The U.S. Attorney for the Western District of Wisconsin announced a major conviction today in the ongoing criminal prosecution of the people who brought the economy to its knees four years ago via a toxic campaign of mortgage fraud. Meet James Wazlawik of Prescott, Wisc.

Wazlawik is 48 years old. He is married with three sons, one of whom was born with Down Syndrome and required heart surgery not long after he was born. Today he was sentenced to one day in jail and three years supervised release after pleading guilty to "making a false statement to a bank in connection with a home equity loan." His crime: When he applied for a $150,000 home equity loan from Citibank in 2005, he put his signature to an "income verification form" claiming that his monthly income was $8,500. In fact, it was substantially less than that.

Why would someone claim, falsely, to earn more income than they in fact do when applying for a mortgage? To get the loan, obviously. But here's how Wazlawik put it in a sentencing letter to U.S. District Court Judge Lynn Adelman:

So Wazlawik, surprised to find that "a person could get a loan without a consistent income," took advantage of a loan officer's offer and signed on the dotted line. But why would a loan officer encourage someone without consistent income to obtain a home equity loan?

Probably because Citibank, the victim in this case—the U.S. Attorney's press release notes that the bank "lost $146,829 when Wazlawik was unable to repay the loan"—spent most of the last decade feverishly buying, packaging, and reselling mortgages that it knew would never be repaid. In 2012, Citigroup paid $158 million to the federal government to settle claims that in order to obtain insurance from the Federal Housing Administration, it systematically lied about the likelihood its loans would be repaid—sort of like providing false information on a loan application.

The government said Wednesday that CitiMortgage had certified 30,000 mortgages for insurance provided by the Federal Housing Administration and submitted many certifications that were “knowingly or recklessly false.”

More than a third of those mortgage loans went into default, resulting in millions of dollars in losses for the government because of the insurance claims.

Preet Bharara, the United States attorney in Manhattan, said lenders for too long viewed “insurance of their mortgages like they were playing with house money.”

Justice Department prosecutors calculated that 30 percent of Citibank's FHA-insured loans went into default. That's $1.44 billion dollars worth of bad loans. For purposes of comparison, Wazlawik's loan (which may or may not have been FHA-insured) constituted 0.01 percent of that amount.

To hear Bloomberg describe it, back in 2005 Citigroup was hungrily scooping up as many mortgages as it could find without regard to the likelihood that they may be paid back. Almost as if they were, as a matter of corporate policy, soliciting people to fraudulently apply. Or soliciting mortgage brokers to find people to do so. Maybe the cousin of a friend.

Investor demand was so strong for mortgages packaged into securities that Citigroup couldn’t process them fast enough. The Citi stamp of approval told investors that the bank would stand behind the mortgages if borrowers quit paying.

At the mortgage-processing factory in O’Fallon, Hunt was working on an assembly line that helped inflate a housing bubble whose implosion would shake the world. The O’Fallon mortgage machinery was moving too fast to check every loan, Hunt says.

By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures, she says. It was Hunt’s job to identify these defects, and she did, in regular reports to her bosses.

In 2005, though it lost $146,829 on the mortgage it issued to Wazlawik as part of its aggressive, overt campaign of purposefully and knowingly issuing mortgages to people who couldn't repay them, Citibank made $19.8 billion in profit. Much of that profit came in the form of fees from packaging and selling loans like Wazlawik's. But like Wazlawik, Citibank failed to anticipate the economy turning sour. It has since been the recipient of more than $476.2 billion in cash and guarantees from American taxpayers, making it the single largest recipient of federal bailout funds after the economy collapsed as a direct result of what Citibank did with loans like Wazlawik's.

To date, no one in the executive ranks of Citibank—or any of the other Wall Street institutions that solicited and profited from loans like the one Citibank issued to Wazlawik—have been criminally targeted by the Department of Justice.

But Wazlawik now has a felony conviction on his record, will spend a humiliating day in jail, and will spend the next three years at risk of going to prison if he violates the terms of his release. You can sleep easy tonight, America, knowing that your Department of Justice is diligently going after those criminals who would do us harm.

[Image by Jim Cooke]