FILE PHOTO: Lisa Cook testifies before a Senate Banking Committee hearing on her nomination to be a member of the Federal Reserve Board of Governors (for a second term), on Capitol Hill in Washington, U.S., June 21, 2023. REUTERS/Jonathan Ernst/File Photo

By Sarah N. Lynch

(Reuters) -The U.S. Justice Department has launched a criminal mortgage fraud probe into Federal Reserve Governor Lisa Cook and has issued grand jury subpoenas out of both Georgia and Michigan, according to documents seen by Reuters and a source familiar with the matter.

The investigation, which followed a criminal referral from Federal Housing Finance Agency Director Bill Pulte, is being conducted by Ed Martin, who was tapped by Attorney General Pam Bondi as a special assistant U.S. attorney to assist with mortgage fraud investigations involving public officials, along with the U.S. Attorneys' offices in the Northern District of Georgia and the Eastern District of Michigan, according to the person, who spoke anonymously since the matter is not public.

Pulte, who was appointed by Trump, has accused Cook of committing fraud by listing more than one property as a primary residence when she applied for mortgages, potentially to secure lower interest rates. Cook owns properties in Michigan, Georgia and Massachusetts.

Trump terminated Cook over Pulte's allegations, prompting her to file a lawsuit challenging his effort to oust her.

Cook's lawyer, prominent Washington attorney Abbe Lowell, said the Justice Department was scrambling to invent new justifications for Trump's overreach in firing the Fed governor.

"He wants cover, and they are providing it. The questions over how Governor Cook described her properties from time to time, which we have started to address in the pending case and will continue to do so, are not fraud, but it takes nothing for this DOJ to undertake a new politicized investigation, and they appear to have just done it again," Lowell said.

The case, which will likely end up before the U.S. Supreme Court, has ramifications for the Fed's ability to set interest rate policy without regard to politicians' wishes, widely seen as critical to any central bank's ability to keep inflation under control.

Trump has demanded that the U.S. central bank cut rates immediately and aggressively, berating Fed Chair Jerome Powell for his stewardship of monetary policy. The central bank is expected to deliver a rate cut at its September 16-17 meeting.

In one of her recent legal filings challenging Trump's actions, Cook said she listed mortgages on three properties on forms submitted to the White House and U.S. Senate in the vetting process for her appointment to the Fed in 2022. Any inconsistencies were known when she was confirmed and cannot give Trump grounds to fire her now.

Mortgages obtained for primary residences and second homes can come with cheaper financing than those for investment properties, which have a higher default rate and are typically subject to tighter underwriting by lenders.

The rates that Cook obtained on her mortgages were higher than the prevailing national averages at the time. While it is not known when Cook locked in her mortgages, borrowers typically fix their rate a month or two before the purchase.

Cook is the third public official to be targeted in a criminal investigation over mortgage fraud allegations.

Martin, who also presides over the "Weaponization Working Group" and serves as pardon attorney, is also pursuing criminal probes into Democratic U.S. Senator Adam Schiff as well as New York Attorney General Letitia "Tish" James. There are also grand juries convened in those two cases, which started prior to Martin's new appointment as a special assistant U.S. attorney, according to the source and documents seen by Reuters.

Although the Justice Department is reviewing all three mortgage cases involving Schiff, James and Cook, proving criminal liability will be difficult, a person familiar with the matter told Reuters. One challenge is that in many instances, even if a person wrongfully claims a home to be a primary residence, the mortgage company is often aware of all the facts and does not believe the home is being used as such. Mortgage fraud, the person added, is about duping a bank into providing better terms for a loan.

(Reporting by Sarah N. Lynch in Washington; additional reporting by Shivani Tanna in Bengaluru; Editing by Chizu Nomiyama, Paul Simao and Alistair Bell)