I’ve been wondering, because I’m sure you have how long it will take the government to take action against the mortgage brokers responsible for at least part of the collapse of the sub-prime mortgage industry. After following several newspaper accounts for information this is 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 brokers don’t. The reason given for this is that they are not a lender but only a seller.
Watch for more fingers pointing and play the blame game. The United States Attorney for the Southern District of New York has announced that David Goldwasser, a mortgage and loan broker in Rockland County, has pleaded guilty to defrauding Key Bank of New York City and First Union Bank of Port Chester New York of nearly $500,000. Mr. Goldwasser admitted in court that he had applied for loans to other parties but also to companies that had a financial interest in them. He admitted that he had submitted untrue financial documents including fake tax returns and bank and brokerage statements. He could receive up to 30 years in prison as well as being asked to make restitution for the full amount.
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 feel you are not a candidate, read on.
Mr Milton is accused of not only stealing the identity of an unnamed individual but also of buying two homes in his name and leaving him more than $1 million dollars in debt. Now because of the announcement by the police another victim appeared. Some of them claim credit card fraud and other types of fraud. Police believe there could be hundreds of victims.
This type of scam happens every day in every city and can happen to you. Here’s what’s interesting, Mr. Milton was the director of a large mortgage company with offices throughout New York. Not the kind of guy anyone would suspect.
Regarding the potential for mortgage fraud by unscrupulous brokers, it remains to be seen the number of prosecutions. Don’t hold your breath on that one. Membership of all mortgage brokerage associations in the United States represents less than 10% of the entire industry. But it was still enough to wreak havoc in the banking world. Many of these brokers feel little or no responsibility as they combine some bad placing loans with the good ones seemingly feeling things will balance out. They took their money and moved on.
Although there are cases of outright fraud. The Orange County Register (California) recently ran an article about a mortgage broker submitting fake loan forms for a law Mexican family who don’t speak English. Now this family has lost their house and of course the mortgage broker who packed it up for them is nowhere to be found. A similar case is being investigated here in Phoenix. In both cases, the broker is only interested in their commission from the deal.
Now I know someone will say that the mortgage broker is the one who falls and the other person is the real bad guy. We have a mortgage broker on our website. Most mortgage brokers do a good job. All the brokers on our website are big companies that really care about the industry. It’s the little “Johnnie Come Lately’s” that cause the most trouble. They have no investment in the overall health of the industry, and are only out for “fast money” it looks like.
Everyone bears responsibility for the problem. A broker only sells what people have been asking for for years: the lowest payouts with little or no down payment. However just a few years ago it was IMPOSSIBLE to get this type of loan. It may be necessary for the banking industry to go back to the way they were 20+ years ago and need a down payment commensurate with the loans maybe more people won’t be able to own their own homes, but financial institutions won’t be in trouble either. The Republic of Arizona carried a headline article this morning (23/10/07) stating that Rep. Barney Frank, head of the House Financial Services Committee, has introduced legislation requiring the banking industry to do just that.
The real root cause of sub-prime is investment banking fraud. It’s bad business to design any product that encourages people to cheat. The scams (or irregularities in judgment if you prefer) are currently running into the hundreds of millions of dollars so they must be prosecuted and corrected in the author’s opinion before our country suffers the mother of all financial collapse.
Simply put the solution is very simple, maybe that’s why no one can see it. Systems like the ones we have today are all about pushing the boundaries of production and sales volume. It’s also about making credit available to people who 20 years ago couldn’t qualify. That part has worked. Home ownership has grown at such a huge leap that no one can argue is a really bad thing.
But as success grew, the industry was cautious and made some stupid decisions. Investment banking people and large subprime wholesalers have become careless and forget the lessons of the past in maintaining loan volumes and extending credit without following good business guidelines.
Risk in the credit business is easy to measure.
Mortgage is at least 5 or 6 thousand years old
The safe mortgage investment formula has been calculated for a long time
· The formula calculated at 80% Loan-to-value is a good risk if the borrower has reasonable credit.
· No more complex than that.
But the risk increases dramatically each time you change the formula.
· Boosting loans to value (Inflated prices are another matter)
· Sell loans with adjustable interest rates for the first five years just to make a sale
· Due to rising prices, long term loans are offered
The last thing is that people with very bad credit are offered credit for homes they can’t afford.
All of these factors combined have created a package that can explode in our faces. We must have a common sense approach.
Where will all this end? Time will answer.
References: Republic of Arizona, Washington Post, The OC Register