White Picket Fences White Picket Fences: An Accountant’s Desperate Attempt to Save his Business

White Picket Fences Meet Toby Groves Founder and president of Groves Funding Corp. The co-mingling of his client accounts with his business accounts resulted in approximately $250,000 losses to the clients.

White Picket Fences Groves Funding Corp. Toby began working as a mortgage broker. Groves Funding put together mortgage packages for home buyers and expanded into mortgage lending. Business expanded into the mortgage lending business. The business made loans to home buyers with the goal of selling the closed loans at a profit on the secondary mortgage market.

White Picket Fences History of the Mortgage Industry In the 1800s-1900s, home buyers were required to put down 50% of the cost of a home. Many people could not afford this upfront cost. President Roosevelt established the Federal Housing Administration (FHA) as a result of the Great Depression. Created to insure mortgage lenders against losses from defaults.

White Picket Fences History of the Mortgage Industry The government established the Federal National Mortgage Association (FNMA) in Known as “Fannie Mae” $1 billion in funding Designed to increase liquidity in the mortgage market. Created the secondary mortgage market. Created an efficient, fair, and stable system for home loans that worked well for decades.

White Picket Fences History of the Mortgage Industry By 1970, there was a concern about lack of competition in the mortgage industry. In response, the federal government created a new GSE called the Federal Home Loan Mortgage Corporation (Freddie Mac) to provide for more competition in the secondary mortgage market. Freddie Mac concentrated on buying loans from savings and loan association institutions.

White Picket Fences Types of Mortgages Fixed term mortgages Required a certain sized down payment in relation to the value of the loan (called the loan to value rate). Adjustable Rate Mortgages (ARMs) The interest rate on an ARM loan is adjustable depending on various economic indicators. Buy-downs The seller subsidizes the borrower for short period of time.

White Picket Fences Types of Mortgages Graduated Payment Mortgages Start with low payments that rise over time. Negative Amortization Loans The payment is less than is needed to pay off the loan over time and so, the loan gradually gets larger over time. Subprime mortgages Loans made to people who would not normally qualify for regular loans because of their inadequate credit.

White Picket Fences Warehouse Line of Credit Some mortgage brokers began to originate their own loans, using what is called a warehouse line of credit. They became short-term lenders. They would borrow from their warehouse line of credit and fund a mortgage loan for a home buyer, and then sell the loan on the secondary market (e. g., to Fannie Mae) for a profit.

White Picket Fences The Offense Toby and his company were not prepared for the move into mortgage banking. Many of the loans that they wanted to sell on the secondary market had problems, such as missing or incorrect documentation. The loans could not be sold on the market for a profit.

White Picket Fences The Offense Toby’s company was losing money that belonged to his clients. Funds that had been placed into escrow to cover insurance premiums and taxes was being used to cover ordinary business expenses. Resulted in approximately $250,000 losses to the clients.

White Picket Fences The Offense Toby decided to apply for a “no income qualifier” loan for himself using his warehouse line of credit. Misstated his income on the application. He could have reported losses, but was concerned about his reputation. Ended up more than $1 million in debt.

White Picket Fences The Unraveling To continue to get loans, Toby also had to rely on other people and companies in the real estate industry to help him falsify documents as he began to create documents to get loans on entirely fictitious homes. Someone blew the whistle on Toby in 2006.

White Picket Fences Analysis of the Case Toby was motivated by a fear of failing. Toby’s situation became a “slippery slope offense”. The offender does not have a grand plan to engage in a large scale criminal offense. The initial offense is viewed as a temporary and short term solution to a crisis that the offender is experiencing.

White Picket Fences Analysis of the Case Toby’s ability to continue his offense for several months was facilitated by two factors: Little to no oversight of his actions. Willing cooperation of others in the industry.

White Picket Fences White-Collar Crime Characteristics White-collar offenders have legitimate access to the target of their illegal activities because of their occupational positions. The illegal actions of a white-collar offender have a superficial appearance of legitimacy. White-collar offenders are often spatially separated from their victims.

White Picket Fences Conclusions Not all white-collar crimes are motivated by a desire for gain. They are often motivated by a desire to avoid a loss. White-collar crimes are almost always based in or part of legitimate business activities. This feature makes them difficult to detect and control. Social, economic and regulatory conditions can create a perfect storm for white-collar offenses to occur.

White Picket Fences White Picket Fences: An Accountant’s Desperate Attempt to Save his Business