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The head of the Federal Housing Finance Agency embraced a highly unusual process to accuse Lisa Cook, a Federal Reserve governor, of committing mortgage fraud, former officials and experts have said. One former high-ranking official called the director’s involvement in a criminal referral “bizarre”.
William Pulte, a businessman and major GOP donor whom Donald Trump appointed to head the powerful housing agency earlier this year, has accused Cook of committing mortgage fraud by misrepresenting her homes as a primary residence, potentially securing more favorable mortgage rates. The justice department formally opened a criminal investigation into whether Cook committed fraud and has issued subpoenas related to the transaction. Cook’s lawyers have called the discrepancies a “clerical error” and she has denied any wrongdoing.
Trump has used those accusations as the basis to try to fire Cook, who has strongly denied the allegations and is contesting her firing in court. Pulte has also made similar referrals against New York attorney general Letitia James and California senator Adam Schiff, both political rivals of Trump.
Investigations into mortgage fraud are usually handled by the Federal Housing Finance Agency’s office of inspector general (OIG), an agency watchdog, staffed with lawyers and agents with an expertise in investigating crimes, including mortgage fraud. The OIG is then the office that typically makes a criminal referral.
“It’s very bizarre for Pulte to be the one making a criminal referral himself and it’s not coming from the IG’s office,” said Janell Byrd-Chichester, a former chief of staff at FHFA. “If we thought there might be criminal activity, that would go to the IG for review and a determination and the IG would be making any referral, not the agency.”
Three other former officials across the inspector general’s office and FHFA said Pulte’s involvement was unusual.
After assuming his position earlier this year, Pulte started an FHFA hotline to report waste, fraud and abuse. The move seemed strange to some in the office of the inspector general, which already has its own hotline to report fraud, according to a person familiar with the matter.
“It’s certainly unusual, if not unprecedented, for the director of FHFA to make a single request to the justice department that someone be investigated for alleged mortgage fraud,” said Guy Cecala, the executive chair of Inside Mortgage Finance, an information company and research firm that has covered the mortgage market for more than four decades. “Historically, we haven’t seen a lot of people prosecuted for mortgage fraud in terms of misrepresenting their occupancy on a house.”
While the FHFA inspector general would take referrals from FHFA, their investigations were typically walled off from FHFA, former officials said. The separation helped protect the privacy of borrowers and their sensitive mortgage information. The inspector general’s office would typically only pursue cases that resulted in substantial losses to Fannie Mae and Freddie Mac, government-sponsored enterprises that are regulated by FHFA.
The extent of the FHFA inspector general’s involvement in Cook’s mortgage is unclear. Also uncertain is whether Pulte requested that officials at Fannie Mae or Freddie Mac pull Cook’s loan documents – highly sensitive information – or whether the claims are based entirely on publicly available mortgage information. In Schiff’s case, the OIG appears to have at least requested documents about his home loans, according to the Los Angeles Times.
“Your inquiry relates to public statements made by the Director of FHFA. I recommend that you reach out to FHFA’s media shop,” a spokesperson for the FHFA inspector general said in a statement. “FHFA OIG does not comment on the existence or non-existence of investigations conducted by this office.” FHFA did not return a request for comment.
Pulte has refused to say why his agency started its inquiry into Cook. There is widespread belief that the decision was politically motivated because Trump wants to remove her from the Federal Reserve board in order to stack it with his appointees.
Understanding the origins of Pulte’s inquiry is significant because misrepresenting occupancy on a mortgage application does not appear to be uncommon. Texas attorney general Ken Paxton, a Republican, and at least three members of Trump’s cabinet have listed multiple places as their primary residence, but have not faced the kind of scrutiny Cook has.
“Issues with Cook’s loan file weren’t caught in some routine audit or the like. No one ever goes back and examines loan applications on performing loans for occupancy fraud; that would entail expenses for no benefit,” Adam Levitin, a law professor at Georgetown University, wrote in a post on the blog Credit Slips. “Instead, the only way anyone would have noticed a problem with Cook’s loan application is that Pulte, as head of FHFA, directed Fannie or Freddie to pull her application. That is unheard of.”
Furthermore, Pulte had referred Cook for a criminal inquiry without presenting bona fide evidence of a crime.
“If Cook broke her promise about property use (and that isn’t clear), all that shows is a breach of contract,” Levitin wrote in a separate blog post in August. “For it to be fraud, she would have to have never intended to perform the promise in the first place. Pulte has no evidence whatsoever about Cook’s intent at the time she took out the mortgage. He hasn’t even shown a breach of contract, much less common law fraud, not to speak of a federal criminal law violation.”
Observers have said it was also unusual for a loan to attract scrutiny if it was being paid. “This case is unusual because I’m not aware of any actual loss that’s occurred. I’m assuming neither of these mortgages are in default. I’m assuming neither of the mortgages in question are underwater,” Cecala said.
After the financial crisis, Fannie Mae and Freddie Mac began conducting random sampling on performing mortgages to see if there were issues that could put them at risk. But in cases where they found issues, it was rare that they would seek criminal punishment for the borrowers.
“Normally in those cases – and again this is just precedent – Fannie and Freddie don’t get involved in the prosecution or even referring it to the justice department,” Cecala said. “They’ll just say, we see a problem with this mortgage and they just require the lender who made the loan to buy the loans back out of Fannie Mae and Freddie Mac securities.”
