I’ve been wondering, as I’m sure you have too, how long it would take for the government to crack down on the mortgage brokers who are responsible for at least a part of the collapse of the subprime industry. After following several newspaper accounts for this information, it’s finally happening, and there will be more to come. The problem with this market is the lack of regulation of mortgage brokers. We regulate banks, savings and loan associations and the like, but not brokers. The reason given for this is that it is not the lenders but only sellers.
Be on the lookout for more accusations and blame games. The United States Attorney for the Southern District of New York announced that David Goldwasser, a mortgage and loan broker in Rockland County, pleaded guilty to defrauding Key Bank of New York City and First Union Bank of Port Chester New York for almost $500,000. Mr. Goldwasser admitted in court that he had submitted loan applications for other parties, but also for a company in which he had a financial interest. He admitted that he had submitted financial documents that were false, including false tax returns and bank and brokerage statements. He could receive up to 30 years in prison and be required to make restitution in full.
Another pending case of a slightly different type concerns a man referred to as a “rogue mortgage broker” from Port Washington NY. Jacob Milton is accused of stealing another person’s identity. Identity theft is the fastest growing crime wave according to the FBI and the US Postal Service. If he thinks he’s not a candidate, he reads on.
Mr. Milton is accused of not only stealing the identity of the unidentified person, but also buying two houses in his name and leaving him in debt of more than $1 million dollars. Now, due to the police announcement, other victims are emerging. Some of these claim credit card fraud and other types of fraud. Police believe there could possibly be hundreds of victims.
This type of fraud happens every day in every city and it could happen to you. Here’s what’s interesting, Mr. Milton is the director of a major mortgage company with offices all over New York. He’s not exactly the type of person anyone would suspect.
As for possible mortgage fraud by unscrupulous brokers, the amount of the prosecution remains to be seen. Don’t hold your breath on it. The membership of all mortgage broker associations in the United States represents less than 10% of the entire industry. But that’s still enough to create havoc in the banking world. Many of the brokers feel little or no responsibility because they bundle loans by placing some bad ones with the good ones, apparently feeling that things will even out. They take your money and move on.
However, there have been cases of outright fraud. The Orange County (California) Record recently published an article about a mortgage broker who submitted fraudulent loan forms for a legal Mexican family who couldn’t speak English. Now this family is losing their home, and of course the mortgage broker who packed it up is nowhere to be found. A similar case is being investigated here in Phoenix. In both cases, the brokers were only interested in their commission from the deal.
Now I know someone is going to say that the mortgage brokers are the scapegoats and that someone else is really the bad guy. We have mortgage brokers on our website. Most mortgage brokers do a great job. All the brokers on our website are top companies that really care about the industry. It’s the little “Johnnie Come Lately’s” that have caused the most trouble. They have no investment in the overall health of the industry, and are only out for the “Easy money” seems.
Everyone has some responsibility for the problem. A broker only sells what people have been asking for for years: the lowest payout with little to no money down. However, a few years ago it was IMPOSSIBLE to obtain this type of loan. The banking industry may need to go back to the way it did over 20 years ago and require a down payment commensurate with the loan, more people might not be able to own their own homes, but financial institutions wouldn’t be in trouble neither. The Arizona Republic ran a lead story this morning (10/23/07) stating that Rep. Barney Frank, the head of the House Financial Services Committee, introduced a bill to require the banking industry to precisely that.
The real root cause of subprime mortgages is investment banking fraud. It’s bad business to design any product that encourages people to cheat. The fraud (or lack of judgment if you prefer) this time is in the hundreds of millions of dollars so it must be prosecuted and repaired in this author’s opinion before our country suffers the mother of all financial collapses.
In a nutshell, the solution is so simple, maybe that’s why no one can see it. The system as we have it now is all about pushing the limits of production and sales volume. It’s also about making credit available to people who couldn’t qualify 20 years ago. That part has been successful. Home ownership has grown by leaps and bounds that no one can argue is a totally bad thing.
But as success grew, the industry shed its caution and made some foolish decisions. The investment bankers and big subprime wholesalers have neglected and forgotten the lessons of the past about maintaining loan volume and extending credit without adhering to good business guidelines.
Risk in the lending business is easy to measure.
Mortgages are at least 5 or 6 thousand years old
A safe mortgage investment formula was calculated a long time ago
The formula calculated at 80% loan to value is a good risk if the borrower has reasonable credit.
It is not more complex than that.
But the risk increases dramatically every time the formula changes.
Increase the value of the loan (inflated prices are another problem)
Sell adjustable-rate loans for the first five years just to make a sale
Due to inflated prices, longer term loans are offered.
The latest is people with extremely poor credit being offered credit on houses they can’t afford.
All of these factors combined have created a package that can blow up in our faces. We must have a common sense approach.
Where will all this end? Time will tell.
References: The Arizona Republic, Washington Post, The OC Register