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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More Evidence Emerging of the Big Banks Role in Mortgage Meltdown

0New Orleans      If there is anyone over the age of 10 years old that has any doubt that the pure and simple, unchecked greed of banks caused the mortgage meltdown triggering the Great Recession, please read, and listen carefully.   Information now coming out on the dealings between Morgan Stanley, the Wall Street behemoth that acted as the primary financier, facilitator, and purchaser of tranches from high-flyer New Century whose fall in 2007 signaled that the party was over make it crystal clear that they funded the mess until it broke the economy and almost bankrupted them as well.  Follow the big money and the trail becomes impossible to miss.

Reports are emerging from of all places an ACLU lawsuit, representing some buyers who lost their homes,  of emails and other information that has come from the discovery process.  Morgan Stanley tried to squash the suit, but a federal judge has now ruled that there is more than enough to push the matter forward.  The Justice Department and local prosecutors are also smelling blood in the water and predicting that Morgan Stanley will settle for a pretty penny before summer gets too hot.

Once again resources and their availability from Morgan Stanley seem to have been irresistible to New Century.  I’m in danger of starting to develop a global theory of how money and resources more than any other factor moves – or halts — not only too much of the work of social change but virtually all of what we see in not only this mess, but also tech, research, medicine, and a lot of other fields, so that’s a warning of things to come.

In this case,  Morgan Stanley was the biggest buyer of New Century subprime loans from 2004 to 2007, about $42 billion worth, and insisted that they wanted packages that were heavily weighted towards adjustable rate, ARM loans, or what the New Century CEO and co-founder once referred to in a negotiating session with ACORN and his own personal situation as “drinking his own Kool-Aid.”  Oh, and make sure they have pre-payment penalties as well, ok?  Risk and compliance factors low on the Morgan Stanley totem pole, in other words, not at the trading desks where sales are sex and everything else is road kill,  and were consistently ignored, even when the big bosses knew better.

According to a report in the New York Times

another lower-ranking due diligence officer, Bernard Zahn, who wrote detailed emails to both Ms. [Pamela] Barrow [a top diligence officer] and Mr. [Steven] Shapiro [head of the trading desk] explaining, in increasingly urgent terms, problems with the loans they had bought.  “It isn’t ‘just a couple of typos or ‘mistakes’ as it was suggested, the more we dig, the more we find.”  Ms. Barrow congratulated Mr. Zahn: “good find on the fraud :).” But rather than pursuing his findings, she immediately went on: “Unfortunately, I don’t think we will be able to utilize you or any other third party individual in the valuation department any longer.”

Hard to miss that message.   You can ask, just don’t tell.

Barrow in another exchange was pretty clear about what they thought of the quality of their borrowers as well, when she…

wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.” “We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”

Well, yeah, and if loan affordability had ever been a criteria rather than bonuses and greed on Wall Street, millions might not have suffered. How do you explain all of that and what you did to your mommas and papas, Morgan Stanley big whoops?

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Federal Reserve Blasts Wells Fargo with Largest Ever Fine

Maude Hurde leadin an action against Wells Fargo years ago

Maude Hurde leadin an action against Wells Fargo years ago

New Orleans I may still be under a gag order on ACORN’s final settlement with Wells Fargo, but who knows at this point and who would care now.  Wells Fargo was always about hard ball and hard bargaining, but when we moved after than in 2004 after settling first with Ameriquest and then Household Finance on predatory lending practices, they were the next obvious target.  We had them to rights, rather to wrongs, but rather than accept the Ameriquest and Household terms for settlements they stonewalled.  The ACORN National Convention in Los Angeles that year made Wells Fargo its central target as 1500 people passed the Disney Concert Hall and then swarmed outside their building, handing the executives a copy of the suit our lawyers filed that day.

We settled eventually on the best terms we could get.  They implemented best practices and supposedly made other modifications.  The suit had been narrowed from the national scale of Household down to just California plaintiffs.

I read with some bittersweet pleasure at justice delayed being still better than justice denied that the Federal Reserve had settled with Wells Fargo this week for $85 million to compensate between 3700 and 10000 victims of virtually the same predatory practices that ACORN had exposed.

The Fed hit them for abuses that continued after our settlement from 2004 to 2008.  Much of it sounded the same though.  Documents had been faked with false income numbers.  Borrowers had been steered into unaffordable loans.   The CEO now, John Stumpt,  released a statement swearing it was a “small group” of employees who made this giant mess, and furthermore they had already paid off 600 customers.  Hmmm?  If that’s supposed to be an apology, then in typical Wells Fargo fashion, it sure doesn’t sound like one to me.

The Federal Reserve slept through the subprime crisis, and this latest fine, even though the largest, does not prove differently.

Judging from the tearless, limp finger pointing by Stumpt at others, it is clear that even as they pay the fine, nothing is changing in the sanctimonious and callow corporate culture at Wells Fargo.

If you want a safe bet, make one that they will continue to do the same thing over and over again, until caught and forced into a situation where they really have to change, rather than copping a plea where they admit nothing and deny everything as always.

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