Man convicted as being a key player of “swindling” $50 Million likely to begin serving 15 yrs. in prison and reportedly has been selling “reverse mortgages” to senior citizens while waiting for date to report to prison.
Evidently, The Washington State Dept. of Financial Institutions (DFI) denied his loan originator license on Dec. 17th of last year. DFI get’s it right, but it still begs the question: How did this fellow get through internal controls at the company he last worked for? Sloppy at best.
Bill Morlin reports from the SpokesmanReview.com:
“Michael Duane Smith has worked as a “reverse mortgage planner
Tim wrote:
“How did this fellow get through internal controls at the company he last worked for?”
$50MM pales in comparison to these flunkies:
Nick Leeson 1995: $1.4BN and collapsed Barings Bank
Toshihide Iguchi 1995: $1.1BN, Daiwa Bank
Yasuo Hamanaka 1996: $2.6BN, Sumitomo Corp
John Rusnak 2002: $691MM, Allied Irish Bank
Jerome Kerviel 2008: 4.9BN Euros, Societe Generale
That’s sad. Are Golf Savings loan originators regulated by DFI? How was this fella able to continue originating loans? He’s at a BANK. Oops…am I shouting? Sorry NOT.
This is a classic example of what’s wrong with our system…punishing mortgage brokers (smaller companies with less lobbying power than banks).
I’ll just keep hanging on to my DFI LO License and wear it like a badge of honor since LO’s who work for banks don’t need to adhear to our guidelines handed down by our state and DFI…heck…look at this example…why should all LO’s who originate loans be treated the same? Jillayne, if you say cuz we’re not, I’ll barf.
Q-Diddy, notice a lot of banks in your list…but are these all in WA State?
During boom times everyone is willing to overlook indiscretions and cutting corners. Studies have shown that a majority of borrowers admitted to fudging the truth at least a little in their mortgage applications in recent years. The lenders didn’t look too hard, and the borrowers didn’t feel too bad about it.
It makes PERFECT sense that lots of things slipped through the cracks during the good times. After all, so long as property kept appreciating who cared if things weren’t 100% kosher, appreciation made everything work out. Heck, it would have been much more of a miracle to have caught malfeasance during the peak of the credit boom. It is the most prudent and moral people who become marginalized during booms. A moral person won’t get as many loan applications approved because they won’t turn a blind eye to borrowers playing loose with their facts, or push the appraisers to meet the targets. During booms, the system is geared towards rewarding the people who get the most deals done, no questions asked. During the busts, it’s the people who ensure there is minimal losses or liability who do the best.
It only makes sense that some of the most egregious actors, and scams, are coming to light now as the credit markets tighten. Lenders are scrutinizing deals much more closely, and brokers don’t want to be stuck with the liability of crooked staff.
Three cheers for all those folks of upstanding character out there: your day is finally at hand. Sadly, the monetary compensation for the moral stalwarts is never as great as the scoff-laws reaped during the booms.
Sniglet,
You’re starting to make sense, and that has me worried! 🙂 It’s true that business decisions and ethics ebb and flow with boom and bust cycles, and consistenly the high flyers and con men often get rewarded on both. For some amusing reading, may I suggest “Going Postal” by Terry Pratchett? My son recommended it, and I had a very good laugh with it.
I’m just trying to imagine being the manager in the bank explaining to the boss why the con-man ever got hired! Maybe it was those employee of the month awards from selling investment scams!
DFI has been remarkably tenacious at pursuing the loan originators who lied on their applications about felony convictions.
http://www.dfi.wa.gov/CS%20Orders/C-07-180-07-SC01.pdf
I go thru the DFI admin actions every couple of weeks or se, just to see how my app fees are being spent. I have to say I am very pleased with the results so far!
Oddly, a case like this may spur banks to VOLUNTARILY license their employees, as evidently the background checks at DFI are much more thorough (if not faster) than at Golf Bank!
The question I have is how many inactive or currently unlicensed (for one reason or another) LO’s are working under the radar as an “employee” of a broker or originating loans under another’s license (ie, just have another licensed LO’s name on the 1003).
Roger,
Do you know how DFI actions have been trending? Have there been more DFI actions in 2007 than in 2005 or 2006?
I have noticed that many law enforcment agencies have only recently ramped up their real-estate fraud investigations and prosecutions in 2007. During the boom years there were few tattle-tales, and many parties didn’t really care that some malfeasance had occured so long as they made money. When things started turning, however, market participants began turning on each other. Borrowers who now owned depreciating assets started looking for ways to get out of their deals by showing negligence or illegality on the part of brokers or lenders. Investors have been scrounging for any improprieties on the part of originators to force them to take back loans, etc.
As a result, many of the naughty practices of recent years have begun to come to light, and the attention of law enforcement. I wonder if the DFI statistics would support this theory (i.e. that more wrong-doing is found all of a sudden when markets start declining)?
Rhonda-
These are all foreign banks, but I believe 3 (Daiwa, Allied, Soc Gen), have US offices. Daiwa and Allied are no longer around. None of them have a WA state presence.
It just goes to show that crooks, cheats, scumbags, whatever you want to call them can break the system if proper oversight is not installed. The Soc Gen guy was able to get around internal controls because he worked in back office/settlement prior to becoming a trader. He used passwords from old co-workers to gain access to the system and hid his trades. I hope that Soc Gen has figured out a way to prevent this going forward.
I’m not shocked by the magnitude of these events. People seem to think these all-powerful institutions are infallible, but they really aren’t. It doesn’t necessarily take boom time for these things to happen. There’s a lot of money floating around in the world and someone is always looking at a quick, dirty way to get it.
Check that, Daiwa and Allied are still around. I just looked them up on Bloomberg.
I’m wondering if the reverse mortgages that this guy was selling were funded only by Golf Savings. A few years ago I had a guy teach a class on reverse mortgages and my understanding back then was that there was tight regulations around them because of abuses to the product and the elderly back in the 1980’s. Furthermore, this gentleman mentioned a certificate was required of the borrower after going through a counseling course of some sort that was intended to help borrowers understand the product and to know if the lender offering the product was on the up and up. Only a couple of lending institutions were supposed to be funding these as well. I’ll admit it’s been a few years since that class was held but I wasn’t aware that the product had taken off in such high numbers again that this guy could have racked up that much in loans already.
My understanding is that originating reverse mortgages are highly profitable. Maybe an LO can chime in.
Tim said: “My understanding is that originating reverse mortgages are highly profitable”
So were sub-prime mortgages, until the default rates increased and investors stopped buying them. I suspect that many reverse mortgage lenders will start feeling a lot of pain when their customer’s homes drop 60% or 80% in value, and they find themselves under-water, as the credit contraction really bites in 2009 and 2010.
Things feel a lot different when you are paying annuities on a property that isn’t worth the value of the mortgage.
Heck, consumers should be scrambling to get all the reverse mortgages they possibly can right now. It’s a great PUT, protecting you from possible massive property price declines.
Do reverse mortgages have a clause allowing the lender to appraise the house at points in the future?
Reverse mortgages have strict ltv limits. Sniglet and I have gone around and around about RM’s over in the Seattle Bubble forum (at least I think it was Sniglet).
The amount that is allowed to be loaned is based on several variables:
-age of the youngest home owner (must be at least 62)
-value of home/equity (existing mortgage okay)
They have very low LTVs. For example, using the following scenaro:
Born in 1940 with a home valued at $500,000 in the Seattle area,
the Senior could opt for:
-lump sum or equity line of $219,000
-receive monthly payments of $1225
Sniglet, with this scenario, the LTV is 45%.
The most popular RM is the HECM which is insured by FHA.
Yes, reverse mortgages can be profitable for LO’s. It’s very important that Seniors shop lenders…especially since as this post points out, some creeps will take advantage of our elderly.
Here is a reverse mortgage calculator: http://www.rmaarp.com/
Reba, a loan originator just needs to work for a lender who offers reverse mortgages. We have two different lenders at our company where I can send opt for clients who need a reverse mortgage. I have gone through 2 courses so far…one was required by one of the lenders and the other course I attended on my own. I will continue to seek education on reverse mortgages. They are a very useful tool for Seniors and like any mortgage, if used improperly, can be harmful or make a significant improvements to one’s life/wealth.
I don’t believe that the HUD approved counselors review the GFEs for the Seniors. In fact the Senior attends the counseling prior to loan application.
Yes, Rhonda, we have discussed reverse mortgages, and you have provided a lot of great info on them. From the example you gave it definitely seems as if lender would be hurting if the value of the home dropped 60%.
I understand that the loan is insured by the government in case of default, but that doesn’t help a lender who winds up under-water on the home. Like I said, a reverse mortgage sounds like a great PUT option for elderly people interested in preserving some of their equity in the case of a significant real-estate downturn. It’s insured by the government, so what do they have to lose? They just have a warm feeling knowing they will get something out of the house even if prices decline substantially, and they don’t even have to move!
Sniglet-
The market would have to move down a lot for lenders to take a hit based on these LTVs. Still, it’s improbable not impossible.
I like the fact seniors get a warm feeling all over. Anyone who is 62 and has paid off their homes deserve it. 🙂
Sniglet, if knew for certain that you were going to lose equity in your home, would you leave it there to evaporate…Or pull it out and put in an interest bearing account?
Rhonda said: “if you knew for certain that you were going to lose equity in your home, would you leave it there to evaporate…Or pull it out and put in an interest bearing account?”
Hmmm…. I guess maybe that’s why I sold my house and am renting. 🙂
Ah…ya got me, Sniglet! I would rather take my equity out and invest it, personally. Of course, “investing” does not mean vacations, cars, etc…
We have convicted felons writing mortgage loans all over the U.S. Here are three ways this can happen:
They use someone else’s loan originator license number and the licensed LO gives them a kickback.
They groom another person to become the licensed LO. Usually this involves a dual relationship such as grooming a lover or someone close to them. This second person becomes the licensed individual and everything is run through their name. The second person is, uh, shall we say, “compensated” in a unique and special way.
They could decide to just take an unofficial “demotion” and then call themselves something like “loan processor.” The loan files are originated under the BROKER’s license number.
All this is often done with the licensed mortgage broker fully aware of the felony conviction. I said often, not always. Sometimes the broker runs a “branch office” type of company where the LOs are far, far away in branch offices located all over the state (and beyond) where there is little supervision by the licensed broker.
The broker who is aware is hedging. He/she puts some money aside, and if caught, an attorney is hired and fines are paid. It’s a business decision: How much money can I make off this person? What are my chances of being caught?
I’m not being flippant here, I’m just helping you all understand how it goes down.
The risks are low and the fines are not so high for a mortgage broker.
For a state or federally chartered bank, the risks and fines are much higher which is why Deb Bortner is quoted in the newspaper article as saying:
“I can’t remember a time in all the time I’ve been a regulator when a bank actually hired a felon.
when you say felons do you mean people whom have been charged with fraud or just all felonies in general? It is my understanding just people whom have a felony related to fraud that cannot be approved for a mortgage license.
Hmmm… I wonder if any loan officers cut corners when issuing reverse mortgages? I could imagine there is plenty of incentive to ensure the homes “appraise” right to hit the LTV.
I am a retired HR Specialist who worked for a high-profile employer. The cost of background checks is negligible. Any employer can contract with a vendor who will prepare a report within days that includes convictions. Reference checking is an art, we talked to those on the applicant’s list then asked “who else worked with … Is there anyone else I should talk to? How can I contact them?”
There is no way to predict what someone with a good history will do in the future but to miss one with a bad history, particularly convictions, is inexcusable.
Sniglet, appraisals are involved…the calculators are just there for reference.
Jillayne, all of your examples of how easy it is for a felon to be in mortgage involves licensed LO’s, which in our State applies to those who work for mortgage brokers. If our our State is not regulating LO’s who work for banks, such as Golf, why should anyone assume they’re going to be more safe? Do you really thinkg Golf is the only bank that made a major oops?
I’ve talked to a mortgage-banker sales-manager who told me that they simply google LO’s names before they hire them (I’m sure in addition to background checks and what ever else they do)…if you simply google this fellow’s name #1 is DFI’s statement of charges against him.
Rhonda,
I believe banks have systems in place that brokers do not.
We have a record here of one convicted felon at Golf.
We have record of 170 convicted felons originating through mortgage brokers in this state who applied for an LO license during 2007 and answered the question “NO” when asked, “Have you ever been convicted of a felony?” They were denied a license, but went ahead and originated loans all throughout 2007, without their broker running a background check on them.
Our state IS regulating LOs who work for banks. If they work for a state-chartered bank, DFI regulates that bank.
http://dfi.wa.gov/banks/default.htm
click on “commercial banks” to see a list.
If the LO works for a lender licensed under the consumer loan act, and their company brokers out, these LOs are also subject to the licensing provisions under the MBPA. (Mortgage Broker Practices Act.)
http://dfi.wa.gov/cs/loan.htm
A good homework assignment would be to sit down and take a look at all the requirements for becoming a state or federally chartered bank, and compare that to the very thin list of requirements to become a mortgage broker in any state.
If loan originators, no matter where they work, want consumers to feel “safe” then it is up to the industry to change that perception, not the government.
I didn’t necessarily imply that my examples were only mortgage broker examples. I do mean to imply that the chances of the examples happening at a state or federally chartered bank are far less.
Jillayne, that’s one LO who works for a bank that was CAUGHT.
Sniglet:
Sorry, I forgot to check in on this discussion.
Clearly, there are much more DFI actions in 2007 compared to earlier years. I do not think it is so much a rush to pin the blame for a deteriorating situation, although I could certainly understand one connecting the dots in such a fashion.
I think the increased number of DFI actions is due to the following factors:
1. Increased budget and staff, funded in large part by licensing fees from 15,000 LO’s. They’ll have to get by on a fraction of that in the years to come.
2. Increased actionable items related to the licensing. Going after the low hanging fruit, as it were, is always a good idea, especially when there is so much of it. Knocking out some 170 or so convicted felons would be considered low hanging fruit, as it only requires accessing records that are readily available.
3. A target rich environment. Previously, there were VERY few (if any) charges directed against loan originators. Prior to licensing, loan originators were like ghosts in the machine. After licensing, there were 15,000 very real targets, with numbers on them.
I expect 2008 will be a year of considerable progress for DFI, and a lot of challenges, as they will no doubt be tasked with interpreting any number of new laws passed regarding wholesale lending, along with rooting out the remaining wrongdoers who have tarnished this business.
BTW, my favorite sniglet was musquirt. Do you have any favorites?
There are lots of interesting sniglets. A couple practical ones that comes to mind are “automagical” and “guesstimate”.
My two daughters have come up with two interesting sniglets:
prettiful
pretty + beautiful
and
chillax
chill out + relax