Not the OP, though I'll tag @MadMonzer, but I am an attorney and there are a few things here that we need to clear up. There are three categories of mortgages: Primary residence, second home, and investment. We can forget about primary residence since nobody is claiming that this was a primary residence. The question we are therefore dealing with is whether this is a second home or an investment property; there are no other categories available.
Primary residences get the most favorable treatment. Correspondingly, the most common type of mortgage occupancy fraud is mischaracterizing an investment property as a primary residence. Second homes carry higher interest rates than primary residences; if you fall on hard times you're going to prioritize keeping a roof over your head over making payments on the ski condo. Investment properties traditionally carried even higher interest rates (note the past tense) because, as investments, the borrower's ability to repay is often contingent on the success of the business. The disadvantage of the higher interest rates and down payments was offset by the ability to use projected income off the property to qualify for the loan. The risk to banks of mischaracterizing an investment property as a primary residence or second home was that the bank wouldn't be properly pricing in the additional risk profile of the borrower, who may be able to afford the property on paper but may in fact be relying on rental income to make the payments.
Keeping that in mind, there are two critical weaknesses to the prosecution's case. The first is that they have to prove that James knowingly and intentionally made a misrepresentation to bank officials. The only evidence they have of this is her signature on a boilerplate rider that was signed at the closing along with a sheaf of other documents. Anyone who has ever purchased a home, including the people who will be on the jury, knows that the documents you sign are selected by the bank based on their understanding of the situation. The borrower isn't drafting these things themself and presenting them to the bank as representations. They are simply memorializations of what is already understood. In other words, everyone on the jury is going to understand that the bank included that rider based on conversations they had with James regarding the use of the property.
If have read that the investigators uncovered witnesses who corroborate James's story that she was forthright about what she wanted to do with the property. Unless the prosecution can produce someone from the bank who is willing to testify otherwise, this case is dead in the water, and even if they do produce such a witness, it muddies the waters but doesn't necessarily mean there's enough to convict. One guy who doesn't remember something that five other people remember isn't going to move the needle much, unless that one guy was in a better position to know. I haven't been able to find details about this evidence, so tke this with a grain of salt, but assuming it does exist, it more or less ends the prosecution right there unless they have something big.
Even without this evidence, though, the case still isn't a slam dunk. Fraud is unusual in the criminal world in that the intent requirements are very specific, and honest mistake is a defense. If nothing was said about the use of the property other than the signed rider, and the decision to use that particular rider was entirely on James, she could credibly argue that she didn't represent the property as an investment property because it wasn't an investment property and was never intended to be. This is supported by the evidence, considering that her proceeds from the deal have thus far amounted to $1,300 in 2020 and nothing since.
But even going beyond that, if we assume that indeed she did intentionally make a misrepresentation to the bank, for it to be fraud that misrepresentation has to be material. Say you're buying a used car from a private seller. Certain things would be material to your decision to purchase: Age, mileage, accident history, repair history, etc. Suppose the seller claims he drove it cross-country last year and everything went well, and you found out later that this was a lie. He may have intentionally lied to you in order to mislead you into believing that the car was more reliable than he had any reason to believe it was, but if this statement didn't influence your decision to buy the car, there's no fraud. The upshot for James is that she doesn't even need witnesses to remember conversations from five years ago, only witnesses who will testify that if they had known about her true intentions at the time it wouldn't have changed anything.
There's another aspect to materiality that goes to a similar defense; while showing lack of financial benefit isn't a great defense in the sense that it doesn't negate an element of the offense, juries in general are unlikely to convict for fraud if the alleged perpetrator didn't benefit from the lie, or if the benefit was minimal. The two benefits one gets from classifying a property as a second home as opposed to an investment property are a reduced down payment requirement and reduced interest rates. The reduced down payment isn't a factor here because James put the same amount down as she would have on an investment property. The only possible motivating factor was the reduced interest rate. A representative for the bank told investigators that had the property been classified as an investment it would have increased the interest rate by a quarter point to a half point. One thing that hasn't been covered much, though, is how little money is involved. This house sold for $137,500. She put 20% down. Classifying it as an investment property would have cost James an extra $15–$30/month. These are not exactly the kinds of benefits one typically makes intentional misrepresentations over.
The Justice Department tried to dress this up as best they could and claimed that she defrauded the bank out of more than $17,000 over the 30-year life of the loan, but this is disingenuous. First, they didn't like the number the guy from the bank she actually used gave them, so they got another expert to testify to the grand jury that the rate increase would be closer to 0.8%. Then rather than use an average length that one would expect her to own the property, they assumed that she would live to age 92 and wouldn't sell, die, refinance, or pay off the mortgage in the meantime. They also assumed that a dollar in 2050 would be worth the same as a dollar in 2020; they should have applied a discount rate based on expected inflation.
All of that is before we even get to whether she violated the terms of the rider itself, which it is not clear that she did. The first thing the rider requires is "Borrower must occupy and use the Property as Borrower’s second home." Unfortunately, neither the rider nor the Federal mortgage regulations define any of the operative words including "occupy", "use", and "second home". A gander of the 1983 edition of Black's Law Dictionary in my office doesn't define "second home" but defines "occupy" and "use" in general terms suggesting some sort of control but without imposing any specific requirements that would be relevant here. Luckily, we can look at the rest of the language to get some clues as to what this means.
The next section states "Borrower will maintain exclusive control over the occupancy of the Property, including short-term rentals, and will not
subject the Property to any timesharing or other shared ownership arrangement or to any rental pool or agreement that requires Borrower either to rent the Property or give a management firm or any other person or entity any control over the occupancy or use of the Property". Now we're getting somewhere! I flesh this out in another comment, but if you've ever rented a vacation property, you probably haven't dealt with the owner directly. The way this is typically done is the owner enters a management contract with a rental company that handles the business end of things including marketing, payments, repairs, cleaning, booking, etc. in exchange for a hefty percentage of the rental price. They aren't going to enter such a contract without access to the most profitable days in peak season, so the owner's ability to use the property himself under these contracts is often limited to a couple selected weeks during the offseason.
A guy I went to law school with bought such a property near a lake that he let the group I was with stay in for free a couple times for bachelor parties. By "free" I mean that he charged us $500/night; he wasn't getting anything himself, but there was a minimum "friends and family" rate that the rental company required him to charge to cover the costs of having the house occupied. Everything was still handled through the rental company, even though we knew the owner. In other words, the type of occupancy the clause requires is more of a constructive occupancy than a physical presence. James did not delegate the rental of the property to a third party; any agreement she made was directly with the occupant. She had control over whether her grandniece could stay there. People elsewhere have mentioned that the occupant was subject to eviction laws, but this isn't dispositive. While eviction proceedings can be drawn out, the arrangement James had was a tenancy at suffarance under Virginia law (no written agreement, no rent paid), and the tenant was only due three days notice.
The relevant part of the clause concludes "Borrower will keep the Property available primarily as a residence for Borrower’s personal use and enjoyment for at least one year after the date of this Security Instrument...." Again, we have language that implies a requirement of control, not of actual possession. There is no requirement of any particular personal use, only that the property is kept available for such use. Aside from the minimal three day notice requirement mentioned above, there is nothing that would have precluded James from using the property while her grandniece was living there. When a landlord and tenant enter into a normal lease, the lease typically precludes the landlord from entering the property except in specific situations; he can come in if he needs to fix something, but not just to hang out. People living in the homes of relatives for free without written lease agreements do not enjoy these same privileges. Ask any 23-year-old who moved back in with his parents after college if he can limit their use of the property. Even if they spend most of the time at their condo in Myrtle Beach.
Even still, several witnesses told investigators that James did use the property when visiting family in Virginia, though she did not stay at the house overnight. Prosecutors seized on this as evidence that she did not occupy the property, but this is a rather specious argument. It's already ambiguous at best whether the language in the rider actually requires the borrower to be present on the property at all. But they want to read into the statute a requirement that a certain number of overnight stays are required. They also want to extend the damage period to the entire 30 year term of the mortgage, even though the restrictions are only in operation for one year, consistent with the idea that someone relying on rental income wouldn't be able to afford to wait a year before leasing the property. the $17,000+ they want to claim she defrauded the bank of goes down to $10,800 if you use the bank's actual high-end numbers, which goes down to $5,400 if you use the bank's actual low-end numbers, which goes down to $800 when you realize that they can only claim the first year of payments as damages (the math is goofy since the amortization schedules are front-loaded).
As for how this compares to Trump, he was charged with hundreds of instances of misstating property values to obtain favorable mortgage terms. Yes, there's some uncertainty with regard to valuations, but he did stuff like inflate square footage and factor in potential development that was prohibited by deed restrictions. And this wasn't a one-time occurrence but a pattern of behavior that went on over years. He saved hundreds of millions of dollars in interest fees. And with his organizations going into bankruptcy six times over the years, he wasn't exactly a low-risk borrower. The fact that he made intentional misrepresentations of material facts in order to achieve a significant financial benefit was undisputed, even by his supporters. The argument was simply that because he paid the money back, no harm, no foul. Well, notice that in the preceding 2,000 words I made no mention at all of the fact that James (presumably) paid the money back according to the terms of the loan. I don't even know if she did, because it isn't relevant. And neither is the fact that this isn't usually prosecuted, another typical Trump defense line.
One final thing I would caution. Remember how back at the beginning I said that the past tense was important? Well, that's because second home mortgages don't get preferable treatment anymore as compared to investment properties. It used to be that using a rental company was the only way to consistently guarantee short-term rental income, and their use was barred by the rider, and a contract with one significantly curtailed the owner's rights to control the property. Then Airbnb came along, and it quickly became relatively easy for the aspiring investor to get significant short-term rental income while maintaining control of the property. Since Airbnb doesn't really have to do anything other than act as a marketing platform and handle payments, they aren't going to insist on a great deal of control. If you only want to rent the place out for a few weeks in the shoulder months, that's okay. If you decide after the first rental that allowing strangers on your property isn't for you, that's okay. Listing your second home on Airbnb didn't violate any explicit prohibitions. But banks weren't stupid, and realized that the opportunity afforded by the short-term rental platforms greatly increased the number of people who were interested in "second homes". The upshot was that when it becomes hard to tell who is relying on rental income and who isn't, everyone pays the higher rates, and the advantage of a second home classification disappears.
If the prosecution's interpretation wins the day, the Democrats can easily take this ball and run with it. The practice of buying Airbnbs for investment purposes and getting second home mortgages on them was widespread between 2019 and 2022, when banks raised second home rates to curtail the practice. Such fraud was much more apparent and easy to prove than whatever it is they're accusing James of, and it shouldn't be too hard for FHFA to cross-reference a list of second home mortgages with a list of Republican donors from swing states and swing districts. You can argue that James's suit against Trump was politically motivated, but at least she had the courtesy to pick something that only a guy like Trump would be guilty of. Trump just gave a future Democratic administration license to run roughshod over a not-insignificant percentage of the donor base. Claim it's politically motivated. Claim a huge scandal. Fine. James is doing the same thing and it's getting her nowhere; only vindication that she didn't violate any actual laws will get her off the hook. My reaction to such a series of events would be one of satisfaction. If Republicans want to pretend that this is actually a Serious Crime that needs to be prosecuted, then their own tribe can pay the price for their indiscretions. The Republicans can feel free to do the same once they get back in power, except the statute of limitations will be up by that point on the period where misclassification made sense. I guess you can't win them all.
p
Not the OP, though I'll tag @MadMonzer, but I am an attorney and there are a few things here that we need to clear up. There are three categories of mortgages: Primary residence, second home, and investment. We can forget about primary residence since nobody is claiming that this was a primary residence. The question we are therefore dealing with is whether this is a second home or an investment property; there are no other categories available.
Primary residences get the most favorable treatment. Correspondingly, the most common type of mortgage occupancy fraud is mischaracterizing an investment property as a primary residence. Second homes carry higher interest rates than primary residences; if you fall on hard times you're going to prioritize keeping a roof over your head over making payments on the ski condo. Investment properties traditionally carried even higher interest rates (note the past tense) because, as investments, the borrower's ability to repay is often contingent on the success of the business. The disadvantage of the higher interest rates and down payments was offset by the ability to use projected income off the property to qualify for the loan. The risk to banks of mischaracterizing an investment property as a primary residence or second home was that the bank wouldn't be properly pricing in the additional risk profile of the borrower, who may be able to afford the property on paper but may in fact be relying on rental income to make the payments.
Keeping that in mind, there are two critical weaknesses to the prosecution's case. The first is that they have to prove that James knowingly and intentionally made a misrepresentation to bank officials. The only evidence they have of this is her signature on a boilerplate rider that was signed at the closing along with a sheaf of other documents. Anyone who has ever purchased a home, including the people who will be on the jury, knows that the documents you sign are selected by the bank based on their understanding of the situation. The borrower isn't drafting these things themself and presenting them to the bank as representations. They are simply memorializations of what is already understood. In other words, everyone on the jury is going to understand that the bank included that rider based on conversations they had with James regarding the use of the property.
If have read that the investigators uncovered witnesses who corroborate James's story that she was forthright about what she wanted to do with the property. Unless the prosecution can produce someone from the bank who is willing to testify otherwise, this case is dead in the water, and even if they do produce such a witness, it muddies the waters but doesn't necessarily mean there's enough to convict. One guy who doesn't remember something that five other people remember isn't going to move the needle much, unless that one guy was in a better position to know. I haven't been able to find details about this evidence, so tke this with a grain of salt, but assuming it does exist, it more or less ends the prosecution right there unless they have something big.
Even without this evidence, though, the case still isn't a slam dunk. Fraud is unusual in the criminal world in that the intent requirements are very specific, and honest mistake is a defense. If nothing was said about the use of the property other than the signed rider, and the decision to use that particular rider was entirely on James, she could credibly argue that she didn't represent the property as an investment property because it wasn't an investment property and was never intended to be. This is supported by the evidence, considering that her proceeds from the deal have thus far amounted to $1,300 in 2020 and nothing since.
But even going beyond that, if we assume that indeed she did intentionally make a misrepresentation to the bank, for it to be fraud that misrepresentation has to be material. Say you're buying a used car from a private seller. Certain things would be material to your decision to purchase: Age, mileage, accident history, repair history, etc. Suppose the seller claims he drove it cross-country last year and everything went well, and you found out later that this was a lie. He may have intentionally lied to you in order to mislead you into believing that the car was more reliable than he had any reason to believe it was, but if this statement didn't influence your decision to buy the car, there's no fraud. The upshot for James is that she doesn't even need witnesses to remember conversations from five years ago, only witnesses who will testify that if they had known about her true intentions at the time it wouldn't have changed anything.
There's another aspect to materiality that goes to a similar defense; while showing lack of financial benefit isn't a great defense in the sense that it doesn't negate an element of the offense, juries in general are unlikely to convict for fraud if the alleged perpetrator didn't benefit from the lie, or if the benefit was minimal. The two benefits one gets from classifying a property as a second home as opposed to an investment property are a reduced down payment requirement and reduced interest rates. The reduced down payment isn't a factor here because James put the same amount down as she would have on an investment property. The only possible motivating factor was the reduced interest rate. A representative for the bank told investigators that had the property been classified as an investment it would have increased the interest rate by a quarter point to a half point. One thing that hasn't been covered much, though, is how little money is involved. This house sold for $137,500. She put 20% down. Classifying it as an investment property would have cost James an extra $15–$30/month. These are not exactly the kinds of benefits one typically makes intentional misrepresentations over.
The Justice Department tried to dress this up as best they could and claimed that she defrauded the bank out of more than $17,000 over the 30-year life of the loan, but this is disingenuous. First, they didn't like the number the guy from the bank she actually used gave them, so they got another expert to testify to the grand jury that the rate increase would be closer to 0.8%. Then rather than use an average length that one would expect her to own the property, they assumed that she would live to age 92 and wouldn't sell, die, refinance, or pay off the mortgage in the meantime. They also assumed that a dollar in 2050 would be worth the same as a dollar in 2020; they should have applied a discount rate based on expected inflation.
All of that is before we even get to whether she violated the terms of the rider itself, which it is not clear that she did. The first thing the rider requires is "Borrower must occupy and use the Property as Borrower’s second home." Unfortunately, neither the rider nor the Federal mortgage regulations define any of the operative words including "occupy", "use", and "second home". A gander of the 1983 edition of Black's Law Dictionary in my office doesn't define "second home" but defines "occupy" and "use" in general terms suggesting some sort of control but without imposing any specific requirements that would be relevant here. Luckily, we can look at the rest of the language to get some clues as to what this means.
The next section states "Borrower will maintain exclusive control over the occupancy of the Property, including short-term rentals, and will not subject the Property to any timesharing or other shared ownership arrangement or to any rental pool or agreement that requires Borrower either to rent the Property or give a management firm or any other person or entity any control over the occupancy or use of the Property". Now we're getting somewhere! I flesh this out in another comment, but if you've ever rented a vacation property, you probably haven't dealt with the owner directly. The way this is typically done is the owner enters a management contract with a rental company that handles the business end of things including marketing, payments, repairs, cleaning, booking, etc. in exchange for a hefty percentage of the rental price. They aren't going to enter such a contract without access to the most profitable days in peak season, so the owner's ability to use the property himself under these contracts is often limited to a couple selected weeks during the offseason.
A guy I went to law school with bought such a property near a lake that he let the group I was with stay in for free a couple times for bachelor parties. By "free" I mean that he charged us $500/night; he wasn't getting anything himself, but there was a minimum "friends and family" rate that the rental company required him to charge to cover the costs of having the house occupied. Everything was still handled through the rental company, even though we knew the owner. In other words, the type of occupancy the clause requires is more of a constructive occupancy than a physical presence. James did not delegate the rental of the property to a third party; any agreement she made was directly with the occupant. She had control over whether her grandniece could stay there. People elsewhere have mentioned that the occupant was subject to eviction laws, but this isn't dispositive. While eviction proceedings can be drawn out, the arrangement James had was a tenancy at suffarance under Virginia law (no written agreement, no rent paid), and the tenant was only due three days notice.
The relevant part of the clause concludes "Borrower will keep the Property available primarily as a residence for Borrower’s personal use and enjoyment for at least one year after the date of this Security Instrument...." Again, we have language that implies a requirement of control, not of actual possession. There is no requirement of any particular personal use, only that the property is kept available for such use. Aside from the minimal three day notice requirement mentioned above, there is nothing that would have precluded James from using the property while her grandniece was living there. When a landlord and tenant enter into a normal lease, the lease typically precludes the landlord from entering the property except in specific situations; he can come in if he needs to fix something, but not just to hang out. People living in the homes of relatives for free without written lease agreements do not enjoy these same privileges. Ask any 23-year-old who moved back in with his parents after college if he can limit their use of the property. Even if they spend most of the time at their condo in Myrtle Beach.
Even still, several witnesses told investigators that James did use the property when visiting family in Virginia, though she did not stay at the house overnight. Prosecutors seized on this as evidence that she did not occupy the property, but this is a rather specious argument. It's already ambiguous at best whether the language in the rider actually requires the borrower to be present on the property at all. But they want to read into the statute a requirement that a certain number of overnight stays are required. They also want to extend the damage period to the entire 30 year term of the mortgage, even though the restrictions are only in operation for one year, consistent with the idea that someone relying on rental income wouldn't be able to afford to wait a year before leasing the property. the $17,000+ they want to claim she defrauded the bank of goes down to $10,800 if you use the bank's actual high-end numbers, which goes down to $5,400 if you use the bank's actual low-end numbers, which goes down to $800 when you realize that they can only claim the first year of payments as damages (the math is goofy since the amortization schedules are front-loaded).
As for how this compares to Trump, he was charged with hundreds of instances of misstating property values to obtain favorable mortgage terms. Yes, there's some uncertainty with regard to valuations, but he did stuff like inflate square footage and factor in potential development that was prohibited by deed restrictions. And this wasn't a one-time occurrence but a pattern of behavior that went on over years. He saved hundreds of millions of dollars in interest fees. And with his organizations going into bankruptcy six times over the years, he wasn't exactly a low-risk borrower. The fact that he made intentional misrepresentations of material facts in order to achieve a significant financial benefit was undisputed, even by his supporters. The argument was simply that because he paid the money back, no harm, no foul. Well, notice that in the preceding 2,000 words I made no mention at all of the fact that James (presumably) paid the money back according to the terms of the loan. I don't even know if she did, because it isn't relevant. And neither is the fact that this isn't usually prosecuted, another typical Trump defense line.
One final thing I would caution. Remember how back at the beginning I said that the past tense was important? Well, that's because second home mortgages don't get preferable treatment anymore as compared to investment properties. It used to be that using a rental company was the only way to consistently guarantee short-term rental income, and their use was barred by the rider, and a contract with one significantly curtailed the owner's rights to control the property. Then Airbnb came along, and it quickly became relatively easy for the aspiring investor to get significant short-term rental income while maintaining control of the property. Since Airbnb doesn't really have to do anything other than act as a marketing platform and handle payments, they aren't going to insist on a great deal of control. If you only want to rent the place out for a few weeks in the shoulder months, that's okay. If you decide after the first rental that allowing strangers on your property isn't for you, that's okay. Listing your second home on Airbnb didn't violate any explicit prohibitions. But banks weren't stupid, and realized that the opportunity afforded by the short-term rental platforms greatly increased the number of people who were interested in "second homes". The upshot was that when it becomes hard to tell who is relying on rental income and who isn't, everyone pays the higher rates, and the advantage of a second home classification disappears.
If the prosecution's interpretation wins the day, the Democrats can easily take this ball and run with it. The practice of buying Airbnbs for investment purposes and getting second home mortgages on them was widespread between 2019 and 2022, when banks raised second home rates to curtail the practice. Such fraud was much more apparent and easy to prove than whatever it is they're accusing James of, and it shouldn't be too hard for FHFA to cross-reference a list of second home mortgages with a list of Republican donors from swing states and swing districts. You can argue that James's suit against Trump was politically motivated, but at least she had the courtesy to pick something that only a guy like Trump would be guilty of. Trump just gave a future Democratic administration license to run roughshod over a not-insignificant percentage of the donor base. Claim it's politically motivated. Claim a huge scandal. Fine. James is doing the same thing and it's getting her nowhere; only vindication that she didn't violate any actual laws will get her off the hook. My reaction to such a series of events would be one of satisfaction. If Republicans want to pretend that this is actually a Serious Crime that needs to be prosecuted, then their own tribe can pay the price for their indiscretions. The Republicans can feel free to do the same once they get back in power, except the statute of limitations will be up by that point on the period where misclassification made sense. I guess you can't win them all.
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