Jimmy Stewart? Or used car salesmen?

Posted by: Dean Foust on May 25, 2007

Don’t know if you caught this, but the heads of two of the largest real-estate interest groups traded barbs this week – over the question of “Who’s to Blame?” For the mortgage mess, that is. The head of stewart2.jpgthe mortgage banking industry’s trade group – the folks who underwrite the mortgages — started it, accusing mortgage brokers of making fat-and-easy profits by putting home buyers into loans without any concern for whether they could repay them. While the banks were, you know, just trying to make loans like Jimmy Stewart did when he ran the Building & Loan in Bedford Falls.

According to
this account from the Associated Press
, John Robbins, chairman of the Mortgage Bankers used_car_salesman.jpgAssociation, says he is “mad as hell” at “a few unethical actors” that have sullied his profession’s reputation. “Unethical people, they’re responsible for this mess,” Robbins said. “The short-term folks. People who get a commission when the deal happens. For them, it’s the number of loans that counts. Good loan? Bad loan? Who cares? For them it’s all about their commission.”

In a lunchtime speech at the National Press Club, Robbins called for a national licensing system for mortgage brokers, which would help weed out “scam artists.”

The battle was on at that point…

According to the AP, the the president of the National Association of Mortgage Brokers responded with a blistering e-mail statement that said, "It is truly unfortunate (Robbins) has attempted to shift blame away from Wall street, federally chartered banks, state-chartered lenders and underwriters for the subprime situation we find ourselves in today."

Harry Dinham, president of the brokers' group, added that congressional hearings have shown that "most residential mortgage loans are quickly sold into the secondary market _ in fact most lenders are really just brokering the transaction but afraid or ashamed to admit it," he added.

My view? A pox on both their houses. Yeah, there were lots of people who probably were selling vacation time shares before, jumped into the mortgage business when the going was good, and now they’re hustling silver bars for some boiler-room commodities firm. That, or hedge fund shares. But the banks were no different – just selling the loans as fast as they could to Wall Street firms like Bear Stearns, who was bundling them into mortgage-backed securities as fast as they could. So in this parlor mystery, everyone killed the butler.

Should mortgage brokers be licensed? Probably. There should be some professional certification, but not sure that would stop an unscrupulous broker from jamming a no-doc Option Arm on a widow. Or enable the bank to track them down when the loan goes sour two years later. The banks and Bear Stearns could have figured out how to put safeguards in place two years ago, but they were too busy shoveling the loans out to investors.

Reader Comments

rich

May 25, 2007 11:15 PM

Dean,

Like most columnist on this site, you got it wrong. The story isn't who blames who. The story is: Who is liable? Who will end up paying their total net worths (and then some) in lawsuits? The ansswer probably is unscrupulous mortgage brokers. Mortgage brokers have an ethical and legal responsibility for "suitability," similar to securities brokers. If they don't try to verify that a mortgage applicant is telling the truth on applications and has capacity to repay, brokers are violating ethics and regulations. Before this mess is over a decade from now, mortgage brokers, individually and collectively, will pay hundreds of millions of dollars in fines, settlements and judgements. Lenders have no such liability. With lenders, it's always caveat emptor. Try to get on top of this situation in the future, please. Stop printing rubbish.

Michael Hoskinson

May 28, 2007 12:11 AM

From today's LA Times article 'Option' ARMs can easily confuse" another quote that reveals the truth that brokers don't work for their clients benefit "Your broker works on commission
The bigger your loan, the more your broker makes — and high fees end up fattening the broker's wallet.
Jeff Lazerson, president of a Web-based shopping service called Mortgage Grader, said high commissions for high-cost loans were one of the biggest conflicts in the real estate industry.
Consumers go to a loan broker to help them find the best deal among competing mortgage lenders, but the broker is paid by the lender based on the profitability of the loan, he said.
"The broker's incentive is not aligned to the interest of the consumer," he said. "It is truly an adversarial relationship."

rich

May 29, 2007 8:55 PM

To say it is an "adversarial relationship" means little from a legal liability point of view. Look, if you sue a mortgage broker for twisting your arm and inducing you to take out a mortgage that was not in your best interest, you are outta luck. If you sue a mortgage broker for misleading you with false statements, you may win if you can prove it.

But if you sue a mortgage broker claiming that the information on loan applications was deliberately falsified with the knowledge, collusion or negligence of the mortgage broker, you are going to win your case time and again. Before it's all over, this lawsuit will be fought and won thousands of times, and many hundreds (if not thousands) of mortgage brokers and their firms will be broke, if not in jail. Of course, by then they will be long gone from the business, which will be in shambles.

When all this is over, it's gonna be a much smaller industry, especially: home builders and mortgage brokers. The builders probably have millions of dollars of liabilities for colluding with mortgage brokers. It's not just gonna be the wronged homeowners who sue; it will also be the states' attorneys general, on behalf of the people, in class actions. A decade of litigation ahead.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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