Because
of this recent sub-prime mortgage fiasco, I was recently reminded of the
collapse of Irvine 's
New Century Financial and other lenders that have had profound impacts in Orange County.This nation wide collapse
has invariable put pressure on liquidity markets across the globe.
The culprits who caused these massive defaults are mortgage
professionals who are given the unregulated ability to underwrite very high
risk loans with merely stated income documentation. The unintended consequences
of their profiteering are inflated home prices above present income levels,
loss of employment among the county’s thousands of financial professionals, and
inevitably county wide home foreclosures for those who couldn’t afford their
mortgages.
New York Senators, Charles
Schumer and Hillary Clinton, who are among the largest
recipients of contributions from mortgage banker PACs, seek new laws to
target little-guy brokers to serve the dual purposes of campaign financing and
political grandstanding. The truth is the brokers just market the
products that lenders provide.
Both Senators are in favor of
strict regulation against brokers in quoting rates to borrowers, while allowing
the lender who bank rolled the loan to remain unhindered. Both also want to
enact laws which limit the amount of income (Yield-Spread Premium) a mortgage
broker can earn from sale. If a broker charges fees or receives earnings from a
lenders sale, it has to be disclosed separately on a HUD-1. The mortgage broker
has to disclose all conditions of the loan they originate per RESPA. Lenders
can thus hide behind banking a loan on the secondary market, and aren’t forced to
disclose their gains to the borrower in escrow.
Take Schumer’s recent op-ed in
the Wall Street Journal; entitled New
Laws needed to Unscrupulous Brokers, he argues the following:
New laws, such as that I am fighting in the sub-prime
lending industry, aren’t needed for the thousands of responsible, ethical
lenders operating in the sub-prime industry today. Nor are they needed for the
secondary markets, which self-correct. New laws are needed for the irresponsible
unethical mortgage brokers who have taken advantage of lax oversight to rip off
borrowers in such gigantic volumes that we are now staring down the barrel of
large home foreclosure crisis in history.
Ethical lenders? Was this piece written by Schumer or
lobbyists from the Mortgage Bankers Association who are seeking to limit
competition in origination? The truth is that brokers operate under stricter
guidelines for loan origination than lenders. Unlike brokers, employees of
lenders operate under the jurisdiction of the Department of Corporations who by
law don’t require licensing to quote rates to borrowers. Also, to reemphasize
the central point of this mortgage meltdown, lenders supply the consumer with
the products that brokers match the consumer market with. Accordingly they were
also in the business funding and flipping stated documentation, and high risk
yet voluminous loan pools to the secondary markets that securitize and
portfolio them into lucrative bonds on Wall Street to bankroll their firms before
the process is repeated with another pool of cheap loans.
In addition to the fraudulent practices of New Century, other mortgage
lenders in Orange County have also recently been
culpable of fraudulent lending practices. In
January 2006, Ameriquest, whose parent company ACC Capital Holdings Corp.
operates out of Orange,
had to pay 325 million dollars in restitution to states attorneys general for
deceiving sub-prime borrowers.
Also in 2006, a Federal Judge affirmed that First Alliance Mortgage, a mortgage lender, was
justifiably liquidated after allegations of mortgage fraud. Aided and abetted
by Lehman, New Century engaged in predatory lending abuses, and teased and
exploited borrowers into loans that they couldn’t afford.
Therefore,
it is unfair to put all the blame on small-fry brokers. The mortgage industry
as a whole should not be in the business of pushing and funding loans without
sufficiently analyzing a reasonable risk of default and foreclosure. Finally
the originator must be responsible in taking on the role of financial adviser
to the borrower. Borrowers must be taught to earn and save as they carve their
path to homeownership. If they don’t, the whole county suffers.
Mr. Ayer registered as a Republican to be electable in an interim election with no incumbents. He did...
This is a misguided post. The lion's share of the blame lies with Alan Greenspan & The Federal Reserve. They're the ones that created the enviroment for some brokers to take advantage of all the cheap money that was floating around. The Fed kept rates artificially low because the stock bubble had burst and they choose to stimulate the economy/inflate our money rather than keep rates at a level that would curb inflation pressures. Housing is in the mess it's in right now because of the Fed. It's completely predictable that Senator's like Hillary & Schumer who took huge contributions from lenders and banks during this artificial boom are now trying to over correct by madating more regulations and proposing bailouts for borrowers who bit off way more than they could chew when they took a teaser rate & 100% financing. You knew this was all going to end badly.
Jeez, from such a conservative blog, I can't believe you aren't blaming the borrowers.
Borrowers know best if they can afford their payments. If they lied to the brokers or allowed the brokers to lie, then the blame lies with them.
I think we can safely say there is enough blame to go around.
Allan nails it.
No one put a gun to the borrowers' heads -- or the lenders'. Lenders who made bad decisions now must reap what they sowed. As it should be. Borrowers who can't meet payments they agreed to will have to find cheaper places to live. As it should be.
What's NOT needed is the government telling people what to do. After all, many of these borrowers *will* pay off there loans, becoming successful homeowners.
p.s. I like this thread -- how often do I get to agree with Allan?
LOL Tyler. The market needs to be allowed to liquidate all this malinvestment & excess. Knowing what I know about the Fed though, this will probably not happen. The(Fed) created a moral hazard for borrowers and brokers by setting the rate so low. Now it's time to pay the piper for these bad decisions.
The other thing that's scary for OC is all the mortgage/real estate related jobs that are going bye bye because of the credit crunch. I know a lot of people who made a lot of money the last ten years in the mortgage business. I hope they have an exit strategy.
If I understand the post, Jubal is objecting to the face that only the little guys are targeted, and that is because the big guys want to limit the free market, right?
Countrywide owns my mortgage, and they send me a come-on every other week that is about as ethical as a carnival barker. The Fed didn't make them do it. They, and the greedy people who bit the apple, deserve the financial punishment that comes their way. Otherwise, we all pay.
An out of state friend recently suggested we round up the appraisers, brokers, lenders and Title guys and sue them.
It worked against big Tobacco!
It'll happen. Trust me.
There's enough blame to go around, number one in my book to blame is the borrowers. Forget lenders and brokers, those guys are businessmen trying to make a buck. Blame the buyer whose family was making $40,000 a year, but he thought he can afford a $500,000 home. Oh let see, he borrowed 80% from the bank and 20% from his relative. Voila, free house... so he thought, and now he's crying.
Here's a great quote: "If people want to borrow money under risky terms and lenders want to lend under a high risk of loss, why should the government stop them?... but most Americans believe it is the government's job to stop people from willingly doing stupid things."