Builder Bailout: What is the Best Defense?
Homeowners were not the only ones hit hard when the real estate market collapsed in 2008. Many developers had multi-million dollar development projects pending and suddenly found themselves with newly-constructed homes that no one wanted to buy. Some builders, hopeful that the market would turn around and trying desperately to stay afloat, turned to creative schemes to secure the financing they needed to hold onto properties under development. This give rise to builder bailout fraud.
Builder bailout fraud can be considered a type of bank fraud because often it involves using false statements, misleading claims, and fraudulent promises to try to improperly obtain funds from a mortgage lender. Fraud against financial institutions is one of the most serious federal crimes and if you are accused of taking part in a builder bailout scheme,you could face the potential for decades of imprisonment if convicted.
At the Law Office of Bukh Law Firm, PLLC, our New York City Mortgage fraud defense lawyers have provided skilled legal representation to clients accused of participating in builder bailouts and all types of residential and commercial mortgage and real estate fraud.
We understand your options for defenses and can advocate for you in court or help you negotiate a plea agreement. To learn more about how a lawyer can help, contact us today.
How Does a Builder Bailout Work
Builders typically finance the costs of constructing a new development over a period of 12 to 18 months. Builders then either must sell a sufficient number of units to repay the loan or must secure new financing. When the real estate market collapsed, many builders found themselves without the money to repay their loans and builder bailout schemes were born.
Builder bailout schemes typically involve disguising fraudulent home sales as legitimate transactions in order to make it appear that renewed financing is not a credit risk for lenders. There are different approaches to engage in this type of fraud including:
- Offering generous buyer incentives to purchase a home without disclosing to lenders : A builder may offer to pay closing costs or down payments or may offer to sell the home for no money down. The incentives are not disclosed to the lender, while the sale is presented as a legitimate and standard home sale.
- Straw buyers or fraudulent purchases by corporations : Some builders form false corporations to purchase homes at above-market prices. Often, 100 percent of the cost of the purchase is financed and sometimes the loans are even taken as cash-out refinances to provide the builder with extra funds. This makes the builder look more profitable and shifts responsibility for repayment of the loans to a corporation that has no assets. Other builders simply sold the properties to fake straw buyers.
- False equity creation : Builders would offer secondary financing to buyers to purchase homes, like 80/20 loans. This would allow buyers to purchase homes without having any financial stake in the house. Lenders would not have the collateral they believed they did to secure the loan since lenders were unaware of the secondary financing.
These are just a few different types of builder bailout schemes. The main purpose of builder bailouts were to make a builder look more profitable and/or to convince a lender of a builder’s ability to resell homes. With this misleading information, lenders would extend additional financing to builders and even, in some cases, provide larger lines of credit based on fraudulent misrepresentation.
Penalties for Builder Bailouts
Builders and their alleged accomplices involved in builder bailouts can be tried for the federal crime of bank fraud. This offense, defined in 18 U.S. Code Section 1344, involves any attempt to knowingly participate in a scheme to defraud a financial institution of items of value. The potential penalty for conviction is a fine up to $1,000,000 and up to 30 years imprisonment.
Many bank fraud schemes also involve using wire or postal mail to send paperwork related to the fraudulent transactions. This can lead to a mail fraud or wire fraud charge, each of which also carry a possible penalty of 30 years imprisonment and $1,000,000 when the fraud occurs against a financial institution.
New York state also has laws prohibiting fraud schemes, including mortgage fraud and builder bailouts. The potential penalties vary depending upon the value involved in the fraud scheme. Because builder bailouts involve large commercial developments and valuable lines-of-credit, serious penalties can be imposed on the state level.
Getting Legal Help
At the Law Office of Bukh Law Firm, PLLC, our New York City mortgage and real estate fraud lawyers understand the ins-and-outs of builder bailouts and we can put our legal experience to work to defend you if you allegedly participated in such a scheme. To learn more, give us a call today.