Mortgage Daily

Published On: January 15, 2018

Ten years ago, investment bank Lehman Brothers Holdings filed what would become the country’s largest and most complex bankruptcy.

Its default on $613 billion in debt sent shockwaves across the global economy, ushered in the worst economic downturn since the Great Depression and disrupted millions of lives. Most people have moved on since what became known as the Great Recession, but not Denver attorney Chris Carrington.

Carrington has spent much of his career since 2009 tracking down and deposing hundreds of borrowers who submitted falsified loan applications. More recently, he has been hunting down the mortgage brokers and originators behind those bogus loan applications.

A dry erase board in Carrington’s office shows the web of subterfuge and complex entities some loan brokers have used to hide their tracks.

“What I kept seeing over and over again is how greed manifests itself,” he said. “There was an unprecedented amount of fraud.”

It wasn’t a career path Carrington, 38, had planned to pursue. He left the Arapahoe County District Attorney’s office in 2007 and joined a criminal defense firm. After Lehman collapsed, one of the firm’s partners asked if he could help with civil cases tied to a client called Aurora Loan Services.

Aurora Loan Services, based in Lone Tree, was a mortgage servicing arm of Lehman, meaning it collected payments from borrowers and dealt with delinquencies and defaults. It primarily serviced higher risk mortgages made to borrowers with lower credit scores.

By 2006, Aurora and BNC Mortgage, a sister firm, were taking on billions a month in higher-risk mortgages. The failure of many of those loans contributed to Lehman filing for Chapter 11 bankruptcy on Sept. 15, 2008. That filing left thousands of loans stuck in the pipeline.

In saner times, borrowers had to prove they made enough income to support a loan. But lending standards last decade loosened so much that borrowers only needed to state they had enough income. They didn’t need down payments either, and they could get loans with low initial rates that adjusted sharply in a few years.

That opened the door to fabrication on a scale not seen before. People lied about their income, they lied that a home would be a primary residence, they lied about how indebted they were, they even lied about who they were, using other people’s identities to take out loans.

“It was crime on a massive scale, but nobody viewed it that way,” he said.

Carrington, who never worked for Lehman but rather the bankruptcy estate, had the task of getting borrowers to admit in depositions that the information on their loan applications wasn’t true. If he could show a loan was sought under false pretenses, it could be kicked back to the originators, some of whom the large surviving banks had acquired.

“It was hard for us to understand what was happening and why it was happening,” he said of his first depositions. But then patterns emerged as he traveled around the country talking to borrowers.

Many of them, on the run from creditors, were hard to find. Often, they didn’t want to talk when located. Carrington had to reassure them that they wouldn’t get into legal trouble, that he was only going after the people and firms that handled their applications.

Some pleaded ignorance, that they didn’t know what was actually on the application, or that they only put down what the mortgage broker told them, saying they were told to list their “potential income.” Some insisted the information on the application was true. Carrington would then produce their IRS tax return from that year, and invite them to reconsider. A few admitted they had lied and were contrite.

Of the hundreds of cases he pursued, Carrington said three stood out.

Echoing the movie The Big Short, a young woman working at a strip club bought three or four homes in as many days. She told Carrington that she didn’t think she would ever have to make a payment. After a few months, they would appreciate so much she could sell them and make a mint.

“All of the properties went into foreclosure,” he said.

Then there was a former Los Angeles resident Carrington tracked to Silver City, in southern New Mexico. She had opened up a coffee shop after walking away from two mortgages.

One of the saddest cases was of an elderly man who showed up for his deposition, struggling to speak beyond a whisper. Carrington asked if he was OK and he said he just had open heart surgery a few days earlier.

“I’m not supposed to be here,” he told Carrington, who then asked why he came. He told him “because you sent me a subpoena, and I don’t break the law.” Carrington cancelled the deposition and called a taxi to take him home.

“It was an interesting juxtaposition of how, on the one hand, he obtained a mortgage based on fraudulent documents, but was so rigid in his commitment to follow the law that he showed up for a deposition on the verge of death,” he said.

Some people committed fraud because they could get away with it. But many of the borrowers were buying into an American Dream that was beyond their means. Greed and hope combined with disastrous consequences, he said.

“They thought they owned these homes, but after working three jobs, liquidating their 401(k)s, eventually getting a divorce from the financial stress, and moving in with their parents at 42 years old, it was obvious that the home owned them, not the other way around,” he said.

After witnessing first hand what caused the thousands of stress fractures that sent Lehman tumbling down a decade ago, Carrington worries it is only a matter of time before it happens all over again.

“Hardly anyone got prosecuted, and that suggests that there’s little risk in folks running these same plays,” he said.

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