January 29, 2013 was a very bad day for Diane Hathaway. That was the day she pled guilty to bank fraud, committed in the course of securing her lender’s consent to a short sale of her Michigan manse in Gross Pointe Park. The home reportedly carried a $1.4 million mortgage with online bank, Ing Direct,[1] and was short selling for $850,000. Apparently, fearing that the lender would pursue them for the entire deficiency[2], she and her husband decided to claim financial hardship by concealing and shifting assets, including a second home in Florida.
Diane Hathaway was, among other things, a licensed real estate broker. She and her husband not only concealed the existence of the Florida home by transferring it to relatives, but Ms. Hathaway liquidated her retirement accounts to make it appear that she was in forma pauperis. As if that wasn’t enough, she lied to Ing, saying she was planning to retire, thus affecting her future income. She paid $10,000 on closing of the short sale and the bank agreed not to seek any more funds from her. Of course, after the short sale closed, she forgot to retire.
If that was all there was to this story, I guess this post would stop here. But wait! There’s more! You see, until January 21, 2013, shortly before her guilty plea, Diane Hathaway was a sitting Justice on the Michigan Supreme Court.[3] Her husband is [for the time being, at least] a practicing attorney.
According to one news report, “ING Direct determined it would have demanded $50,000 to $100,000 from Hathaway before the short sale if loan officers had known about the assets and available cash she concealed….”
She could now face up to 18 months in prison, and will undoubtedly lose her license to practice law. What will happen to her husband, who was not charged in the loan fraud case, has not been made known. But from where I sit, if they were both on the loan and/or the Florida title which was transferred, I suspect his license is in jeopardy as well.
Ruminations and Riffs – A Morality Play.
There are several ways to look at this story: Perhaps the first reaction might be: “What was this person thinking?! Did she really believe she could get away with this? How could anyone be so dumb as to jeopardize their entire career, reputation, and (possibly) freedom?”
But, there is another, perhaps secondary, reaction to the story: Stupidity is not a trait exclusively reserved to the chronically stupid. Smart people make dumb mistakes. But does this qualify as a “dumb mistake”? Speaking as a Majority of One, I believe both of these reactions, while perhaps natural, ignore a far deeper issue I will call a “tertiary reaction”: My thought is that if smart people can make dumb mistakes, then they really weren’t very smart in the first place. Clearly, (former) Justice Hathaway is a smart person. [Her bio appears here, in Wikipedia.] However, intentional acts of perjury and bank fraud can hardly be called “mistakes,” if we are to understand that word in its common parlance. Thus, it does not take much reflection to conclude that this ruse was much more than a dumb mistake by a smart person.
This particular deceit depended not upon a single, fleeting, error of judgment [e.g. “Maybe I can conceal my ownership of the Florida property”], but a series of interconnected deliberate and premeditated actions culminating in publicly recording a property transfer – not once, but twice[4] – patently lying on written financial disclosures to a federally regulated institution, and then certifying the truthfulness of the disclosures by signing her name “under penalty of perjury.”
In short, this little misstep by (former) Justice Hathaway was not simply akin to intentionally stepping on a banana peel, but having the supreme self-confidence to turn around and go back to step on it again and again and again, believing all the while that she would never slip.
The fatal flaw here was not stupidity; nor a transitory error of poor judgment. It was the vice – or sin, depending on one’s bent – of Pride, which is defined by C.S. Lewis as follows:
“Now what you want to get clear is that pride is essentially competitive – is competitive by its very nature – while the other vices are competitive so to speak, by accident. Pride gets no pleasure out of having something, only having more of it than the next [person].
***
Pride is spiritual cancer: it eats the very possibility of love, or contentment, or even common sense.”[5]
In his poem, Deadly Sins[6], he describes Pride:
“Pride that from each step, anew
Mounts again with mad aspiring,
Must find all at last, save you
Set too low for her desiring.”
Conclusion. It is entirely possible that my Ruminations and Riffs are totally incorrect. (Former) Justice Hathaway may have a perfectly reasonable explanation for what actually occurred:
- Perhaps she was ill when her law school professor gave the lecture on Legal Ethics.
- Perhaps she explained exactly what she was doing in a lengthy email to Ing Direct, but it hit the lender’s spam filter, and they never received it.
- Or perhaps there is a medical explanation; i.e. when she was born, her moral compass was inadvertently set a few clicks off True North.
Be that as it may, unfortunately, (former) Justice Hathaway never called me before throwing herself under the Bus of Bad Judgment. I would have told her that based upon my experience over the last three years, people far wiser,[7] wealthier, and better positioned than her, have had to accept some form of distressed housing event. They were all truthful and they all survived with their lives and reputations intact.
I would have told her that most banks, including Ing Direct, which has had its share of reputational embarrassments lately, are not in the business of fleecing distressed homeowners today – their fleecing days have passed. Today, banks would much rather get these non-performing assets off their books, than engage in protracted litigation chasing down a Michigan Supreme Court Justice for a deficiency liability. (In reality, it doesn’t make much difference if you’re a Justice or a Janitor. Most banks will consent to a short sale with little or no effort to collect the deficiency – assuming the short sale price reflects the current fair market value of the property.) And even if a bank wants a “contribution,” asking for it is dependent upon the borrower’s current balance sheet. No savings, no contribution. And when sought, the amount almost always reflects a significant discount off the nominal value of the promissory note.[8] So going to the extreme of committing bank fraud in order to “beef up” one’s Hardship Letter, is not only unwise, it’s unnecessary.
I would have informed (former) Justice Hathaway that the fact banks require Hardship Letters is simply because they [the banks] have deluded themselves into believing that something other than “negative equity” is necessary before they will deign to consent to a short sale. But, in reality, almost any event qualifies as a “hardship” today. [Most of life’s vagaries will suffice: E.g. starting a family; getting married; downsizing; retiring; intending to retire, etc., etc.] The sale price of the home, not the Hardship Letter, is the litmus test for short sale approval.[9] The letter is merely the metaphorical “ticket” you need to queue up in a bank’s short sale line.
Unfortunately for our wayward (former) Michigan Supreme Court Justice, her bogus Hardship will quite possibly result in some Hard Time.
[1] It was sold in 2011 to Capital One 360.
[2] That is, the difference between what the bank netted from the short sale proceeds, and what it was owed under the promissory note.
[4] Once, when she conveyed title to her relative before the short sale consent was obtained; twice when the recorded transfer occurred after her relative conveyed title back following closing of the transaction.
[5] Mere Christianity, Harper Collins, 2007 (p. 233)
[6] The Collected Poems of C.S. Lewis, Fount Paperbacks, 1994.
[7] Note: Wisdom should never be equated with intelligence. Wisdom requires that one understand the relationship between cause and effect, and then acts in accordance with that understanding. Some folks might call it “insight” or “foresight” but these words are woefully inadequate descriptors. Wisdom matures with age, like grapes to wine. As an aside, I believe it is difficult – if not impossible – to reach a wise decision that is not also a moral decision. Although both travel by different names, they ultimately arrive at the same destination, albeit not always at the same time. Wisdom is the product of keen observation accumulated over a lifetime. Moral decisions do not depend upon either observation or the lapse of time; for those with a moral compass pointing True North, a moral decision can [not always] occur long before one realizes that it was also a wise decision. And for the Truly Wise, the reverse is equally correct.
[8] Although Ing reportedly said it would have sought $50,000 – $100,000 from her as a “contribution” toward their deficiency, if true – which I doubt – that figure represents a mere 9% – 18% recovery, which is a pretty big discount for a $550,000 “haircut.” The reasons I doubt the contribution figures of $50,000 – $100,000, are several: Certainly, Ing did not want to be heard to say they would have made no effort to recover at least some of the deficiency. What kind of message would that send to their borrowers already queuing up for a short sale? But this was a sitting judge! Does anyone really believe Ing would have held her feet to the fire, if push came to shove over the amount of her “contribution”? Who knows when Ing would need a “favor” returned? Besides, it already appears from at least one news report, that Ing has publiclly stated that its actual loss was “$90,000 at the most….” Since federal sentencing guidelines are driven by the amount of loss suffered in a bank fraud, it appears Ing has already done the former justice a big favor. Her plea deal capped her possible sentence to 18 months. Reporting a $550,000 loss could have resulted in the former justice remaining behind bars for many years.
[9] How many short sales have you ever heard of where the bank rejects a short sale, saying: “Your Hardship Letter isn’t hard enough. When your life really starts to circle the drain, get back to us.”
