An open letter from mortgage industry statistician Tom LaMalfa to Sen. Chuck SchumerTom LaMalfabrokers, inflated appraisals, mortgage market meltdown, Federal Reserve, Wall Street
Dear Sen. Schumer:
In a recent op-ed to the Wall Street Journal, you
wrote, "Unscrupulous brokers inflated appraisals, misrepresented
the cost of loans and induced borrowers to take out loans they
cannot repay." How could you have concluded that Mortgage Brokers
are the core of the mortgage market meltdown currently occurring?
Fraud and unfair dealings are only a small part of the extant
What balderdash. Having observed and studied the mortgage
brokerage business since the late 1980s, I can demonstrate that
your aforementioned statement is erroneous and detrimental to any
rational examination of the problem. For now, suffice it to say
that Mortgage Brokers don't sign appraisals or ever authorize in
any direct way approvals of credit or collateral. Brokers perform
none of those three functions. Their indirect influence is also
If you seek culpability, look at the Federal Reserve first,
Wall Street banks second and then lenders. This is where most of
the blame lies. The Fed flooded the market with liquidity that Wall
Street moved to lenders, and they to brokers, and they to
borrowers. You delude yourself to think that millions (yes, it will
ultimately involve millions) of "homeowners" were "induced" to
become homeowners by some magic potion. Most borrowers were as
greedy (on a much smaller scale, of course) as those rapacious
investment bankers you shield. You ostensibly seek to divert
attention from the true miscreants, the ones who funded this mess,
for they help fund your re-election campaigns.
You wrote, "New laws are needed for the irresponsible, unethical
Mortgage Brokers who have taken advantage of lax oversight to rip
off borrowers ..." Your "new laws" are too late and
Where, oh, where have you been as this mess has been unfolding
over the past three years? As long as home prices appreciated eight
percent, 12 percent, even 20 percent per year, not a peep was heard
from you, Congress, the White House or the regulators. It was all
smiles as Congress promulgated a 70 percent homeownership rate and
the Bush administration promoted its so-called "ownership society."
I have been warning people about this woeful situation for years,
including a letter to the U.S.
Department of Housing and Urban Development Secretary in August
2005, suggesting the market had created a ticking time bomb.
Fact: Prime and sub-prime borrowers wanted something (i.e.,
equity buildup) for nothing, and for years they got it, thanks to
rising home prices. Homes became ATMs. Most borrowers were once
prime borrowers who became sub-prime because of their own actions
and credit decisions. Truth is, their middle-class lifestyle was
being challenged--thanks in large part to Congress' indifference to
the people. Fact: These Americans supplemented faltering income
with credit that every financial intermediary promulgated 24 hours
a day, seven days a week for decades. Talk about culpability.
Think about this, senator: It's not difficult to "convince"
people to borrow when Congress watches benignly as 3.5 million jobs
leave the country and middle-class folks' income stagnates for
decades. That Americans over-borrowed is evident in the consumer
credit data and our nation's abysmal savings rate. Consumer debt,
like federal debt and corporate debt, has never been higher than it
is today. Almost everyone in America is in hock.
You wrote of investors losing confidence in sub-prime products.
That's only part of it. What investors have lost confidence in is
Wall Street itself. Wall Street burned the investors--pension
funds, mutual funds, insurance companies, endowments, hedge funds
and bank trust departments--at home and globally. All were misled
(lied to) about the performance of the collateral. They feel
deceived, and probably were. It is these "brokers" you and your
committee should be investigating, not the small mom-and-pop shops
that, on average, produced $32.4 million of originations last year
and made profits on average of $220,000. Your Wall Street titans
earn that in a month.
Finally, the "bad advice" you wrote about emanating from brokers
came from the sum of: 1) the Fed, 2) the investment banks, 3) the
White House, 4) Congress and 5) the lenders. Mortgage Brokers are
salespeople, not accountants, financial planners or fiduciaries.
Bring any of the latter three groups into the mortgage delivery
system and watch origination costs spiral. It will usher in a cost
structure like that of the 1980s and earlier, and 90 percent of the
people will be worse off for 10 percent to be better off.
Truth is, Congress holds a much larger share of the blame for
the mortgage meltdown than Mortgage Brokers. This card-carrying
Democrat knows this first-hand, so stop the finger pointing at
small business--it's the Wall Street brokerages and the Fed you
should be investigating. The big guys are to blame ... once