There's a potentially fatal flaw in the mortgage fraud indictment against New York Attorney General Letitia James, according to some legal experts.
The Democratic attorney general who successfully sued Donald Trump for business fraud before he returned to the White House was charged with two counts of financial fraud in connection with her 2020 purchase of a three-bedroom house in Virginia.
But Politico has obtained her signed "Second Home Rider" and other mortgage documents that it reported reveal some glaring issues with the allegations.
"The mortgage contract James signed does not prohibit renting out the house, according to Politico’s review of the contract and legal and real estate experts," the website reported. "In fact, the key language in the contract expressly allows renting under certain conditions."
Lindsey Halligan, the president's handpicked U.S. Attorney for the Eastern District of Virginia, alleges that James signed a contract that prohibits her from renting the house but did so anyway, which the federal prosecutor says violated the terms of her loan terms, as well as federal bank and mortgage fraud laws.
But Politico obtained those mortgage documents, including her signed 'Second Home Rider,' from the Norfolk Circuit Court Clerk’s Office, and found the charges could come up short at trial.
"The rider, a standard addendum to mortgage contracts developed by Fannie Mae and Freddie Mac, requires James to 'maintain exclusive control over the occupancy of the Property, including short-term rentals,'" Politico reported. "The idea is to restrict buyers’ ability to use a 'second home' as an 'investment property' — by hiring a management company and using it primarily to generate income — after obtaining the lower loan rates associated with houses purchased as vacation or 'second' homes."
"That final, three-word phrase in the rider — 'including short-term rentals' — could be decisive," the report added. "In plain English, the provision means that James is explicitly permitted to rent the place out periodically, so long as she remains in charge of matters such as the number of tenants and how they use the property, legal experts say. The contract’s restrictions bar James from giving 'a management firm or any other person or entity any control over the occupancy or use of the property.'"
Halligan's indictment accuses James of using the Norfolk house “as a rental investment property, renting the property to a family of (3),” but does not allege that she ever hired a property-management company or any other third party to oversee the home.
“James filed Schedule E tax form(s), under penalties of perjury, treating the … Property as rental real estate, reporting fair rental days, zero personal use days, thousand(s) of dollars in rents received, and claiming deductions for expenses relating to the property, further contradicting the second home classification,” Halligan wrote in the indictment.
The New York Times and ABC News have each reported that James' grandniece, Nakia Thompson, has lived largely or entirely rent-free in the house for five years along with her children, and the Oct. 9 indictment is vague about whether the attorney general has actually received rental income from the property but did report “thousand(s) of dollars in rents received” for tax purposes – but experts say that's not enough to establish criminal fraud.
“The core of the allegations is that James knowingly lied that she was not going to rent,” said Georgetown Law professor Adam Levitin. “The problem is there is absolutely no statement ever made by James that she would not rent out the property — the contract language does not prohibit rentals, it prohibits rentals via a third party.”
Eric Forster, a real estate consultant who frequently serves as an expert witness in mortgage fraud cases, agreed the contract does not prohibit renting the house.
“There’s nothing in the Second Home Rider that says that when you’re not using [the home] for vacation that it must be vacant the rest of the time,” Forster said.
The government-controlled Fannie Mae and Freddie Mac lenders have long taken a position that aligns with Levitin's and Forster's interpretation, stating in its 2019 guidance on Second Home Riders “that the property may be rented out on a short-term basis," and the $1,350 in rental income she reportedly collected suggests she may have entered a short-term agreement that does not violate mortgage or federal law.
“The indictment fails to acknowledge that the Second Home Rider permits rentals with certain conditions nor that this view of the Second Home Rider is fully consistent with Fannie Mae’s own interpretive guidelines on it,” said Benjamin Klubes, a former acting general counsel at the Department of Housing and Urban Development during the Biden administration.