I have been wondering, as I am sure you have as to how long it would take the government to take action against the mortgage brokers who are responsible for at least a portion of the collapse of the sub-prime mortgage 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 companies and the like but the brokers are not. The reason given for this is that they are not the lenders but only sales people.
Watch for more finger pointing and playing the blame game. The United States Attorney for the Southern District of New York has announced that a David Goldwasser, a mortgage and loan broker in Rockland County has pled guilty to defrauding Key Bank of New York City and First Union Bank of Port Chester New York of almost $500,000. Mr. Goldwasser admitted in court that he had submitted application for loans for other parties but also for a company that he had a financial interest in. 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 as well as be required to make restitution for the full amount.
Another case pending of a slightly different type concerns a man referred as being a “rogue mortgage broker” of Port Washington NY. Jacob Milton is accused of stealing another person’s identity. Identity theft is the fastest growing crime wave according to both the FBI and the U,S, Postal Service If you think you are not a candidate read on.
Mr. Milton is accused not only of stealing the identity of the unnamed individual but of buying two homes in his name and leaving him more than $1 million dollars in debt. Now due to the announcement by the police other victims are emerging. Some of these are claiming 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 could happen to you. Here’s what is interesting, Mr. Milton is the director of a major mortgage company with offices throughout New York. Not exactly the kind of guy anyone would suspect.
As to potential mortgage fraud by unscrupulous brokers it remains to be seen as to the amount of prosecution. Don’t hold your breath on that one. The membership of all the mortgage broker associations in the United States represent 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 the loans placing a few bad ones in with the good ones apparently feeling things will balance out. They take their money and move on.
There have been instances of outright fraud though. The Orange County Register (California) ran an article recently 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 packaged it for them 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 mortgage brokers are the fall guys and 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 major companies who really care about the industry. It’s the small “Johnnie Come Lately’s” who have caused the most problems. They have no investment in the overall health of the industry, and are only out for the “fast buck” it seems.
Everyone bears some responsibility for the problem. A broker only sells what the people have been asking for years: the lowest payment with little or no down payment. However just a few years back it was IMPOSSIBLE to get this type of loan. It may be necessary for the banking industry to go back to the way they did 20+ years ago and require a down payment commensurate with the loan possibly more people would not be able to own their own homes, but the financial institutions wouldn’t be in trouble either. The Arizona Republic carried a lead article this morning (10/23/07) stating that Rep. Barney Frank the head of the House Financial Services Committee has introduced a bill to require the banking industry to do just that.
The real root cause of sub-prime is investment-banking fraud. It is bad business to design any product that encourages people to cheat. The fraud (or lapses in judgment if you prefer) this time around is in the hundred of millions of dollars so it must be prosecuted and fixed in this author’s opinion before our country suffers the mother of all financial collapses.
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 limits of production and volume sales. Also it’s about making credit available to people who 20 years ago couldn’t qualify. That part has been successful. Home ownership has grown by giant leaps that no one can argue is a totally bad thing.
But as success grew the industry threw caution to the wind and made some foolish decisions. The investment banking folks and the large subprime wholesalers got careless and forgot past lessons of 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 computed at 80% Loan-to-value is a good risk if the borrower has reasonable credit.
· It’s no more complex than that.
But risk increases dramatically every time you change the formula.
· Increase the loan to value (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 people with extremely poor credit being offered credit on homes they cannot afford.
All these factors combined have made 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