NORFOLK, Virginia — The politically charged mortgage fraud indictment against New York Attorney General Letitia James accuses her of lying to lenders in order to get a favorable loan rate on a second home. She then rented the property, the indictment alleges, in violation of the terms of the loan she obtained.
But there’s a glaring issue with that accusation: 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. In fact, the key language in the contract expressly allows renting under certain conditions.
That potentially fatal flaw in the indictment is one among several problems critics have identified in the case against James, a Democrat who sued Donald Trump and secured a multi-million dollar judgment that was later thrown out. James’ allies have criticized the indictment as political vengeance.
In a five-page indictment, James is charged with two counts of financial fraud in connection with her 2020 purchase of a three-bedroom house in Norfolk, Virginia. Lindsey Halligan, Trump’s handpicked top federal prosecutor in the Eastern District of Virginia, alleges James signed a “Second Home Rider” contract that prohibits renting the property. James then rented out the home anyway, in violation of those loan terms and federal bank and mortgage fraud laws, according to the indictment.
POLITICO obtained James’ mortgage documents, including her signed “Second Home Rider” from the Norfolk Circuit Court Clerk’s Office. 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.” 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. 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 has alleged that James used the house “as a rental investment property, renting the property to a family of (3),” but not that she ever hired a property-management company or some other third party to oversee the Norfolk home.
The White House, when asked for comment, referred POLITICO to the Justice Department. The Justice Department declined to comment.
“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.
James’ grandniece, Nakia Thompson, has lived in the house for five years along with her children, according to The New York Times. The New York Times and ABC News have each reported that Thompson has lived there largely or entirely rent-free. POLITICO has not independently confirmed whether Thompson paid rent or for how long.
Thompson declined to speak with a POLITICO reporter who earlier this month knocked on the door of the house.
The Oct. 9 indictment, for its part, is vague about the allegations that James received rental income from the property. It says only that she reported “thousand(s) of dollars in rents received” for tax purposes.
James’ 2020 tax return reflected $1,350 in rental income, which was paid to cover the cost of utilities, according to ABC News.
Even if Thompson did pay rent as the indictment suggests, that fact alone does not establish criminal fraud, three experts in contracts, finance and housing law told POLITICO.
“The core of the allegations is that James knowingly lied that she was not going to rent,” Adam Levitin, a Georgetown Law professor who specializes in banking and finance law, said after reviewing James’ Second Home Rider. “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 has served as an expert witness in mortgage fraud cases for nearly 30 years, agreed that the contract does not prohibit renting altogether. Forster offered expert testimony in a similar mortgage fraud case against former Baltimore state’s attorney Marilyn Mosby, a Democrat. “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,” he said.
The longstanding position taken by government-controlled Fannie Mae and Freddie Mac also supports Levitin and other experts’ interpretation: Fannie and Freddie updated the Second Home Rider in April 2019 specifically to clarify “that the property may be rented out on a short-term basis,” according to 2019 guidance from Freddie Mac.
The $1,350 in rental income that James reportedly collected suggests she may have made the sort of short-term agreement that would not violate the terms in her mortgage contract nor the federal fraud statutes she is charged under.
“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.
After updating their guidance in 2019, a Fannie Mae spokesperson explained that the revision was triggered by confusion from lenders and homeowners who interpreted the contract as barring renting altogether. In reality, the spokesperson said at the time, renting was always allowed.
James made her first courtroom appearance on Friday in Norfolk, and pleaded not guilty to the federal charges. Her lead attorney Abbe Lowell told U.S. District Judge Jamar Walker that he plans to argue that the indictment does not actually allege that James took actions amounting to bank and mortgage fraud — which suggests that her defense team will rely on the prevailing interpretation to argue that no contracts or laws were violated, even if James had in fact rented out her place.
Lowell did not respond to a request for comment.
Fannie Mae did not respond to questions about the contract language. The Federal Housing Finance Agency also did not respond to inquiries about the Second Home Rider.
The director of the FHFA, Bill Pulte, wrote a criminal referral to the Justice Department in April alleging that James may have violated federal fraud statutes in relation to a separate property that she purchased in 2023. James was not indicted based on those allegations, although the charges based on her 2020 home purchase followed several months later.
James’ Second Home Rider also requires her to “keep the Property available primarily as a residence for [her] personal use and enjoyment for at least one year.” According to Freddie Mac’s 2019 guidance, that means keeping the home available for more than half of the year. Current guidance from Fannie Mae requires the owner of a second home to simply occupy the property “for some portion of the year.”
The IRS considers a dwelling to be a “residence” if the owner uses it for personal purposes for either 14 days a year, or for at least 10 percent of the total number of days that the unit is rented out to others. Personal purposes include any day the dwelling is used by a family member or anyone else who does not pay a fair or typical rental price, according to the IRS.
The IRS’ guidance is helpful in interpreting the terms in James’ Second Home Rider, although it isn’t conclusive because the contract does not directly reference or cite the IRS’ documents, Klubes said. “It does further complicate the government proving a knowing and willful violation of the law with this type of guidance out there that may provide support for how James handled the property,” Klubes added.
Other terms in the contract, such as “available” and “occupy” are not well-defined, and are subject to multiple reasonable interpretations. The fact that those terms have not been conclusively interpreted by courts also works in James’ favor, Levitin said.
For now, the two sides in the case will begin with arguments in November over whether Halligan was illegally appointed to her position. The judge will also hear similar arguments from James Comey, the recently indicted former FBI director who publicly announced an investigation in 2017 into connections between Trump’s campaign and Russia.
Democrats have criticized both cases, pointing to the broader pattern of prosecutions against Trump’s perceived political enemies that emerged after the president spent months, sometimes years, publicly urging the Justice Department to prosecute them.
