Oh, No, Subprime Mortgage Brokers are Coming Back

 

 

 

 

 

 

 

 

New Orleans   Please, just move the soapbox over here a little closer, because I’m going to jump and shout yet again, and sadly, not for the last time about the little named co-conspirator and enabler of the Great Recession real estate meltdown: mortgage brokers. They are under regulated, lightly trained, totally unsupervised, largely sales people too often paid little more than commissions on mortgage closings achieved often by hook or crook. They beat the bushes to create the paper stream of deals that are then packaged and picked up by banks and, increasingly, nonbanks, who have even more of the mortgage action than they did a decade ago.

A thinly disguised job announcement in the “B” section of The Wall Street Journal headlined “Subprime Brokers Back in Demand” is a warning to the rest of us that big trouble is on the way, especially in lower income communities. The reporter wrote that Southern California was once again on the “cusp of efforts to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.” Call me, “some,” because that’s exactly what I’m saying. Further she notes, that “some brokers faked loan applications and steered people into debt they couldn’t afford.” Oh, yes, many, many of them did, and subprime companies ate these loans like candy.

Here’s what’s really scary. The demand for brokers is coming largely from nonbank lenders and smaller lenders, both of which are lightly or hardly regulated, by states not the feds, and in the case of nonbank lenders, they are not even required to follow the Community Reinvestment Act or provide their data through the Home Mortgage Disclosure Act. The market includes families with lower credit scores, and, god knows, there is a huge market, especially now in the wake of the recession, and these families want and need loans, and many of them deserve mortgages, especially as the Home Savers Campaign has found, since too many are finding no alternative outside of land installment contracts and various rent-to-own schemes. Additionally, workers and families with difficult to verify income sources from cash payments in the gig economy or tipped employment, need so-called stated income loans, where their money is verified without company provided W-2s. We absolutely believe there needs to be a set of subprime products and stated income loans. Where we separate is over the issue of who and what is going to protect families from abuse. One of the reforms of the last decade has been an increasing reliance on affordability, meaning a family’s ability to pay the loan. Who and what is going to assure that that benchmark remains prominent?

Brokers are just in sales-and-promotion. They push the responsibility to financial institutions, and since they are the middle-men, they can venue shop until they find some place willing to take paper and issue the loan. They then get paid. Period. The consequences downstream mean nothing to them.

Meanwhile nonbank lenders have almost half of the total mortgage market now. In the increased scrutiny since the recession, only $6 billion nonprime loans have been issued in the first quarter of this year and only $22 billion in all of 2016, compared to $1 trillion in such loans in 2005 according to Inside Mortgage Finance, cited by the Journal.

If regulators don’t make the effort to separate the baby from the bathwater this time around, millions of families and thousands of neighborhoods will drown in it again.

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Alternative Mortgage Lending Tiptoeing Around a Broker-based Implosion – Again!

REUTERS/Chris Helgren

New Orleans   In the 2008 Great Recession, fingers pointed wildly in all directions and in some cases in little Taliban caves around the country they are still doing so, and trying to play the blame game at the expense of the victims. One of the more troubling terms to emerge from those terrible days for borrowers trying to stay in their homes was the notion of “liar’s loans,” as the subprime industry called some of these mortgages. The haters tried to claim the borrowers were the liars, though our work repeatedly found that the culprits – the big liars in the affair – were almost invariably mortgage brokers channeling huge volumes of paper to subprime lenders and blowing up the numbers on “stated” income mortgages.

ACORN understood the value of stated income mortgages because many of our lower income families worked in contingent employment that was impossible to verify because of cash transactions without social security statements. Tipped employees were just one of the examples. As we met with subprime company after subprime company (four in one wild day in Orange County, California, the subprime ground zero!), we raised our concerns about the supervision of brokerage networks accounting for much of the loan volume in the portfolios they were assembling and the incredibly high percentage of stated loans, often approaching or exceeding 50% of the lending they were making and packaging. They would then flannel-mouth something about a risk algorithm that was protecting them and assure us they were on top of it all, when in fact as it developed, they were doing the happy dance to bankruptcy and blindsiding our members, many of them whom had no idea what numbers brokers had claimed to be their income, often without so much as a wink-and-a-nod, and were shocked to find in some cases that their social security income had now been converted to six figures.

All of ACORN’s fights against predatory practices by subprimes came roaring back to mind when ACORN Canada shared an article with me about the cash-crunch and turmoil that ousted the top officials and plummeted the share price of Home Capital Group, a leading company in what the Financial Post called the “alternative mortgage lending” space, which is just another name for subprime loans. The problem was simply described:

Home Capital’s current crisis began on April 19, when the Ontario Securities Commission accused the company and some of its officials of misleading disclosure. The OSC alleges that the company misled shareholders because it knew there was fraud in its broker channels before July 2015, when it announced the findings of its internal investigations and disclosed it had cut ties with 45 brokers as a result.

The Post commentators were aghast that regulators were investigating Home Capital for what they viewed as dated and minor problems with the company’s brokerage channels and accused the OSC of what Republicans in the US would now call “regulatory overreach.”

How quickly people forget! The Ontario Securities Commission fortunately had some memory cells left from watching the real estate American meltdown a decade ago, and recognized what US regulators have still failed to grasp in the patchwork quilt that regulates and licenses brokers in this country on a state by state basis. Broker fraud is inevitable in the mortgage supply chain whenever brokers are substantially paid by commissions based on closings, rather than standards that include buyer affordability. We always demanded, and often won, though sometimes too late, agreements that US-subprimes not allow mortgage brokers in their networks to be paid that way. Given the hammering of stock prices for all the companies in the Canadian subprime industry, smarter investors must suspect that all of them are only loosely supervising brokerage networks, and that’s scary.

Low-and-moderate income families need a subprime market so that they can access mortgages for houses and apartments, but they also have to demand that the companies not be predatory and that they work as hard to keep their acts together as families do who are busting their butts to pay their bills and their house notes. Let’s hope Canadians are coming to grips with these companies and have learned the lessons that Americans are living in denial and still trying to forget.

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