Increases in mortgage fraud drives need for better detection

Increases in mortgage fraud drives need for better detection

September 26, 2007

Broker bashing continuesRichard H. Lovell Esq.Mortgage Brokers, sub-prime market, Sen. Chuck Schumer, The Wall Street Journal, The Middlemen—Mortgage Mess Shines Light on Brokers’ Role, The New York Times, Myths Spun by Lax Lenders
This article is for informational purposes only and does not
constitute legal advice. Readers should not rely on it as such. No
one should attempt to interpret or apply any law without the aid of
an attorney.
Used car salespeople (and lawyers, too, I am sorry to say)
have often been looked upon as the bottom rung of the professional
ladder. If someone wanted to put down a group of professionals,
they compared them to either used car salespeople or, yes,
attorneys. Well, the tide seems to have turned. The favorite
whipping boy for all of the ills of the world (besides perhaps
Barry Bonds or the architects of the ill-conceived debacle in Iraq)
seems to be the Mortgage Broker!
Not too long ago, The Wall Street Journal, not usually
known as an anti-business publication, ran a front-page article on
July 5 titled The MiddlemenMortgage Mess Shines Light on Brokers
Role. Sen. Charles Schumer of New York was quoted on that same
front page as saying The Mortgage Brokers are the wild, wild West
of mortgage finance. He went on to say in the same article, We need
to bring a sheriff to town. Subsequent to Schumers comments,
legislation was introduced in the U.S. House of Representative by
the top Republican on the House financial panel. Rep. Spencer
Bachus (Alabama) wants the federal government to set licensing
standards and provide for a national database for Mortgage Brokers
and others who sell home loans.
The Wall Street Journal article, in the first few
paragraphs, indicates that 58 percent of home loans are originated
by Mortgage Brokersup from about 40 percent ten years earlier. The
breakdown shows that half of all mortgage loans made to borrowers
with good credit are originated by Mortgage Brokers, but Mortgage
Brokers originate a whopping 75 percent of sub-prime mortgage and
about 70 percent of Alt-A loansi.e., loans that fall between A
loans and sub-prime loans. Sub-prime loans, of course, are the ones
that have received the overwhelming amount of press coverage as of
late. By providing these statistics at the beginning of the article
(remember the title of the article), the writer is clearly
attempting to illustrate how the Mortgage Broker has replaced the
used car salesperson as the nations most despised service provider.
However, if one has the patience to stay with the article to its
completion (which continues for almost an entire inside page of the
paper), one would see that the main focus of the story is not about
the Mortgage Brokerage industry, but about the escapades of one
particular unlicensed Mortgage Broker in northern California. While
the web of deception that this particular mortgage originator has
spun is quite interesting to read about, if the press and our
legislators would spend more time publicizing (and regulating) the
proliferation of unlicensed handguns in the same manner that they
publicize the havoc caused by the occasional misguided Mortgage
Broker, we would be much better off.
Yes, the Mortgage Broker seems to be stuck in the unenviable
position of being the scapegoat of the mortgage industry. About the
only things that this industry has not been accused of is selling
those steroids to Mr. Bonds (if, in fact, he used them) or outing
Valerie Plame. Then why are they being held responsible for this
sub-prime mess, and why hasnt the industry been defending itself in
the mainstream media? Is it because the politicians are so far
removed from the actual reality of the mortgage business that they
dont understand the difference between a Mortgage Broker and a
lender? Recently, the head of a federal banking insurance
corporation was heard to say that Mortgage Brokers are a big chunk
of the problem with sub-prime lending. It is not the Mortgage
Broker that is making the non-performing sub-prime loans, it is the
lenders. The public, and the regulators, need to understand this
differentiation!
An editorial that appeared in The New York Times on July 10,
Myths Spun by Lax Lenders, read: Lenders should not be able to
offer loans that do not fit a borrowers credit profile. That is all
fine and well. If lenders had not offered these products, then
Mortgage Brokers would not have been able to sell them. Lenders
offered them and made a great deal of money on them, as did Wall
Street. Those who made a lot of money on lousy loans dont stand to
lose their houses now that the game is ending, The New York Times
editorial went on to state. True. But Mortgage Brokers were only
one of the tools used by the sub-prime lenders to facilitate the
making of these sub-prime loans. If the loans werent available,
Mortgage Brokers couldnt have originated them.
The undeserved noose seems to be tightening around the neck of
the Mortgage Brokerage industry. As Congress seems intent upon some
sort of national licensing initiative, one must ask how this would
benefit consumers in states like New York where the Mortgage Broker
is already licensed and heavily regulated. In fact, here in the
Empire State, even stricter regulations will soon go into effect
requiring licensing of and background checks on individual loan
originators.
The Federal Reserve has recently issued rules requiring that
lenders qualify applicants differently than they had been doing.
More specifically, they want to make sure that an applicant
qualifies for a mortgage payment based upon the real interest rate,
not on any teaser rate. Great! Long overdue! Again, what did the
Mortgage Broker do wrong? In most cases, it was the lender who
determined that a borrower had sufficient income to repay the loan,
not the Mortgage Broker.
Even though the blame seems to be directed, for the most part,
on the wrong parties, the Mortgage Brokerage industry is going to
have to work very hard to regain the confidence of the general
public. There are only so many evenings that the national news
shows can lay the blame for the mess on an essential and functional
industry before the industry fights back, and fights back hard.
Whenever you see an article, hear a broadcast or witness a
legislator equating Mortgage Brokers with the wild, wild West, pick
up a phone, write a letter or send an e-mail in response. Only you
can turn this public relations nightmare around. Do it now!
Richard H. Lovell Esq. is the founder of Ozone Park,
N.Y.-based law firm Richard H. Lovell PC. He was a member of the
New York Association of Mortgage Brokers board of directors for
more than 14 years. He may be reached at (718) 835-9300 or e-mail
mortgaglaw@aol.com.

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