Mortgage Fraud

I think it could also be titled "Confessions of a Dishonest Guy who was a Mortgage Broker". First of all, all brokers receive payment from the lender, not the borrower (except junk fees). It is in the BROKER's best interest financially to put the buyer in the higher interest rate because he gets a larger yield premium from the lender he chooses for the borrower. The broker always has several choices of loans to choose from with a buyer, he usually goes with the highest yield premium to make the most money for himself. I don't like the way this guy blames the lenders, as he had choices or could have told his clients "no" or explained what would happen if they weren't able to refinance, etc.

Not all brokers are dishonest and not all mortgage applicants are honest either.

Hi Gardensgirl,

Just a bit of clarification here;

First of all, all brokers receive payment from the lender, not the borrower (except junk fees).

Not only untrue... extremely unusual. MOST brokers are paid an origination fee (or it may be labeled by other names,) directly by their client. In some cases a broker may also be paid incentive fees by the wholesale lenders, but not always by any means.

Further, in many (if not all) cases, a broker can originate a loan at equal or lower rates AND fees than a retail banker, and *STILL* be paid incentives by the wholesale banks (often wholesale divisions of the same bank the broker just beat in retail pricing.)

It is in the BROKER's best interest financially to put the buyer in the higher interest rate because he gets a larger yield premium from the lender he chooses for the borrower.

ACTUALLY, for long-term professionals in the brokerage business, it is in the broker's best interest to structure their client into beneficial financing such that the client is happy enough to refer friends, family & co-workers, and loyally return to do business again (as homeowners typically have an average of one new mortgage finance event per 3-5 years.) This is not just from household moves (which also averages once per 3-5 years,) but also life and career changes, as well as equity recapture and investment rebalancing.

The broker always has several choices of loans to choose from with a buyer, he usually goes with the highest yield premium to make the most money for himself.

While most brokers definitely have many resources to draw their funds from, the BEST in the industry build their client database carefully, and guard and nurture it jealously.

On a gross numbers basis (based on recorded lawsuits) there has been far FAR more consumer abuse by retail mortgage bankers (AmeriQuest, New Century, and similar) than mortgage brokers.

Not all brokers are dishonest and not all mortgage applicants are honest either.

VERY TRUE, dat!

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

When we bought our first new house in 1978, we were told we qualified for a $130,000 house---based on our GROSS income!!!!

When I asked why gross and not net---since net income was what we had available for bill paying-----we were told home buyers need to buy more than they can afford, since they will be getting raises at work and that is the best way to accrue equity. And that was a conventional 30 year fixed rate mortgage at about 6%.

I did some figuring and found the payment on the $130K was about 2/3d's of our combined net---no way could we have made the house payments and fed our 2 sons and pay utilities. When I mentioned that fact to the realtor---I was chastized for thinking small---we just needed to get part time jobs and scrimp until we got enough raises to afford the payment!!!!!

Needless to say, we dumped that realtor quickly, but the successive agents used the same calculations. They said it was the indusrty standard.

I am not much of a financial fella, but I was smart anough then to know that was BUNK!!!!!! We bought a $48,000 house----just over a third of the recommended amount---and still had problems making the house payment and having any money to do much.

So, the gouging of the buyer has been a tradition for the real estate industry for a long time.

We are going to buy a house early next year---already looking in the area to establish a guideline----I see 850 sq. ft. houses on slabs with a $100K+ advertised price----when the actual value is closer to $60-$70K. And the wording in listings is really almost comical---slab basements(just a concrete slab on soil), raised wood foundations(means crawl space), alternative cooling(three window air conditioners), Wooded lot(2 trees)---and so it goes.

Hi Handymac,

When I asked why gross and not net---since net income was what we had available for bill paying-----we were told home buyers need to buy more than they can afford, since they will be getting raises at work and that is the best way to accrue equity.

Calculating on gross is the correct method, but the explanations you got were ignorant, at best.

Loan underwriting figures discount your affordability by anticipated taxes & common living expenses. Income gross is used because it would be virtually impossible to get an objective consistant calculation of "net" from non-financial-educated consumers and real estate agents.

We bought a $48,000 house----just over a third of the recommended amount---and still had problems making the house payment and having any money to do much.
So, the gouging of the buyer has been a tradition for the real estate industry for a long time.

I think it's wrong to claim "the industry" gouges because you couldn't manage a particular purchase you chose to make. Homes and mortgages take a LONG time to happen... you can't claim to have been "tricked by sleight-of-hand."

If you legitimately qualified to borrow up to $130,000... and later "had problems making the house payments" on a $48,000 (or less?) mortgage... either your income significantly dropped, your expenses signficantly increased, or your money management/budget skills were woefully weak.

Especially over the last 5-8 years, almost everyone can QUALIFY to borrow MORE money than you might responsibly choose to borrow. It's ALWAYS up to YOU to do the right thing...

McDonalds isn't the cause of fat people being fat.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Hi Dave,

Thanks for responding. I guess I should have clarified myself more. I mean the guy in the article and those who "jump into the mortgage business" while rates are good types of brokers. Those are types I had in mind when I wrote what I wrote. Being in the business yourself, I"m sure you saw/see a flood of "new" mortgage employees when the rates were low and refinances were extremely high. Once they have to "work" for it, they are gone. Their "job" is to make money, not help people. They didn't get into the field because they enjoy helping people own a home, they did it to get a quick paycheck.

Personally, I qualify the "loan origination fee" as a junk fee. Either way, the broker can make the same (if I remember correctly)...........he can put his client in a lower rate and charge a LOF (aka points), or he can put them in a slight higher rate and make the money solely off the lender. Don't forget the rate reductions for credit scores, 1/4 point off here for this, a quarter point off for that, etc. There are all kinds of incentives for brokers to use a particular lender........the unscrupulous ones go with the lender that is putting the money in their pocket, buyer be damned. (or worse, the buyer is paying points or a LOF on top of it!!)

There are reputable brokers as well and I wholeheartedly agree with you on that. My brother owns a mortgage business and has been in the business itself approx. 20 years. When I worked for him (long time ago), I personally know of people he would turn away. However, where there is a will there is a way......and I"m sure those people found someone to do a loan. Remember, this trickles down the RE agent who has probably spent countless hours on these people and only done a preliminary check on them.

I can't tell you how many people lied like the dickens on their applications. They couldn't even make their mortgage payments, yet were buying new BMW's, Mercedes, Lexus, etc. Crazy stuff!

Yes, definitely there are good brokers............but I didn't like this guy saying all of a sudden he felt "bad". I'm sure there is a sudden reason for it......when he was getting checks worth a few thousand dollars at the age of 20, I seriously doubt he felt that bad. :)

"If you legitimately qualified to borrow up to $130,000... and later "had problems making the house payments" on a $48,000 (or less?) mortgage... either your income significantly dropped, your expenses signficantly increased, or your money management/budget skills were woefully weak."

Dave, I agree with your position on about every post you make, but ease up on the guy in this case. I myself have been approved for a $450,000 mortgage, when in reality I went with a loan (on a different property, of course) less than a third of that. Now while I haven't exactly had "problems" making the payments, I find that I still have to follow a budget to make it work.

Back to handymac's point, Net income isn't reliable because once you ask for a net income, it raises question of net of what? Net of your tax withholding, or is it also net of what you contribute to a 401k, or is it also net of your annual tax refund (if you get one), or is it also net of health insurance withholding, and what happens when those withholding rates change?

Its a lot easier to figure people can handle a payment that is 28% of gross income than a payment that is 40% of net income (even if that works out to the same payment).

And then if you really want to muddy the water, is it also net of other bills? (the car payment, utility bills, homeowner's insurance...)

I concede that handymac has a point though: use of gross income is a bit on the simplistic side. But if ain't broke, why fix it?

Yeah, when I got approved for something recently that was 48% of our gross (when gross included a bonus that hasn't even paid out yet), I was pretty surprised. Of course, the bank doesn't realize (or care) that I pay $23K in tuition each year, so I would definitely have trouble making the payments for which I'd been approved. Unless, of course, I didn't want to do those pesky things like have health insurance, drive anywhere, eat food... lol.

Folks,
Why would ANYONE CARE what a BANK says they are willing to offer you?????

SERIOUSLY!!!

Do you buy ALL the insurance the insurance salesman say you deserve to buy?

Do you buy all the car a car salesman says you deserve to buy?

Do you even buy the "Restaurant Daily Special" that is "highly recommended" at $50 a plate when you budgeted $20?

Everyone OWNS THEIR OWN DECISIONS.

That is my point. What you are maximally QUALIFIED for is NOT a number you can point fingers at & blame for your lack of budgeting or money management.

That's all...
Dave Donhoff
Strategic Equity & Mortgage Planner

"Why would ANYONE CARE what a BANK says they are willing to offer you?"

Well, for starters, its a good indicator of whether the bank is an ethical operator...

Well, for starters, its a good indicator of whether the bank is an ethical operator...

Not really, I'm sure their offer would be different for someone with a 790 FICO vs. a 590.
Banks make judgements based on risk, sometimes they lose, but most of the time they don't.

I'm sorry, but it's not the bank's responsibility to budget anyone's money. They do the best they can to figure out the maximum they will lend you and yes, those limits have gotten too high - but let's be realistic. At some point personal responsibility kicks in and it's YOUR responsibility to take on a payment you can afford. It's not that difficult a concept - you sit down and figure out what you can afford to pay and that's what you base your loan amount on. We were qualified for 50% more than we could reasonably afford (especially knowing taxes went up) but we borrowed what we could afford. We have also at various times in our life had as much as $75,000 in open credit on credit cards (they just keep raising the limit, we keep dialing it back) but just because it's there doesn't mean we have to spend it either. Just because I could walk into any car dealer right now and qualify for a loan to take home whatever car I wanted to doesn't mean I have to.

We bought our house and then refinanced it a couple of years later with a mortgage broker. Both times we shopped around and our broker had a combination of the best rates and the lowest fees. He did NOT push us into higher rate products and his rates were far better (by close to a half point in some cases) than the equivalent retail product and the retail fees were no lower than his. As much as I liked him from our first transaction, the second was not a "gimme" for him and he still had the best rates with comparable fees to every other lender I checked out. I would not hesitate to recommend him to anyone.

I agree that the one in the story is a crook who happened to be a mortgage broker. He's a self-admitted liar and even at 20 he should have known that lying is bad, even if someone else tells you it's okay to lie. In fact, most 6 year olds know this already, even if they choose to ignore it ;).

Folks, Why would ANYONE CARE what a BANK says they are willing to offer you?

I cared only in that it shocked the heck out of me that with all that's gone in the past few months I could even get approved to buy one home while owning another when the payments were that much of my gross. I didn't say I took them up on the offer. lol

As to why I asked, we weren't sure a contingency offer to sell our home first would be accepted and wanted to know if then making the offer without a contingency was possible. I have other assets I could and would use for downpayment but needed the flexibility/time to make that happen. So I found out that, if needed, I could make an offer with no contingency because yes, I could get the new mortgage on top of the old one.

As for personal responsibility, I have plenty, which is why I wouldn't put myself in that situation just because the bank said I could. And I don't excuse those who willfully put themselves in a position to be in over their head just because the bank said they could. I just honest-to-goodness was expecting to hear "no, sorry, regulations have tightened up and that's not a risk we're willing to take", and it surprised me when it was "okay, sure".

All this talk about banks bothers me. The ones you should be complaining about are Freddie/Fannie. They will, in some cases depending on credit & income, qualify up to 50-55% of gross income. A bank is not going to underwrite to that high of income/payment ratio unless they can immediately sell the loan.

It's the same with jumbos originated for resell. Banks are using the investor's standards not their own.

The vast majority of banks are credit lenders. (Some are collateral lenders.) If a bank is making a portfolio loan most will underwrite at 40% or under of gross income.

/tricia

"Well, for starters, its a good indicator of whether the bank is an ethical operator...
Not really, I'm sure their offer would be different for someone with a 790 FICO vs. a 590."

Bernie, I'm the same person with the same credit score applying to both banks. One bank approves me up to $175,000 (which might be a small stretch but is reasonable) and the other bank approves me up to $450,000 (which there is no conceiveable way I could afford. I'd default within two months of starting a loan like that). You can't seriously be telling me that both of these banks are equally ethical...

Hi mfbenson,

One bank approves me up to $175,000 (which might be a small stretch but is reasonable) and the other bank approves me up to $450,000 (which there is no conceiveable way I could afford. I'd default within two months of starting a loan like that). You can't seriously be telling me that both of these banks are equally ethical...

I can't see how ethics is in consideration with the scenario you pose.

CLEARLY the bank offering $450k is financially in grave risk of survival, if they regularly offer more money than they have realistic odds of recovering and being paid for. That's simply stupidity on that bank's part.

Stupidity is merely stupidity though... its not unethical, in & of itself.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

"Bernie, I'm the same person with the same credit score applying to both banks. One bank approves me up to $175,000 (which might be a small stretch but is reasonable) and the other bank approves me up to $450,000 (which there is no conceiveable way I could afford. I'd default within two months of starting a loan like that). You can't seriously be telling me that both of these banks are equally ethical... "

Approving/pre-qualifying and getting to the closing table with the money are 2 separate things. What you are being told and what you will get, all comes down to the lending guidelines, and it would not be the first time that errors in this process have denied a buyer from purchasing a property they were told they could afford.

"That's simply stupidity on that bank's part.

Stupidity is merely stupidity though... its not unethical, in & of itself."

Wait a second... you're saying that banks have no fiduciary duty to their customers and they should only look out for their own profit?

Its worse than I thought...

"Approving/pre-qualifying and getting to the closing table with the money are 2 separate things."

I guess you've got me there. I can't really respond as to what would have hypothetically happened, since it can't be proven one way or the other. Still, it seems like a foot-in-the-door, bait-and-switch operation: entice customers with big dollar signs, get them to settle for lesser amounts once they're committed to a deal. Perhaps not the most egregarious ethics violation, but still not completely honest either.

I don't think lenders have a fiduciary responsibility to borrowers, like REALTORS or attorneys can have to their clients. I think it's a business/commercial relationship, which means borrower beware!

Correct. Under existing federal law and the law of 49 states, mortgage brokers owe no fiduciary duty to their clients. There are, of course, numerous laws governing outright fraud, but, execpt for California, no jurisdiction requires a broker to attempt to get "the best deal" for the client.

Putting the mortgage borkers and their role in the subprime meltdown aside for the moment, I still don't understand why the bond raters gave mortgage bonds so full of shaky mortgages such high ratings. Or why the underwriters signed off on these pieces of junk. Why did a financial industry which one would expect to be able to tell the real deal from all the flim flam fund mortgaeges for people who had almost no prospect of paying them? Sure, I know nothing is infaliable and people make mistakes, but how could the whole industry industry blind itself to what was going on?

I can understand why greedy and /or naive borrowers took out the loans. I can understand why mortgage brokers were eager to sign them up. I can even understand, I guess, the mortgage companies that sold these shoddy products to bigger fish like Countrywide. I can also understand the hedge fund and mutual fund investors who wanted high returns on their investments.

But what about the financial institutions that actually did the funding? Why weren't they pickier about whom they loaned their money to?

Well, at least I'm learning a lot by getting proven wrong so much lately. I looked it up and sure enough lenders don't have a fiduciary duty unless there was the establishment of a trust (as in trust fund).

Still, something about assisting people in the ruination of their life, even if legal, doesn't sit right ethically for me. I wouldn't be able to sleep at night if I didn't know that I make my customers' lives better, not worse, for having done business with me.

Unfortunately, I suspect many, if not most, members of the borrowing public think they do. That mistaken public perception makes it easier for unscrupulous brokers to mislead their customers.

If the general public knew that, as far as fiduciary duty goes, mortgage brkers fall in the same category as used-car salesmen, borrowers would be more wary.

As Dave pointed out, the lending industry is trying to clean up their act. The same applies to Colorado.
Anytime you have large amounts of money involved, the crimals will be close by.

http://www.dora.state.co.us/real-estate/mortgage/denial.htm

Here is a link that might be useful: People Denied A Mortgage Broker or Loan Originator License in Washington

California leads the way:
In California  where one of the most publicized suits has been filed on behalf of nine families  the state affords home owners some protection not found in other states. The law says mortgage brokers must act in the fiduciary interest of their clients. Congress is considering similar legislation nationwide.

Here is a link that might be useful: Borrowers Fight Back Against Misleading Loans

"Still, something about assisting people in the ruination of their life, even if legal, doesn't sit right ethically for me."

It's going on all the time - children are hard-sold credit cards in college and grow up thinking money grows on trees.

If I took advantage of all the credit I'm offered, I'd be driving luxury cars, trading up to a mansion, shopping for clothes on Rodeo Drive, etc. But wait, there's a catch... Oh yeah, I remember - I wouldn't have anything put away for my retirement, which I'm planning to do earlier rather than later, LOL.

Unfortunately, many people can't resist temptation and live as high off the hog as they can, with no money in the bank. As we've all seen and heard. (I even have family members that do this.)

I don't have much sympathy/empathy for them that do so. But I do worry about the youngsters who live this way - developing terrible financial habits for their futures.

Me? I had no choice - back in the olden days (the 70s and 80s), credit wasn't given freely. I had to save, save, save, and develop lifelong good habits. Now, with credit coming out of my ears, I know better than to succumb to the temptations.