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Insider among many who experts say played roles in housing crisis

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Sunday, Feb. 5, 2012

Tino Martinez admits he helped approve billions of dollars in questionable home loans even when he thought they "would result in default and foreclosure."

After Martinez was hired as his company's top Midwest executive, its Chicago metro operation went from 6,000 loan applications in 2003 to more than 100,000 three years later. Another company's Midwest operations he oversaw loaned $130 million a month to risky borrowers.

Now that many of those loans went bad as part of the nation's home mortgage crisis, he wants to make good. Martinez filed a whistleblower lawsuit in Cook County, Ill., to get money for Chicago and Illinois taxpayers -- and stands to keep 15 percent to 30 percent of any settlement or verdict for himself.

"It's kind of a retroactive acknowledgement that something was wrong," said Courtney Boho Marincsin, a lawyer for Martinez who declined to make him available for comment. "In the midst of it, he didn't realize something was wrong and at the end, it was too late. Hindsight is 20/20."

Welcome to the era of mortgage fraud whistleblowers.

Federal rules that took effect in 2010 reward insiders for presenting evidence of fraud and protect them from getting fired when they do. As a result, experts told the Tribune-Review, more whistleblowers are coming forward -- as many others work behind the scenes -- to help prosecutors seeking a $25 billion settlement with several large lenders.

"Banks hit a rock every bit as real as that rock the Italian cruise liner hit," said Patrick Burns, spokesman for Taxpayers Against Fraud, a Washington whistleblower advocacy group. "If banks thought they could sail past it, they were wrong."

Martinez's lawsuit closely follows other, unrelated financial industry litigation in which whistleblowers claim illegal foreign currency exchange profits by Bank of New York Mellon and State Street. Those banks are fighting the allegations.

Martinez's lawsuit lays out a step-by-step process of widespread mortgage fraud that involved bad loans worth billions of dollars in Chicago and Illinois. He names six banks: Citigroup, Deutsche Bank, The Goldman Sachs Group, JP Morgan Chase, Merrill Lynch and Morgan Stanley. Spokesmen for each bank declined to comment on pending litigation.

The lawsuit, filed in 2010 in Cook County, Ill., but held under seal until last month, was brought on behalf of Chicago and Illinois. Martinez says taxpayers were hurt because the city and state lost money on programs designed to help home buyers.

The public had to provide counseling to people who lost homes, and additional fire and police services in areas where borrowers defaulted and abandoned properties, the suit says.

The lawsuit doesn't say how much Martinez profited from his bad loan recommendations.

Prosecutors in those jurisdictions have declined to take over the lawsuit. The Illinois attorney general's office wouldn't say why. The Chicago law department did not return a phone call.

"People who applied for mortgages trusted (Martinez) and probably were under the impression they could pay back the mortgages," said Virginia Gerde, business ethics professor at Duquesne University. "He did not follow through on his professional responsibilities and is now coming back to say the banks should not have given him the money. That's just trying to pass on the responsibility to somebody else."

Whistleblower lawsuits can be lucrative for tipsters with evidence that the home mortgage crisis hurt the public, said Stephen Kohn, executive director of the National Whistleblowers Center in Washington. Public pension funds lost billions of dollars by investing in mortgage-backed securities.

"If you think about the real losers, it wasn't just the people who lost their homes, it was the taxpayers who footed some of the bills and the investors in some of these mortgages who really got harmed," Kohn said.

The companies that employed Martinez -- both out of business -- borrowed money from banks, made loans to home buyers and then sold the loans to the banks. Martinez's suit says the banks ultimately were responsible because they gave seed money to his employers and purchased their loans.

"Martinez made exceptions to loan requirements whenever he thought the Wall Street banks or other investors would buy the loans," the lawsuit says.

Martinez must have figured the banks knew what they were doing, said Sherman Marek, another of his lawyers.

"I don't know what his thought process was," Marek said. "In a situation like that, I would assume that people know something that I don't as to how this all works."

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