The Mortgage Witch Hunt

Just in time for Halloween, officials from various levels of government are gathering together over the [photopress:salemexamof.jpg,thumb,alignright]frightful happenings going on in the mortgage industry. Home values were going down, mortgage payments were on the rise and consumers did not contact their mortgage professional for advice. Some were provided opportunities to own homes by using “non-traditional

92 thoughts on “The Mortgage Witch Hunt

  1. Good Morning!
    I’m very happy to be one of the first to comment. Large Corporate Lenders such as CitiBank, and Chase were allowed to raise credit card interest rates up to 32%. My wife had one of these cards and I was shocked to see the interest rate. I was told she did not make her payments on time. She paid the bill every month on the first with the due date by the fourteenth. It took the card company over two weeks to process a payment, we cancelled the card.
    That same company ended up owning a second mortgage on one of our properties. The rate was a nine per cent second on a non owner occupied loan. We began getting all kinds of solicitations about consolidating our credit card debt into a home equity line of credit. Let’s do the math; a credit card bill with 32% interest or a second on a property at 9%., which would be better for me?
    Before the change in the bankruptcy laws I would have kept the unsecured credit card debt. In the old days a person could rack up tens of thousands or hundreds of thousands in unsecured debt and dispense with it in bankruptcy. For good or bad those days are gone.
    With the change in the bankruptcy laws the next best thing to do is to get that home equity line and pay it off at the lower ineterst rate. Yes, I know, it’s better to not build up the debt in the first place, I’m just saying that in today’s easy money, consumer economy, these things have happened.
    The banks were late to the game. Mortgage bankers, or brokers, began following the slippery slope of contrived debt consolidation guidelines as a means to home ownership. The original thinking was that a secured debt was better than unsecured debt. Many very large corporate lenders felt that even a under secured mortgage was better than no security at all so they encouraged Loan Originators to take on those loans.
    It is my opinion that the debt consolidation schemes are what started the avalache of overly optimistic values on properties. As banks, mortgage bankers, and mortgage brokers began seeing every one else collecting secured debt they jumped on board. After all, every bank has an Asset Management Division for fore closures.
    As far as the politicians, they collect campaign contributions. I did contact my state government officials about the 32% interest rates. I thought the Usary Laws had a cap of 24%. They changed that law, I guess, long ago. Our government put the laws in place that have made these very scary circumstances. Asking politicians for more laws is like asking the wolf to protect the chickens from the foxes.

  2. Rhonda,

    I am certainly in the same highway with you when you mentioned, “Keep in mind, mortgage brokers did not create these programs; they are simply the dispenser of mortgages accompanied with a mortgage plan”

    And the biggest fault lies in the scoundrels (the top executives of the big banks, biggest lenders, and some of the biggest wall street financial companies)

    But Realtors and Mortgage originators are second in command. We were in direct contact with the consumers-the closest warm bodies to directly influence them. The problem is we were also swept by the blind faith hysteria advertising ‘buy buy buy,market has gone up 20% every year’ and it is also our fault that all this happened.

    We need to gain that trust back and I believe articles found in this blog greatly helps us do just that. Genuine. Interesting. Full of facts. To the point.

  3. why are mortgage brokers actions, literature, and marketing not under the scrutiny of FINRA just like all other financial service agents?

  4. I agree that mortgage brokers take too much of the blame. If it makes you feel any better, average Joe six pack (or the average congressman) doesn’t really understand the difference between bank loan officers and mortgage brokers.

    I will say that mortgage broker compensation models do create some problems. Yield spread premium and payments on ‘overage’ provide an incentive for brokers to hike rates and fees for uninformed buyers. Although there are clear disclosure rules in place, HUD rarely takes enforcement action and most borrowers can’t interpret the disclosures. Brokers could avoid some of this criticism if more of them adopted the up-front fee model.

    The smarter (in an evil sort of way) banks have used related or subsidiary companies to broker their loans. For example, Wamu has used a subsidiary called Long Beach Mortgage to run much of its subprime business. Wamu may lose a mint on bad loans from the subsidiary, but at least their brand identity is somewhat protected. When things get ugly, they can roll up the business and wag their fingers at all those shady subprime brokers.

  5. Matthew, whoever regulates mortgage brokers should also regulate mortgage bankers and mortgage originators from credit unions and/or consumer loan companies. It should be a level playing field.

  6. Interesting that the comment I made this morning didn’t make it to the post. Mortgage brokers are the tail end of the consumer credit market that started suggesting consolidation loans as second mortgages. Creating secured debt from unsecured debt seemed like a good idea to many Large Corporate Lenders such as Citi Bank and Chase.
    These are the same people who charge 32% interest on credit card debt. It was no surprise they began offering mortgage products as an alternative.
    Sub prime lenders soon began selling purchase loans with the second tagged on as a equity line of credit. The avalanche really began when Lending Institutions and Banks piled on seeing secured debt as a pretty safe bet with rising appreciation.
    The difference is the collateral for the debt. The Master Builders Association and Board of Realtors began to heavily promote home ownership. By the end of the whole mess every body was involved in the Real Estate business.
    Every body in America was either a Real Estate agent, Mortgage Originator, Home flipper or builder. Every body knew what they were talking about, every body was an expert.
    I don’t think pointing a finger at any one part of the system, as a witch hunt, is fair. For sure pointing at Loan Originators who were waiters, financial planners, or bank tellers one week and Real Estate Mortgage Experts the next is a very small piece of the puzzle. Calling Loan Whole Salers slimey for selling mortgage products is denitely wrong.
    We are all to blame. Politicians, Banks, Real Estate companies, and the consumers who bought into the hysteria of Real Estate appreciation are all equal partners in this. For me, it’s the Real Estate agents who should have known better that should take the most blame. In turn the Real Estate brokers who encouraged the Real Estate sales mentality are the ultimate swindlers. It’s no wonder that Internet Based Business Models are claiming they can do the same job for less. When Real Estate agents became order takers rather than a trusted source of information and advice in the largest financial decision most people will ever make, that was the biggest part of the mess we are in today.
    That’s if we really want to find fault or blame some one. More important to me is to find solutions to this very real problem for the economy. My number one solution is to have Real Estate agents mentored for at least two years before being turned loose on the public. For sure I would do away with desk fee offices that do not have strict over sight. More education did not work. I really think the Board of Realtors showed they should be watched more closely. The Board of Realtors had a membership drive while the consumers were being duped.
    As for our government investigating or having more over sight; politicians live by campaign contributions. Lenders, Realtors, and Builders are all good sources of income for the political bodies. The one phrase from my comment this morning that I thought was good is: Having politicians watch dogging the mortgage or Real Estate Industry is like having the wolf protect the chickens from the foxes.
    Our government put all of the policies in place to make what has been done to the consumers legal.

  7. david, did your comment this morning go into the spam bin?

    With regards to your comments about how the lenders started offering the seconds to help consolidate debts…makes me think of how consumers are now relying even more on credit cards since second mortgages are either limited (loan to values, credit scores) and/or the values in their homes are not supporting the past HELOC craze.

    One of the positives of this market is that it will eliminate the apart-timers. And for LOs who work at a mortgage brokerage, they will have to meet the state standards, pass the competency exam and have a background check compliments of the FBI. That’s all ready weeded out a small handful of bad actors.

  8. laxtosnoco,
    Any unethical LO can be evil with what they charge an unsavvy consumer. Banks don’t have to disclose their YSP. The LO is probably still being compensated for it. I work for a Correspondent Lender and when we close in our credit line, I don’t disclose YSP/SRP. However if I’m brokering a loan (outside of our credit line), I do disclose YSP/SRP.

    Honestly I don’t know how a LO would be very competitive if they kept the YSP all for themselves and did not factor it into the rate (like I do) for the consumer. In fact, some of the lenders I work with as a correspondent add the SRP/YSP into the rate all ready.

    I’ve watched a lot of testimony recently and it’s amazing how little our elected officials know about mortgages. Perhaps they’re like most consumers who are not aware of what their current mortgages are or maybe they have “their people” take care of those details for them. That’s why it’s concerning to me that they’re going to take on regulating the mortgage brokers (while leaving the LOs who work for mortgage bank$ with their lobbying dollar$ alone).

    Countrywide also has (or had…not sure if they’re still around) a subprime division separate brand.

    So does GMAC Mortgage….Dietech.

  9. FYI, Wachovia bought World Savings recently. World savings have been offering NegAm for more than a decade and successfully before the recent “crisis”.

  10. Ubersalad, how do you define successful with World Savings? I think the difference was we were in an appreciating market so consumers (in our area) could bail out via selling or refinancing when needed. I did a few “World Savings” bail outs.

    I have a client who went to another broker for a refi and convinced her to do an option arm with Countrywide. I can’t save her.

  11. They had one of the lowest industry default rate. For a bank that does only Option ARM, you don’t think their qualifying process is much better than everyone else’s? They’re successful in several ways, first in the way that they were able to introduce many foreign buyers or otherwise non-traditional borrowers into home ownership. Not that I would agree with anything that David Losh guy was saying, but if he’s all-for non-traditional lenders, World Savings was one of them. Low default rate, very hands-on approval process…World Savings had a good model.

  12. I have a hard time buying that. I can hardly stomach watching the commercials with the dancing home owners and the lady with the puppies…I don’t think this mortgage is for the main stream consumer. It’s better for an investor IMHO…I don’t see any Wachovia ads on TV like that. It’s all geared towards, “Hey Mr and Mrs Homeowner, make the lowest payment possible…no worries!” During these times, I find their ads very appalling.

  13. Hard time buying what? I am not talking about Wachovia, I am talking about the old world savings. World Savings never had tv ad, at least not in WA.

    They pulled their own credit report, do their own appraisal and charge up front processing fees. Why? So they can do the necessary work without driven by cost. World Savings was good, but now with all these option arm lenders running around, they made everything option arm bad.

  14. I don’t think we’re even talking about the same thing. Somehow you’re pretty focus on what you want to talk about and seeing only what you want to see.

    Like I said, foreign buyers who had little options of financing. How about when house price were

  15. Ubersalad,
    I’m only telling you what I see. I don’t see anything wrong with an option ARM when the borrower understands the terms and consequences. As I’ve said many times, there are no bad mortgages, just bad (or lack of) advise. I’ve never provided an option arm, I have heard stories from other LOs who say it’s helped a single parent hang onto their home as a “band aid” mortgage and others who use it for investing purposes.

    You are correct that I am opinionated about that program. One of my clients lost her home many years ago because of her mortgage with World. I’ve helped her with financing the home she has now and she still talks about the home she had to sell and neg am mortgage she didn’t have a clue about.

  16. Option-Arms simply haven’t hit their resets and recasts in-mass yet.

    Subprime is the first wave.

    Then we see the Option-Arm defaults after that.

    Wait a year or two, Ubersalad. Then we can see how well World Savings vetted their loans.

  17. Sorry, I’ve been tied up all day. I just popped David’s comment out of the spam filter and it moved into the #1 spot.

  18. It continues to amaze me at how it’s always someone else’s fault. Banks blame the brokers, the brokers blame the banks.

    Both blame Wall Street, the ratings agencies, the consumers for being stupid enough to fall for the scams, and so forth.

    At some point, won’t any group take responsibility? Oh, I guess it takes courage, maturity, and humility to admit a degree of fault. Maybe I’m asking for too much.

    Blame-shifting is weak.

    You would think an industry group would figure out a way to capitalize on doing something DIFFERENT when compared with all the blaming that’s going on. It sure would set them apart.

    But maybe I’m asking for too much….again.

    Oh well. I can dream, can’t I?

  19. David wrote: “Before the change in the bankruptcy laws I would have kept the unsecured credit card debt. In the old days a person could rack up tens of thousands or hundreds of thousands in unsecured debt and dispense with it in bankruptcy. For good or bad those days are gone.
    With the change in the bankruptcy laws the next best thing to do is to get that home equity line and pay it off at the lower interest rate. Yes, I know, it’s better to not build up the debt in the first place, I’m just saying that in today’s easy money, consumer economy, these things have happened.”

    David, I’m not sure what changes you think occurred in bankruptcy, but you can still discharge your unsecured credit card debt–or reaffirm it if you wanted to (there’s no reason to). That has not changed.

    There are income tests and different checks on budgets, and you do have to reaffirm car loans to keep them now, but really the only major difference is a lot of needless bureaucracy added to the system.

    Oh, and with the increase of the homestead from $40,000 to $120,000, it means you’re much less likely to lose your home assuming you can make the payments on it. So adding debt secured by your home would be a bad thing.

  20. What, a litter of puppies isn’t an savvy investment? Perhaps this “mainstream consumer” has an inside line on a pending puppy shortage and will corner the market, making returns well in excess of the 7% she’s paying to borrow the money.

    Sarcasm aside, I about barfed when I saw that Wachovia ad. Spending home equity to raise unplanned puppies while shelters put down thousands of unwanted pets every day is borderline bad taste.

  21. Regarding the credit card payments vs HELOC argument, for cash strapped consumers, rolling credit card debt into a mortgage was the only way to make it manageable. One thing that changed in 2005 just before the bankrupcy laws were increased minumum payment requirements on credit cards.

    The just of the change was that individual credit cards could no longer be used as infinite term interest only loans, as principal had to be repaid at a rate of at least 2% + the periodic interest charge.

    This change went largely unnoticed since it happened during a period of enormous appreciation and home equity extraction. Homeowners with large amounts of credit card debt could simply roll the credit cards into a 30-year payment plan for significantly lower monthly payments, many of which had interest only minimum payments at a rate well below the typical credit card.

    Not exactly a wise situation to get yourself into, but for many struggling consumers it was the lesser of 2 evils. Unfortunately, I hear it wasn’t uncommon for the same strapped borrower to repeat the process every year as long there was equity to tap at a relatively low rate.

  22. Thank you for reminding me about World Bank. I think that the only house I ever owned by myself, just me, no investor or spouse tagged on, was through World Bank. I was so proud, and grateful. I had traded in properties, I think, for about twelve years at that point, and never owned a house by myself.
    I remeber the day the guy called me to tell me the loan was approved. I cried, I’m almost crying now remembering it. They looked at my Schedule C, then wanted to see proof of my Yellow Page ad, just crazy stuff like that, then gave me loan. It’s a powerful thing.

  23. The whole chain of suppliers of these loans have guilt in the mess. I think the big difference in what the which-hunt targets is that legal regulation of banks and funds are mainly superflous since you more or less can switch on cncbc anytime of the day and understand that they are now paying the piper in a BIG way. They will and have to self-regulate since it’s critical to their survival. Mortgage brokers are another story since they are not left holding the toxic result and thereby the need for regulation is perceived as much bigger.

  24. Jillayne-

    I’ll assess the blame and the appropriate punishment:

    1- Unscrupulous mortgage originators for deceitful business practices and fraud- throw them in jail.

    2- Lenders (not those intermediaries but the investors to whom Wall Street sells- let them lose their investments for their recklessness.

    3- Borrowers- common sense dictates that you can’t afford a $3000 payment on $60,000 annual income. What astound me is that people will hire an attorney to set up a partnership with their cousin to sell cookies but refuse to spend $300 to have one explain documents when they buy a home. Let them lose their home in foreclosure.

    Failure is a sage advisor. The investors will earn their money back and the borrowers will be able to buy a home in 4-5 years- both will be more judicious then.

  25. A mortgage “witch” hunt implies that an investigation is taking place in which the targets of the investigation are innocent.

    There is no such thing as a real live “witch”. There are however, parties responsible for the mortgage meltdown currently taking place in this country.

    This is not a witch hunt. Parties responsible for the current situation will be exposed and legislation (albeit far too late) will be passed to deal with what has transpired.

    Yes mortgage brokers did not invent these products, many of them just pimped the products like drug dealers selling crack.

    All parties should be held accountable: Brokers, originators, banks, Wall Street, Federal Reserve, Congress, and lax federal regulators.

  26. “Jillayne, my main point of this post is that brokers could possibly cease to exist.

    Okay, fair enough 🙂

    Question: if brokers cease to exist, or, as Morgan Brown pointed out, if their numbers are drastically reduced, who do you think brokers will blame for their demise?

    Or….maybe those that remain will keep quiet because they’ll be happy for the reduced competition.

    Perhaps national trade organizations like NAMB will be loud and full of blame because their existence depends on membership fees.

    If all that’s left is conforming and hard money (and a little bit of subprime here and there), how WILL the remaining brokers compete with banks?

  27. Hi Matthew,

    Perhaps you’ve exposed the truth surrounding the witch hunt/blame game. No party wants to admit blame because then they’d be the target of everyone’s venom.

    Attorneys would bring class action lawsuits on behalf of shareholders and consumers, the government would levy fines, consumer groups would protest and demand change, employees would quit in shame, stock prices would tumble, CEOs would lose their jobs, and so forth. So the witch hunt is just a game to keep us from focusing on the truth.

    Because all of this is already starting to happen anyways.

    Thanks for enlightening me.

  28. Brian,

    You’re such a godfather. No, wait, a godfather-type of person would have the brokers thrown in the river wearing a pair of cement shoes.

    “Unscrupulous mortgage originators for deceitful business practices and fraud- throw them in jail.”

    I object. I don’t want my tax dollars spent housing and feeding them. Let them go live in a van down by the river.

  29. Jillayne, “maybe those that remain will keep quiet because they’ll be happy for the reduced competition.” Bingo.

    I of course I would love a smaller pond. Especially if the “unscrupulous mortgage originators for deceitful business practices and fraud” are out of the picture.

    My husband was listening to a local radio show yesterday (KIRO, I think) and he noticed that the word “broker” was wrongly used instead of “originator” or “lenders”. It’s giving the public the wrong picture.

  30. Q: Where’s the petition from the mortgage broker community to stop the abuse of Yield Spread Premiums (YSPs?)

    A: There isn’t one.

    Ironically, this bill will hurt those brokers who use YSP in a way that helps the consumer. The YSP party is over. It doesn’t matter how many signatures are collected.

    Until the broker community cleans up its act, the federal government is going to keep doing it for you.

  31. I have tried to start a conversation with Todd over at Lenderama but now all of my comments are going into the spam bin. There is no contact information or email on that blog for anyone, so I was left to post a request to fish out my comments from the spam bin on another one of Todd’s blog posts. My request went into the spam bin. I am less than impressed.

  32. Jillayne, I see lots of comments to you…I’m missing yours? Todd does have a LinkedIn badge by his photo.

    On another note, do you really think this bill is going to clean up the mortgage industry? This could be as useful as APR.

  33. Thanks, Rhonda. I found Todd’s email. Paul is now is leaving snide comments about how Jillayne must have been scared off.

    I also see that Todd has deleted all my comments.

    Gee, this makes me want to visit Lenderama every day.

    Rhonda, do you want to do a post about Barney Frank’s proposed legislation and the petition here on RCG, or do you want me to do it?

  34. “Until the broker community cleans up its act, the federal government is going to keep doing it for you.”

    But the government won’t be cleaning up any act; it’ll will drastically drive up costs to the consumer.

    The government is targeting the wrong group of scoundrels. How about those lenders who funded the predatory loans?

    PS- jail, river…whatever- both are appropriate

  35. Pingback: The Odysseus Medal competition — Voting for the People’s Choice Award is open | BloodhoundBlog: Real estate marketing and technology blog | Realtors and real estate, mortgages, lending, investments

  36. I posted months ago about credit contraction and it is here – if the loans are not bought there will be no loans. The U.S. has written checks its body cannot cash – better change before too late

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