I’m unaware of the federal government having previously charged anyone for fraud based on renting out a second home. Yet that’s what we have with the Letitia James mortgage fraud indictment. We don’t have all the facts available, but based on what is in the indictment, it’s clear why the career prosecutors in the Eastern District of Virginia refused to bring a case: James doesn’t appear to have made any misrepresentation in her mortgage because the mortgage does not directly prohibit rentals.
The indictment is pretty barebones. But here’s the heart of it:
6. The loan was originated by OVM Financial under a signed Second Home Rider, which required JAMES, as the sole borrower to occupy and use the property as her secondary residence, and prohibited its use as a timesharing or other shared ownership arrangement or agreement that requires her either to rent the property or give any other person any control over the occupancy or use of the property.
7. Despite these representations, the Peronne Property was not occupied or used by JAMES as a secondary residence and was instead used as a rental investment property, renting the property to a family of (3).
Unfortunately, the indictment does not indicate the date the property was rented out or the length of the rental duration. Both matter a lot. That’s because the Second Home Rider provides:
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Occupancy. Borrower must occupy and use the Property as Borrower’s second home. 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. 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, unless Lender otherwise agrees in writing, which consent will not be unreasonably withheld, or unless extenuating circumstances exist that are beyond Borrower’s control.
Three things matter here with the timing of the lease.
1. The Occupancy Covenant Does Not Prohibit Rentals Generally
The Second Home Rider does not prohibit renting out the property. Let me say that again. The Second Home Rider does not prohibit renting out the property.
The prohibition in the Second Home Rider is on devolving control over rental decisions to a third party, like a rental agent, not over renting itself. That’s why it says that the “Borrower will maintain exclusive control over the occupancy of the Property, including short-term rentals” (emphasis added) rather than “Borrower will maintain exclusive occupancy of the Property.” All the Rider is saying is that the Borrower has to be the one who decides on the occupant, rather than some third party.
You’d think a former insurance lawyer like Linsey Halligan (the interim US Attorney for the Eastern District of Virginia) would know how to read a contract provision carefully. But it’s pretty clear that this isn’t about law. It’s just a naked abuse of prosecutorial power.
Still, let me humor the argument that Halligan is a true believer in fiat justitia ruat caelum. Is there any plausible legal interpretation that supports the indictment? In short, no.
If the Rider wanted to prohibit rentals, it could have just said so directly: “The Borrower shall not rent out the property.” It didn’t. Instead, by placing a restriction on the use of third-party rental agents, the Rider implicitly authorizes rentals.
Perhaps the sentence that the “Borrower will keep the Property available primarily as a residence for Borrower’s personal use and enjoyment,” implicitly excludes rental arrangements, or at least those that last more than half of the year, but I’m not even sure that can be read as a prohibition on rental, so much as a prohibition on turning the property into something other than residential. It is, at best, an incredibly inartful way of drafting a rental limitation.
If the Rider does prohibit rentals for over half of the first year, then the date and length of the lease in the James case would be relevant, and that isn’t revealed in the indictment. But I’m not sure it really matters because James should will simply due to the ambiguity in the Rider. The Second Home Rider is an absolutely terrible bit of legal draftsmanship (as are many Fannie/Freddie uniform documents). The ambiguity means that James should be able to defeat the claim that she “knowingly” engaged in fraud.
Both charges brought against James, 18 USC 1014 and 18 USC 1344, require that her actions be done “knowingly,” and the Supreme Court has recently held, in the context of another provision, that “knowingly” is about the defendant’s subjective interpretation. The in pari material canon means that the interpretation on “knowingly” should apply to the provisions under which James was charged. It will be exceedingly difficult for the prosecution to show that James subjectively believed that she wasn’t allowed to rent out the property at the time she signed the mortgage given the ambiguity of the contract language.
The indictment attempts to show James’s subjective intent by noting that James subsequently listed the property as a rental property on her taxes, but that’s not evidence of her intent when she signed the mortgage. Instead, it’s just a statement reflecting the reality that the property was being used as a rental (which is allowed in any case). Moreover, it actually bolsters James’s case as it is consistent with her believing that she was allowed to rent out the property.
Likewise, the indictment notes that James’s application for homeowner’s insurance claimed the property as “owner-occupied non-seasonal use.” But no date is given for the insurance application, and the characterization of the property could well have been correct prior to the property being rented out (again the date of the rental matters).
Remember, the burden of proof is on the prosecution to show James’s subjective intent beyond a reasonable doubt. That cannot be done based on the evidence in the indictment. There isn’t sufficient evidence in the indictment to show that James knew that she was promising not to rent out the property and intended from the get-go to violate that promise.
2. The Occupancy Covenant Only Lasts One Year
Even if I’m wrong about the interpretation of the occupancy covenant, the operative restriction would come from the final sentence, which only attaches for one year. When did James rent out the property? We don’t know. That’s important information left out of the indictment.
3. Extenuating Circumstances: COVID
The Second Home Rider also has an exception for “extenuating circumstances exist that are beyond Borrower’s control.” The mortgage was from August 2020, in the middle of the COVID pandemic. That opens the door to an extenuating circumstances argument.
Putting this all together, this is an indictment that probably should not have been brought under the DOJ’s own guidelines: there isn’t sufficient evidence to even reach a conclusion of probable cause, much less that the evidence would be sufficient to obtain a guilty verdict.
Comments
15 responses to “The Letitia James Indictment Falls Short”
Solely addressing the legal question, the phrase starting with “including short term rentals …” provides examples of the Borrower’s broad promise to “occupy and use the Property as Borrower’s second home.” The restriction is not limited to agreements giving a third party control over how the property is occupied or used, and you could argue that any lease gives a third party control over occupancy and use, where the tenant is the third party. Also, Fannie’s guideline provides that a second home “must be occupied by the borrower for some portion of the year” and “must not be a rental property,” at least as of 2022. https://selling-guide.fanniemae.com/sel/b2-1.1-01/occupancy-types#footnote-3311-1.
The Second Home Rider is a terrible bit of legal draftsmanship. It’s remarkable that such a badly drafted contract provision is one of the most ubiquitous contract terms in the United States.
As far as its interpretation, there’s an easy way to have prohibited rental: “Borrower shall not lease out the property.” That’s not to be found here. The Rider does not say that “Borrower will maintain exclusive occupancy of the Property.”
Instead, it says “Borrower will maintain exclusive control over the occupancy of the Property, including short-term rentals”. That means that the borrower has to be the one who decides on the occupancy, not that the borrower must be the occupant. That interpretation is also consistent with the next clause (which should not be set off by a comma–the drafter apparently didn’t understand how commas are used), which is an elaboration of the requirement that the borrower has to be the one who determines the occupancy. Thus, the borrower “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.” There is no prohibition on rental here. It’s a prohibition on devolving control over rentals to someone else.
If there’s any prohibition on rental to be found in the Rider it has to derive from the first sentence and the last: “Borrower must occupy and use the Property as Borrower’s second home” and “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.” But neither is a clear prohibition on rental. The first sentence does not require occupancy and use for one year; a minute would suffice. The last sentence is the requirement with the annual duration, but what on earth does it mean to “keep the property available primarily as a residence for Borrower’s personal use and enjoyment”? The “primarily” suggests that it is not exclusive, thereby allowing other use of the property, including rental. And what if the borrower is personally renting out the property and enjoys doing that?
The Fannie Seller’s Guide isn’t relevant here. It’s evidence of what Fannie believed the covenant to mean, but it isn’t evidence of what James thought it meant, and for criminal law purposes, it is only James’s subjective intent that matters. Schutte v. SuperValu (SCOTUS 2023, interpreting “knowing” requirement in False Claims Act). The drafting ambiguity gives James all the subjective intent she needs to defeat the charges.
Adam, Just like Lisa Cook Mortgage Fraud case you fail to address basis Loan Origination and Underwriting Basics…and the Uniform Mortgage Loan Application (FN 1003 / FH 65) Form..
DOJ covers it in Paragraph 17 of Letica James Indictment and is “Triple Trouble” for Cook….Three Loans in 90 days is what we used to call “Three Loan Monte”, Rack and Stack” and “Shake and Bake”…For a then soon to Fed Governor that is very problematic around ethics, principles and so much more.
My firm belief is she was coached either by Bank-Fund Staff FCU or Univ of Mich CU (Ann Arbor) loan officer, possibly with u/w or management knowledge. To claim inadvertent error or some one else at fault is total supposition and wishful fantasy while ignoring Gravity.
Leticia James aside, Cook is “Cooked” with Ann Arbor loan by the pending Atlanta loan transaction. Atlanta was under contract, credit applied for and Loan Summary completed. Somethings are just not a “error” and Cook’s three loans were not accidental.
Three Loans, Three Months, Three States need a roadmap and a story. When I was growing up that roadmap was Borrower Letter of Explanation.
Best and Safe to All, I welcome dialogue and discussion. Happy to Share
Anthony–
The bullet/clause that includes your referenced “must not be..” is immediately clarified by the exact text also contained in your footnote cite/link that follows. Therefore, the discussion below addresses both of your contentions vis-a-vis the guideline provisions.
Your footnote cite does not support your narrative in either discussion or timing applicability.
Here is that footnote text:
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If the lender identifies rental income from the property, the loan is eligible for delivery as a second home as long as the income is not used for qualifying purposes, and all other requirements for second homes are met (including the occupancy requirement above).
So, your referenced document specifically acknowledges/anticipates a ‘rental potential’ and only limits such rental income as not being part of the financial analysis on the borrower’s ability to repay the loan.
So, assuming your argument, presumably, James owned the property for at least a minute duration even if switching from signing a mortgage instrument to confirming the details and details and executing a rental agreement. Further, the footnote clearly anticipates possible property rental AND still delivering the loan for a “second home.” The limitation only applies to assessing the borrower’s ability to repay the mortgage.
You share that the footnote was effective “at least as of 2022.” The mortgage arose in mid- to late-2020. So, based on your writing writing, an action/loan prior to the cited footnote even if it was written/intended differently.
As Adam Levitin notes, the guidelines are not relevant. But, for the sake of discussion, IF the footnote existed prior to August 2020 and if cogent argument made to consider the guidelines, I contend that note would then be exculpatory for James. It would also likely be futher evidence of prosecutorial misconduct and additional grounds for professional sanction. But, again, the subject mortgage arose prior to the cited guideline footnote as you wrote.
It’s Letitia James, not Jones!
omg you’re right. Corrected.
The article misses the point. The question isn’t whether James breached the mortgage contract. It’s whether she deliberately made a false statement on the application. Lying on an application to get better terms on a loan is not the same thing as whether you subsequently breached the loan agreement. One is a crime
(as she has herself has repeatedly acknowledged), while the other is a breach of contract claim.Perhaps she has a good explanation of (a) why she wanted a second home in Virginia, and (b) why it turned out that she didn’t use it as a second home. If so, she’s not guilty. That’s why we have trials.
But the idea that she could reasonably have thought, “I want to buy a rental property, but since the mortgage contract says that under some circumstances I can rent a second home, it’s okay to lie and say I plan to use it as a second home” is … a stretch.
Frank–you’re correct that there’s a distinction between representations in a loan application and promises in the mortgage contract. A breach of a promise is normally just a breach of contract, although if the promisor never intended to keep the promise, it could be promissory fraud, and that is what the government is alleging. The government does not claim ANY false representations on the loan application. The only false statement claimed is the promise in Covenant 6 of the Deed of Trust, as amended by the Second Home Rider. In other words, the government is alleging promissory fraud, which is a darn hard thing to prove because it’s all about the borrower’s intent at the time of signing the document.
It is utterly irrelevant why James wanted a second home in Virginia. All that matters is whether she promised not to rent out the property and if she never intended to keep that promise. A plain English reading of the Second Home Rider is that James never made the promise, so she couldn’t break it.
You are correct
Thanks for the reply, but I’m not sure I understand your point. Lying under penalty of perjury to obtain a better deal on a mortgage is a crime even if no covenant in the resulting mortgage is breached. I believe Donald Trump tried that defense, and lost.
You argue that the reason why she picked this house is irrelevant. But the question is whether at the time she made the allegedly false statement she had a present intent to use it as a second home rather than an investment property. Under contract law, a false statement of present intent is a false statement of fact.The jury necessarily must decide whether James, at the time of the mortgage, had any intent to live in the house herself, and the reason for choosing an unimpressive 1,400 sq. ft. 3/2 detached house in a modest residential area of Norfolk VA—where she apparently has rarely been before or after the mortgage—seems directly relevant to whether she had any intention of actually living there herself.
The post suggests that buyers lawfully can certify a property as a second home when they actually intend to use it as an investment property because second homes, once purchased, can subsequently be rented. I don’t think that’s advice that people should rely on.
Frank-you’re alleging a different case than the one in the indictment. I’m not a criminal procedure expert, but if the indictment contains one set of facts constituting an alleged fraud, it is basically bound to that for trial; switching to a different set of facts seems like a material variation that isn’t allowed. That would seem to preclude getting the loan application in for purposes of 18 USC 1014 (false statement) because it is a different statement.
Now perhaps the argument is that it is _additional_ not _different_ facts that all go to the same “scheme” for 18 USC 1344. That seems like a trickier question, and I don’t know what, if any, caselaw there is on this. (The additional/different issue I know is all about UCC 2-207 Battle of the Forms!) But I would think James would have a decent lack of notice argument if an essential part of the scheme are documents not mentioned in the indictment.
As far as your common sense point, however, my first reaction was that I have no idea why James picked this particular house in Norfolk for _any_ purpose: it doesn’t jump out as a vacation home, but it’s also strange for someone to buy a random house some 7 hours away from their regular home to hold as an investment property.
But then I saw this NYT article that says that the house has been occupied by James’s great-niece and family, and that the great-niece previously testified to a different grand jury that she had never paid rent. Additionally, James’s financial disclosures indicate that she made only $1k-$5k in rent from a property in Norfolk–which might not even be this property! So even if the Second Home Rider prohibits rentals (which it does NOT), it doesn’t appear that James actually rented out the property. And what’s more, if she didn’t rent it out, it’s hard to say that it’s being held as an investment property, so I’m not sure that there’s any basis for claiming that James made any misrepresentation.
The house in the indictment on Perrone Avenue in Norfolk is not the house rented by her niece which is on Sterling in Norfolk. Not to question your analysis which I agree with. Renting for at least part of the year is not only not prohibited by the covenant language, it’s assumed in Fannie Mae guides on second homes which say 12-month lease might be a red flag.
I’m a little confused by the familial relations. My understanding was that there’s one house with a niece and this one is another relative, a grand-niece.
Also in 2019 Fannie/Fresdie updated the 2nd home rider to make clear that rentals were permitted. Fannie seems to think that anything up to ½ year is allowed, although that’s not definitive. In any case, it doesn’t seem that James rented the property, so much as permitted rent free occupancy.
Oh, my bad. I thought the article I saw was conflating niece and grand-niece. So family in both houses, which the indictment and the referral letter both fail to mention.
I’m not 100% about the various kinfolks.
But if Halligan failed to tell the indicting grand jury that the grand-niece previously testified to another grand jury that she didn’t pay rent, that starts to look like real prosecutorial misconduct. You don’t have to show a grand jury all possibly exculpating evidence, but you can’t omit something really key like that. Of course Halligan is admitted to practice in Florida, not Virginia (EDVA local rules allow US Attorneys to practice without Virginia admission), so not much chance of bar discipline, I suspect.
It is worth mentioning that the “finder” of this alleged fraud, convicted felon Sam Antar was the accounting brains behind the over $100 million “Crazy Eddie” securities and tax fraud. The guy is an inveterate self promoter and styles himself a sociopath who teaches people to beware of sociopaths. I delve into some of Antar’s history in a “chat with Grok,” which I think helps to bring out Antar’s possibly not entirely altruistic motivations for his trophy hunting.
https://econospeak.blogspot.com/2025/10/crazy-bondi-her-indictments-are-insane.html