I have been wondering, as I am sure you have, how long it would take for the government to take action against the mortgage brokers who are responsible for at least part of the collapse of the subprime mortgage industry. After following various newspaper reports to get this information, it is finally happening, and there will be more to come. The problem in this market is the lack of regulation of mortgage brokers. We regulate banks, savings and credit companies and the like, but brokers are not. The reason given for this is that they are not the lenders, but only the sellers.
Be on the lookout for more finger pointing and playing the blame game. 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 applied for loans for other parties, but also for a company in which he had a financial interest. He admitted that he had submitted false financial documents, including false tax returns and bank and brokerage statements. You could receive up to 30 years in prison and could be required to pay the full amount back.
Another pending case of a slightly different kind concerns a man referred to as a “rogue mortgage broker” from Port Washington NY. Jacob Milton is accused of stealing someone else’s identity. Identity theft is the fastest growing crime wave according to the FBI and the US Postal Service If you think you are not a candidate, read on.
Mr. Milton is accused not only of stealing the identity of the unidentified individual, but of purchasing two houses in his name and leaving him in debt of more than $ 1 million. 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 are possibly 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 throughout New York. He’s not exactly the type of guy 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. Membership of all mortgage broker associations in the United States represents less than 10% of the entire industry. But that’s still enough to wreak havoc in the banking world. Many of the brokers feel little or no responsibility because they bundle the loans by placing some bad with the good, seemingly feeling that things will balance out. They take your money and move on.
However, there have been cases of outright fraud. The Orange County (California) Registrar recently published an article about a mortgage broker who submitted fraudulent loan forms for a legal Mexican family who did not speak English. Now this family is losing their home, and of course the mortgage broker who set 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 that someone is going to say that the mortgage brokers are to blame and that someone else is really the bad guy. We have mortgage brokers on our website. Most mortgage brokers do a great job. All of the brokers on our website are major companies that really care about the industry. It’s the little “Johnnie Come Lately’s” who have caused the most trouble. They have no investment in the overall health of the industry, and only seek the “Easy money” It seems.
Everyone has some responsibility for the problem. A broker only sells what people have been asking for for years – the lowest payment with little or no down payment. However, only a few years ago it was IMPOSSIBLE to obtain this type of loan. It may be necessary for the banking industry to go back to the way it did more than 20 years ago and require a down payment commensurate with the loan, possibly more people could not own their own homes, but financial institutions would not. in trouble either. The Republic of Arizona published a lead article this morning (10/23/07) indicating that Rep. Barney Frank, the head of the House Financial Services Committee, introduced a bill to require the banking industry to do precisely that.
The true root cause of subprime mortgages is investment bank fraud. It is bad business to design any product that encourages people to cheat. The fraud (or judgments if you prefer) this time is in the hundreds of millions of dollars so it must be prosecuted and fixed in the opinion of this author before our country suffers the mother of all financial collapse.
Simply put, the solution is so simple, maybe that’s why no one can see it. The system as we have it now is about pushing the limits of production and sales volume. It’s also about making credit available to people who 20 years ago couldn’t qualify. 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 dumb decisions. The folks in investment banking and the big sub-prime wholesalers were neglected and forgot the past lessons on how to maintain loan volume and extend credit without adhering to good business guidelines.
Risk in the loan 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 80% loan-to-value formula 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 the inflated prices, longer-term loans are offered.
The last thing is that people with very bad credit are offered home credit that they cannot pay.
All of these factors combined have created a package that can blow up in our face. We must have a common sense approach.
Where will all this end? Time will tell.
References: The Arizona Republic, Washington Post, The OC Register
