I usually don’t give more than a passing glance at news about the trials and tribulations of the giant roulette wheel on Wall Street. The hollow ring of their dog-ate-my-homework excuses for dips in market values, like the reasons dreamed up by the PR departments of the oil companies to explain the rise in gas prices while the price of a barrel of oil goes down, just never seem quite credible. However, the excuses given for the recent market falls—turmoil in the mortgage “industry” and the overvalued real estate market—caught my attention because of a local story in the Mercury News on Sunday.
Titled “The Harsh Side of the Housing Boom,” the excellent in-depth report by Pete Carey detailed multiple instances of apparent fraud perpetrated by local licensed mortgage and real estate professionals. The gist of the story is that non-English-speaking immigrants are lured by the professionals (who work on commission) into buying homes they can’t afford. The buyers are enticed by various means into signing mortgage documents in English, a language they don’t understand, that have been significantly padded with fraudulent income and asset information added by the agents and brokers who make up the numbers so that the buyers, who would ordinarily not qualify for a loan, easily gain approval.
Most of these loans to homebuyers with poor or no credit histories are of the “subprime” variety, meaning that they are higher risk and carry a much higher interest rate, sometimes as high as 11 percent or more. (Think about your mortgage if it had 10-12 percent interest!) Apparently, the lending institutions rarely do even basic due diligence before approving applications. Since the buyers can’t in fact afford the mortgage payments, they get into trouble very quickly, the homes get repossessed and the mortgages are often assumed by the agents and brokers or their associates and families, who turn around and sell the homes at a profit while the original buyers get thrown out in the street (which is better than being stuck paying hard-earned money to these snakes).
Some of these buyers who have been seduced by the unscrupulous real estate professionals have begun filing lawsuits and complaints against the alleged fraudsters. Time and time again, the names of certain agents and brokers come up in the complaints. Their answer to these charges reminds me of the kids in “Angels with Dirty Faces” saying, “Oh faddah, I didn’t hear nuttin’ and I didn’t see nuttin’.” And for every victim who takes action, how many just walk away and say nothing out of fear or ignorance?
According to the stories I have been reading and hearing, this sort of thing is going on all across the country. The nation’s second largest subprime mortgage institution, Irvine, California-based New Century, which is at the center of the controversy, has been suspended from trading on the NYSE. It is alleged that much of the company’s bad debt problems stem from making dicey subprime loans without proper due diligence. If you multiply the San Jose situation all across the country, you can see why there are around 2 million homes in default in the U.S. right now, a staggering figure.
This seems a very serious issue that goes way beyond the effects on corporate America and Wall Street. The subprime mortgage companies are doing with loans what Enron was doing with power. If this is the pin that pokes a hole in the overvalued real estate bubble, it’s going to affect property values and lending rates for every home owner in the city and the country. It’s also going to affect the status of every single bad development scheme proposed for San Jose, including Evergreen and Coyote Valley. That, along with the successful prosecution of the perpetrators, may be the only good news to come out of this situation.
Since it appears no one else wants to comment on this I will add something.
First, this is perfect example of why people need to learn English. If for no other reason than to not fall prey to the unscrupulous.
Second, and more important, is that during the housing boom of the last 5-6 years a type of loan emerged that lets the borrower make payments at a ridiculous low level. The end result is that the outstanding loan amount actually INCREASES over time, rather than decreasing. After some number of years the payments jump to a more normal level, and many of the individuals realize that they cannot afford the payments. The end result being the loss of their home and credit.
Business Week had an excellent article on this a few months ago, and it appears to be an even bigger problem than giving bogus loans to low income people who do not speak English.
Blue Fox
Thanks for your comment. I am beginning to think that people are afraid of this subject for some reason. I was hoping to learn something today.
I am worried that this subprime lender situation is just the tip of a very large, economy-killing iceberg. For instance, what about the interest-only mortgage? I cannot understand why anyone who thinks straight would sign on that dotted line. The only beneficiary of such a loan is the real estate industry. They make the profits while these types of “sales” keep values inflated. In the end, the ordinary homeowner will pay.
I find it hard to believe that people with even a rudimentary knowledge of mathematics could fall prey to this type of scheme. Everyone desires a home, and the security that accompanies one. This is why it mystifies me when I hear of people getting so far into this form of debt, with no perceptible way out. It is an entirely different situation to lose a secure job unexpectedly, leaving you in financial difficulties.
The language issue is another troublesome reflection of today’s society. When the last of my family arrived in the United States in the 1860’s, from Germany, Mama and Papa sent the children to school by day, and learned English from them at night. Papa had to be capable of speaking of business matters with the other men in the community, and Mama wanted to gossip with the other wives. They worked hard and succeeded, the government did not provide nearly as many social services, and yet they persevered to attain the American Dream. This was in agrarian Nebraska; larger cities throughout the nation often had enclaves of (Insert Nationality) benevolent societies, which would assist (privately) the newly arrived immigrants.
I am not suggesting that the unscrupulous were not there to confound and extort the confused and frightened new arrivals. Merely, that past generations had to face many more difficult challenges with fewer resources available to them. If they could do it, what is lacking from today’s new arrivals? I work in the high-tech world, and over 70% of the employees at my company are immigrants. We represent many different cultures, and educational backgrounds, and yet no one has had this type of difficulty. We all work hard and hope for the best for our family and friends.
Is it a matter greed or desperation? Greed, that one has to immediately attain more than what they can reasonably expect; or desperation that financially things will have to get tremendously better and allow you the home you desire. Tough questions…
I signed up for an interest only mortgage with the full intention of paying off the loan in 5 years before the interest rate goes up. I am on schedule to do this. Of course that only works if you are able to pay off the loan by paying down the principal.
#3 John
A good post that gives us something to think about. Thanks.
#4 Hugh
OK, that makes sense. I can understand why you would chance an interest-only loan in your case. But I hear stories of young couples taking out these loans at a high interest rate without a hope in hell of paying the principal off in 30 years. It’s the ready availability of huge amounts of credit to almost anyone that seems to be behind the current problems—-that and the concurrent overinflated value of homes due to so much easy credit creating a kind of falsified, artificial demand that continues to drive up prices.
There is also the underlying issue that most Americans (I use that term to identify everybody we are talking about here—it is inclusionary, regardless of actual status) do not properly manage their household budgets, do not know how to save, overextend themselves because they have got to have more stuff. Until this sickness is cured these problems will continue. Until people use common sense—don’t spend more than you can afford—these problems will continue.
Most Americans appear to be fools when it comes to using their (and losing) their money. Anybody who runs up credit card debt and pays the usurious interest rates is foolish. Folks who buy more house than they can afford need a serious lesson in economics. As we all know, buying even a starter house in this area is a killer, so it is understandable that people want more than they can afford. It is not understandable when people actually buy a place they cannot afford.
Certainly the unscrupulous agents who prey on those who do not clearly understand what they are getting into should be sent to a remote island somewhere. But, until people live within their means regardless of tempting sales scams, we will continue to read about these stories.
I don’t think any one should knock anyone if you don’t know what happen I am a victim of Mortgage servicing fraud and mortgage Predatory lending by Two Mortgage company’s
I speck english and I been in nY all my life anyone could fall in their trap it mate be you tomorrow.Smurf
Read some of these links
http://groups.google.com/group/emc-mortgage-servcing-fraud
#1 – Spot on.
Very few people have a working knowledge of the danger that negative amortization (excuse me, “choose a payment”) loans can pose to their financial future.
You hear the ads on the radio all day long about the “1% mortgage” and how the payment on a $500K loan would be $1500 or some such.
Right at the end of the advertisement, you hear the mumbled ‘small print’ section where they say the APR of the loan is 7.9% or worse.
And all the time they make their monthly 1%, they’re being amortized at 7.9%, and the actual loan balance on the house is going up, up and away.
Eventually they get upside-down on the loan-to-value ratio and are forced to either refinance a ridiculous amount, or walk away.
So: Is it a scam, or is it a business taking advantage of people who are either too stupid or too lazy to read a mortgage statement or to be able to do rudimentary arithmetic?
And how many of these people getting caught up in this kind of situation have two or three brand-new cars (or worse – leased cars) in their driveways?
Jack and others-
Why are you shocked that there is fraud in the real estate and mortgage industry? Aren’t they also businesses that employ individuals from all segments of the population? Isn’t it reasonable to assume that just like the general population, a certain segment of the humans working in these fields will be unscrupulous and predisposed to committing crimminal acts. Why should we assume they would be any more ethical as a group than Silicon Valley CEO’s who back date stock options, the former 10th Largest City Mayor accepting junkets from a software company, an unqualified Attorney General firing attorneys to create political patronage jobs, or School Board Members who make fraudulent charges on the district’s credit cards?
Crime and greed go hand in hand and are attracted by wealth and opportunity. With the feeding frenzy over real estate and lower interest rates the last 4 years, I was not surprised by the news that subprime lenders were eventually losing their shirts and that some of the unscrupulous people they hired committed fraud to earn commissions. This is just a symptom of the end of a business cycle. Look at the number of “agents” and “loan reps” who flooded the real estate and mortgage finance industry during this period. Is it any wonder that when the only qualification needed to be hired by some of these firms during the peak demand periods was having a pulse and a desire to earn commissions, that criminals were hired in their open cattle calls? Get real and don’t expect every thing in the Murky News to be the Gospel for these businesses. For the large lenders, their subprime loans account for less than 1-percent of their totals. This is a necessary shake out and is really no different than turning over a rock and watching the vermin scatter. I’s the end of a business cycle and the criminals are finally being discovered. We saw it with Merger Mania and the S&L scandal in the 80’s, Arthur Andersen, Enron, and the Dot.Bomb’s in the late 90’s. Why should the new milenium be any different.
In terms of the unaffordable housing prices, it is simply basic economics—the law of supply and demand. People need to realize that we live in a desireable local with employment and that there is a shortage of available housing. It is a function of scarcity. More people keep moving here and we’re not building enough houses. Steven Levy, a Bay Area economist, notes that we still have not even met the housing demand that was generated in 1991. Why is this occurring? 1) Cities have too much land zoned for industrial or commercial uses because they want to lure more sales tax and fee generating businesses, 2) Under Prop 13, building housing is a net revenue loss for Cities relative to the cost of extending services to new residents (except in the $1M+ category), 3) Growth control & development restrictions prevent vacant land from being developed to respond to the market, 4)NIMBY’s fight proposed housing developments so they don’t get built or the number of allowed houses is only a fraction of what the City says it wants in its adopted Planning documents, 5) Defect lawsuits have pushed the cost of insurance policies for developers to unsustainable levels and discouraging higher density developments, and 6) Labor groups have pushed City Councils to extend prevailing wages to non-public sector developments and have tried to extort developers and business owners by lobbying these bought and paid for Coucil Members to impose “Community Benefit” findings on development projects.
I agree with #10. Construction defect lawsuits are a function of developers building crap in the pursuit of a quick buck. my condo near downtown just settled a defect suit for $4 million. Our costs of the suit were just under one million, but we still came out ahead. Our HOA would not have gone through this [paying fees as we went along rather than a bigger contingency fee if we won.] unless there was good reason.
Regarding the housing market, it seems that there is a big inbalance between the salaries people have and the price to obtain a house with a regular 30 year loan in San Jose. The type of loan (interest-only) that was introduced 5 years ago or so it only brought all of this mess to real estate, we are in a situation where we have never had a real estate down cycle where this type of subprime loan was part of the equation. It will be interesting to see what is coming in the months ahead…
This story is as old as time…unscruplous people taking advantage of those who are vunerable.
The realtor who scammed these folks is scum and should be prosecuted…so should his company and the loan broker who conspired with him. The contract was in english while he lied in spanish…scum.
All the rest is business for those who knowingly take the risk…
There wouldn’t be defect lawsuits if developers built the stuff properly in the first place.
In the Merc today it’s Subprime loans aren’t loose enough – and it’s apparently only hurting Latinos.
Subprime loan woes crush some buyers’ plans
“Peña is buying her first home, a three-bedroom house in San Pablo priced at about $500,000. She was scheduled to get the keys to her house this week, but instead she learned 10 days ago that her loan had fallen through because the lender changed its criteria.”
Earlier this week it was Subprime loans were exploiting the poor – and again only the Latino poor were affected.
“Nearly three years ago, Luis Mapula was living in a converted garage with his wife and two daughters and earning $54,000 a year as a fence company construction worker. Then, almost like magic, he became the owner of a $543,000 home with no down payment.”
Bottom line?
Regardless of the facts, one thing you can count on – the Mercury News will spin the story chockful of immigrants-of-color-as-victims to keep their self-loathing readership weeping between sips of socially conscious coffee.
Hey, what does this all have to do with my hearings on Katrina victims?
We need to focus on my local issues around here.
Great topic Jack!
I am a mediator and I can tell you first hand that you should NEVER sign something you don’t understand. I spend most of my work time getting folks out of contracts that they signed because they committed to things they shouldn’t have or can’t afford. People sign contracts for everything from cars, loans, gym memberships, to leases on property. Most of my clients are immigrants who barely speak English. Some of them are Hispanic, but most are Vietnamese. It disheartens me terribly because by not learning English, they are victimized at a higher rate than others.
My mom and two sisters are German born immigrants. When they came to this country, after World War II, they didn’t speak, read, or understand English. To become citizens, they had to learn the language, and take a test proving they had a basic understanding of English. I’m not sure what’s changed requiring immigrants to know English since then, but it should be addressed.
There are too many dangers living in a country in which you don’t know the language. A few examples are that Police Officers issuing you a command, and you not understanding it, can get you killed. Secondly, many immigrant business owners come through my office because they are being sued for illegal, or unfair business practices. Thirdly, not one road sign is bilingual!
These scummy loan brokers who are doing these illegal things to unsuspecting homebuyers, is a perfect example of what this country is turning into. I’ll bet they get a way with it too. Credit card companies are the worst thieves around. If I gave you a personal loan and I charged you rates from 24-30% if you defaulted, and I tried to take you to court, suing you for that amount, a Judge would charge me for loan sharking! No lie.
Sallie Mae, and other companies providing students loans have sealed the law on making sure you can not go bankrupt on them. You can be homeless, out of work, and dying of cancer, but they don’t care, they’ll make sure they get their money before you can collect your disability check. These huge companies are going way to far.
The bottom line for me is this, people aren’t living beyond their means, they’re trying to survive on money that doesn’t stretch as far as they need it to. Landlords are jacking up rents, and leases on properties, food and gas prices are climbing everyday. People who don’t health insurance get ill and use credit to survive. Something needs to give, and soon. We are the richest country in the nation. You would think big business owners would have enough integrity, and compassion to remember who made them rich, and honor the trust we put in them when we engage in business with them. Very sad state of affairs~
Some part of this debacle I understand. Subprime lenders lend $$ to people with subprime credit. More risk=higher interest rates. A few years ago the lefties were whining because so many people were left out of home ownership due to poor credit. Well, they have bad credit for a reason—they spend more than they make. So, New Century and others to the rescue, loaning $$ to high risk individuals at an extra cost to account for the extra risk. And now those same lefties are whining that they never should have got the loans in the first place—a complete 180.
In coastal California, everyone’s betting on the continued rise in housing values/costs, so they believe they can re-finance to a conventional loan in 3-5 years based upon their increased equity. And for several years now that has worked.
But none of this makes any sense in most of the rest of the country, where housing values/costs may only increase 3%-5% in five years.
I haven’t heard enough about the alleged “predatory” practices yet to form an opinion. The lefties think anything poor or uneducated people do that gets them into trouble is someone else’s fault, not the responsibility of the person himself; eg. he raped and stole and killed because he came from a broken home, or a “disadvantaged” area or race. Same is now true with mortgages, as far as these folks are concernedd—it’s the lender’s fault, not the borrower’s fault for biting off more than she/he could chew.
Nobody FORCES people to take these loans. Most people prefer home ownership, and apparantly will do anything to get on that bandwagon.
I purchased my first home in Willow Glen in 1980. My parents had never owned a home. I went from $390/month rent to $1150/month (conventional 20% down)mortgage, plus taxes and insurance. A year or so later mortgage rates were above 20%!! My Master Card was still only 18%. The first year was tight, but I made it.
Not so many people, it seems, these days. One thing I heard on KQED yesterday was the story of a guy who was buying his father’s house. A day or two before close of escrow the lender jumped his rate from 5 1/2% to
8 1/2%. On the one hand, that seems predatory. On the other hand, why did he not get a rate lock in the first place? Doesn’t everybody? And he was buying the house from his father, so why didn’t he just tell the lender No to the rate hike, and seek other financing. The KQED reporter (really editorialist) blamed the lender. But no-one forced this guy to go through with the loan when the greedy lender upped the price. The borrower has little but himself to blame.
I’d like to see and hear more about these allegedly predatory practices before I come to any conclusion re who is to blame on the larger scale. But companies like New Century are reaping what they have sown by taking on so many high risk loans. They and others got greedy, and it’s no-one’s fault but their own, either.
Shame on you, #17, for daring to suggest that borrowers actually assume some responsibility for their financial situation. You’re right, why didn’t the guy buying his father’s house go to another lender. Wouldn’t his old man agree to extend the escrow deadline?
JMO- I love the way you find the balance in things. I thought a lot about your comments, and I agree with a lot of what you said. Our nation is turning into one where people aren’t being accountable for their actions. Having said that, I have another perspective I’d like to share.
The thing that bothers me about what lenders are doing is this, if you know someone is low income, and/or you know their credit is bad, why on earth would you charge them a higher rate than they can afford? It’s like credit cards, or the phone company charging a higher rate of interest, or the phone company giving you a fine when you miss a payment. It doesn’t make logical sense to me. Obviously people default if they don’t have the money to pay, why make it worse by charging more?
Secondly, these companies, as I understand it, get tax incentives to do business with low-income folks. For example, developers get a lower cost loan to build housing, if they set aside 10%-20% of their units for low-income renters or buyers. I don’t see how these lenders can walk a way from their obligation to behave honestly. Many of these loan contracts either had no income stated, or a higher income than the person had, and according to the news, it was the fault of the lenders because they were remiss in either including it, or they forged amounts earned by these families.
By giving loans to low-income persons you are going in the gate knowing what they can and can’t afford. These businesses seem to have lost their integrity, and are taking advantage of people who don’t understand the terms they are entering into. In the old days, a hand shake, and open honest discussions about terms, and following through on promises made, is what made good business. Businesses who practiced this way got more business via word of mouth; return business, and happy customers.
Today, it’s all about the money, and more money, regardless of who you hurt to get it.
Bridget #19:
Thanks for the compliment.
I suspect there’s a lot of Glen Gary Glen Ross in this industry. Unscrupulous salespeople doing whatever it takes to earn a commission, and companies setting up boiler rooms where you eat only what you yourself kill.
My big question remains how widespread is the problem? Is Everybody doing it, or, as usual in any industry, merely the few without morals? Does everybody help borrowers fill out a fraudulent applications and then submit them? What sort of checking is done? In the ones that go upside down, perhaps none. A blogger above made mention of a person earning about $50k getting a 100% loan on a $550k house—clearly a foreclosure waiting to happen.
I don’t know who these outfits package and sell their loans to; not Freddie Mac or Fannie Mae; so the investors who buy them must know of the added risk, unless they are being duped at their end, as well.
I understand why poor folks with bad credit get charged higher interest—to cover the added risk, the higher default rate than good risks. It’s not as counterintuitive as it seems to you, Bridget. It’s the same reasoning behind junk bonds paying higher interest than solid corporate bonds—someone has to get extra $$ for the extra risk.
I just opened the Yahoo Home Page, and guess what popped up, very inconspicuously: “$599,000 loan for only $1,997/mo. Bad credit OK – LendingTree “
I guess they don’t read the papers @ lending Tree.