find.  He’ll teach you what to do tomorrow morning at 6:00 am when there’s a knock on your door.  You may have been a great salesman for years, but you’re not quite prepared to talk your way out of this one just yet.