Should Homeowners Be Jailed For Taking Out Bad Loans?

Should Homeowners Be Jailed For Taking Out Bad Loans?

To date, not a single mortgage lender has been sent to prison for their role in the financial crisis. At least one borrower hasn't been so lucky.

Charlie Engle, the drug addict-turned-ultra-marathoner profiled by New York Times columnist Joe Nocera this week, is currently serving a 21-month sentence in minimum-security prison for exaggerating his personal income on two so-called liar's loans, neither of which required additional verification.

"Everybody was doing it because it was simply the way it was done," Mr. Engle was caught saying on the wiretap that led to his convinction, Nocera notes. "That doesn't make me proud of the fact that I am at least a small part of the problem."

Engle's punishment stands in stark contrast to that of the Countrywide chief executive Angelo Mozilo, who personally pulled in millions of dollars from his company's embrace of low-documentation loans like Engle's. As a part of a deal with the Securities and Exchange Commission to settle fraud charges, Mozilo did fork over $67.5 million to the government for his role in the subprime crisis, no more than a manageable fraction of his overall profits.

Engle wasn't so lucky. Besides his imprisonment, he found himself forced to pay $262,000 in restitution to Mozilo's Countrywide Financial, by then owned by Bank of America.

Increasingly aggressive tactics have been implemented to recoup questionable loans since the subprime bubble popped. The debt-collection industry, for one, has made use of arrest warrants to obtain money owed, with the Wall Street Journal recently reporting that "20 judges across the nation said the number of borrowers threatened with arrest in their courtrooms has surged since the financial crisis began." One in three states, the WSJ noted, now allow the use of these "debtor's prisons" for those borrowers unwilling to repay loans.

Recouping investor losses has been the primary focus of the Security and Exchange Commission since the crisis first unfolded, with Citigroup fined $75 million for misleading investors last year. Goldman Sachs also agreed to pay a $550 million fine -- $300 million to the government, $250 million to investors -- after the SEC sued them for mortgage-related securities fraud.

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