The following is an excellent excerpt from the book “FLEECED: How Barack Obama, Media Mockery of Terrorist Threats, Liberals Who Want to Kill Talk Radio, The Do-Nothing Congress, Companies That Help Iran, and Washington Lobbyists for Foreign Governments Are Scamming Us. . . and What To Do About It” by Dick Morris and Eileen McGann from Chapter 14 “THE SUBPRIME LOAN CRISIS: Why the Greedy Are Going Free” on page 246 and I quote: “Lenders – although many mainstream banks made subprime loans—Citigroup and Lehman Brothers actually set up subprime subsidiaries—most of the mortgages flowed through nonbank lenders such as New Century Financial, Ameriquest, Option One, Countrywide, and Ocwen Mortgage Solutions. Jim Hightower, a vigorous and virtuous consumer advocate from Texas who briefly served in the state government, notes that while “brokers are on the front lines . . . the lenders are the ones who invented the scams that are bleeding borrowers.”
Conventional mortgages from reputable banks typically carried a 1 percent fee for the lending institution. But Hightower reports that subprime borrowers were “commonly hit with fees (hidden in mortgage payments) totaling more than 5 percent.”
Contrary to the tradition of most banks, which carefully investigate the borrower’s credit history and income, these lenders did little to check out their customers. Hightower reports that one broker said, “you could be dead and get a loan.”
As The Washington Post reports, subprime lenders have been in a “feeding frenzy” to make loans and “basic quality controls were ignored in the mortgage business, while the big Wall Street investment banks that backed these firms looked the other way.”
Subprime mortgages are so profitable that although they accounted for 20 percent of mortgage loans last year, they generated 30 percent of the profits in the mortgage business. The Washington Post adds that “lenders also made a fortune selling subprime loans to Wall Street. Investment banks charged huge fees for packaging them into massive bonds called mortgage-backed securities. Investors received high returns for buying and selling these bonds.”
In the rush to cash in, the usual safeguards were abandoned by lenders. The Washington Post says that “automated underwriting software that searches for irregularities and possible fraud was also supposed to stop bad loans. But industry professionals say such programs were easily manipulated. Meanwhile, some appraisers and underwriters, who examine housing values and other claims made on loan applications, say they felt pressure from bosses to let questionable loans through.”
A lot of “questionable” subprime loans were loaded with gimmicks, usually buried in the fine print of the lending agreements and couched in legal language. Some home loans were based on bloated appraisals of the value of the properties for which they were lent. In some cases, the lenders wouldn’t tell the borrower about the property taxes or mortgage insurance premiums they’d be obliged to pay. Hightower notes that this practice “leads to borrower shock (and sometimes default) when the tax and insurance bills arrive separately in the mailbox. At this point, ever-helpful lenders offer to refinance the loan, thus collecting additional fees.”
Borrowers who came to realize that they were headed off a cliff when the initial term of their mortgage expired could do little to avert the catastrophe. They couldn’t refinance even if they found a lender who would give them the money to pay off their current subprime mortgage. Seventy percent of subprime loans include prepayment penalties with a fee of several thousand dollars for paying off the loan early. (Only 2 percent of conventional mortgages carry such penalties.)
The ever-eloquent Hightower sums up the abusive process: “What a system! Lenders mislead borrowers, collect fat fees from them, then shift the risk of any bad loans to Wall Street. The Wall Street repackagers then transfer the bad-loan risk to their rich investors, drawing even fatter fees.”
The subprime lending craze led to an increase in foreclosure of 41 percent during the first half of 2006. A total of 550,000 American families lost their homes in the last year. In all, some 2 million American families may face foreclosure of their subprime loans.
One of them is Gerald Porter, a seventy-six-year-old California man who is suing his mortgage company, saying that it “conspired with a bank to commit elder abuse and fraud by arranging to refinance his home with a high-interest loan that he did not want.” He charges that “Loyalty Mortgage, Inc, and the Downey Savings and Loan Association worked together to earn high fees by harassing and intimidating him into taking out an unnecessary and expensive loan.”
If we take his allegations at face value, Porter’s case demonstrates how far lenders and brokers will go to get people to sign up for mortgages. He says that the defendants “took advantage of him because of his age, diminished physical and mental abilities, and inexperiences with financial transactions and used a campaign of repeated harassment, physical intimidation and fraud to obtain his business.”
Porter says that Loyalty representatives made “incessant” calls to get him to take out a loan. He finally ”gave them his personal financial information because he thought they would stop calling once they had the data.” But the calls didn’t stop. Indeed, a Loyalty representative, one George Lopez, “came to his home [and] stayed there for five hours, during which he used physical intimidation to obtain an electronic copy of [his] signature.” Porter says he was ”fearful for his life while Lopez was at his home.” The complaint says that Lopez, who is “physically imposing. . . poked Porter in the chest with a rod-like device used to obtain electronic copies of signatures”
Porter says “he was shocked when he received a notice from his mortgage lender. . . saying that his debt had been paid off through a refinancing loan from Downey Savings” and notes that the new mortgage has such high monthly payments that they “will leave him unable to pay all his bills.”
Commenting on the subprime defaults, the president of the Federal Reserve Bank of Saint Louis, William Poole, suggested that the market is starting to punish those who made bad loans. “This year’s markets punished mostly bad actors and/or poor lending practices,” he said. “Lenders who made loans to borrowers without documentation, or who did not check borrower documents that proved fraudulent, or who made adjustable-rate loans to borrowers who could not hope to service the debt when rates adjusted up, deserved financial failure. As is often the case, the market’s punishment of unsound financial arrangements has been swift, harsh and without prejudice. . . . I cannot feel sorry for the lenders who have gone out of business.”
On the other hand, Poole continued, “my attitude is entirely different toward the relatively unsophisticated, but honest, borrowers who have lost their homes through foreclosure. Many are true victims.”
And, as often happens, minority families are the hardest hit by the scandal. According to a study by United For a Fair Economy,” “People of color are more than three times more likely to have subprime loans than white people.” The study estimated that these families have lost between $164 billion and $213 billion in the subprime collapse.
But what about the middlemen? The brokers and their favored lenders who made bad loans, knowing they were bad, and then sold them on the secondary mortgage-backed securities and are now comfortably enjoying their fees and commissions? These people have gotten away free.
And some of them are showing considerable chutzpah while enjoying their gains. Having been the president of Countrywide Financial Corporation, one of the biggest subprime lenders, Stanford Kurland has now founded the Private National Mortgage Acceptance Company. Its purpose? According to the Wichita Business Journal, “to purchase and restructure distressed mortgages.” So first Kurland makes money giving out bad loans—and now he wants to make money fixing them up!
Unfortunately, the Fed hasn’t been as forthcoming with regulatory action as Poole has been with his sympathy. While the Federal Reserve Board did issue guidelines on June 29, 2007, requiring banks to stop abuses like imposing prepayment penalties, the regulations apply only to banks, not to nonbank lenders who account for most of the subprime loans.
But where was the Fed when the subprime crisis was building? Out to lunch, as The New York Times has noted. “An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses,” the Times reported. “Both the Fed and the Bush administration placed a higher priority on promoting ‘financial innovation’ and what President Bush has called the ‘ownership society.’”
The Fed finally acted on December 20, 2007, but it was too little, too late. It issued new regulations, binding on both regulated banks and other lenders, requiring them to get detailed financial information—including tax returns—from would-be borrowers and making them liable for determining prospective borrowers’ ability to repay their loans. The Fed would let borrowers sue lenders who approve loans they are fairly certain they cannot repay.
But the Fed regulations are only prospective; they do nothing to punish—and therefore deter—those who made the bad loans in the first place.
One company, Fannie Mae, is hoping to use the subprime mess to resuscitate its reputation and expand its empire. In our most recent book, Outrage, we examined the role of Fannie Mae, the once public, now private company that still has quasi-official status and guarantees a vast number of mortgage loans. We described how Fannie Mae uses the implied, but not legally binding, federal guarantee of its debt to generate low-cost capital to buy up mortgage loans so as to let banks make new loans in the housing market.
Unfortunately, as we also noted, Fannie Mae has inclined toward empire building, using its vast lobbying and political clout to get special favors from the government. Most recently, Fannie Mae was found to have overstated its earnings by $200 million, allowing it to pay $90 million in salary and bonuses to its CEO, Franklin Raines.
As punishment for such infractions, the federal government imposed limits on how large Fannie Mae’s portfolio can grow. Circling like a vulture over the subprime debacle, Fannie Mae is using its lobbying power to get congressmen to propose lifting the ceiling as a way of curing the subprime crisis.
But, given its sordid history, can Fannie Mae be trusted to lead us out of this crisis without feathering its own nest in the process? Sending in Fannie Mae to rescue the system may be like asking the wolf to indemnify the farmer for the losses in his chicken coop.
While the Federal Reserve Board buried its graying head under the sand as the subprime crisis grew, Congress has been considering a series of ever-so-limited legislative fixes to the problem. But none go to the root of the situation: how to punish the folks who gave us this crisis to begin with.
Here’s the state of play on legislative fixes as of this writing:
CONGRESS TO THE RESCUE?. . . FORGET ABOUT IT!
Congress Has Passed:
• A program to build or preserve 1.5 million “affordable homes or apartments over the next ten years.” Big deal! It’ll take years for those homes to open their doors—while hundreds of thousands are facing foreclosure right now.
• A bill to make the IRS forgive taxes when a lender finds it in his heart to forgive some of the mortgage debt. Again, small potatoes.
• The House passed legislation to expand Federal Housing Administration refinancing—a little help, but not much.
• $250 million for housing counseling to those facing foreclosure. A hand-holding measure—not what we need.
And it’s considering. . .
• Letting bankruptcy court judges revise mortgages to offer relief. If it passes, it’ll do a lot of good.
• Legislation to curb predatory lending practices. A.K.A.: closing the barn door after the cows have escaped.
• More oversight hearings. Just what we needed, more talk!
Most states have done nothing to deal with the subprime crisis, but a few have taken limited steps:
North Carolina recently passed a law to limit the fees mortgage brokers can charge and to stop prepayment penalties. The law also contains disclosure requirements to alert home buyers to the perils of adjustable rate mortgages.
As North Carolina’s governor, Michael Easley, has said, “If Washington isn’t going to act, the states are going to act.” But perhaps more candidly—and less typically of a politician—he has also admitted that “I should have watched this [crisis] closer, all of us should have on the state level. We should have looked at our laws closer and made some changes.”
The International Herald Tribune reports that “about a dozen states. . . are starting to make legislative and regulatory changes to protect subprime borrowers” including Maine, Minnesota, Illinois, New York, and Massachusetts.
Ohio, which has the third highest mortgage foreclosure rate in the nation (after California and Florida), now requires lenders of subprime mortgages to verify the ability of borrowers to repay loans—a key step that all states should have taken a long time ago.
But most of the states are working to help those who are facing foreclosure by instituting various schemes to refinance their mortgages at lower rates. The Herald Tribune reports that Maryland, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania have all “rolled out mortgage programs intended to refinance loans by homeowners at risk.” But these measures will help only hundreds of homeowners, a few thousand at best. Considering that half a million families have already lost their homes and many more will follow, this is scant relief indeed.
fortunately, Congress may begin to consider seriously legislation to reform subprime lending practices. Senator Christopher Dodd (D-Conn.), the chairman of the Senate Banking Committee, had previously opposed new legislation (arguing that the Federal Reserve had all the power it needed under the Home Ownership and Equity Protection Act of 1994). But he is now reversing his position, advocating new reforms and promising to file a bill to “prohibit brokers and lenders from steering homebuyers into a more costly loan,” which would stop brokers from playing “lenders and borrowers off against each other and would ban prepayment penalties.”
It’s another good start. But to these two objectives—reforming lending practices so the abuses will stop, and refinancing victims’ mortgages to prevent them from losing their homes—we would add a third: punish those who made bad loans, making an example of them so that others aren’t tempted to imitate their behavior.
Action Agenda – Skilled brokers and unscrupulous lenders will always find a way around regulatory requirements. Though legislation can effectively end certain obnoxious features of the subprime mortgages—such as prepayment penalties and the exclusion of taxes and insurance from the list of monthly payments the broker must reveal to the borrower—it won’t solve the basic problem. No amount of disclosure, or rehearsed or scripted statements about the perils of subprime lending or the dangers of adjustable rate mortgages, will halt the practice
This is because every time an unsuspecting borrower meets a broker or lender who’s anxious to make a buck, both sides are not to close a deal. The borrower sees the mortgage as his gateway to middle-class living, and the broker and lender sees it as a ticket to risk-free dollar signs. Even if the lender and broker sit the borrower down and say “in three years, your rate will go up to this figure and may go as high as this other figure,” the borrower is perfectly likely to disregard the warning, betting the property value will increase and cover the extra amount, or that he’ll get lucky and interest rates will fall. Or maybe that big raise will come through. Or perhaps he can switch jobs. Hope springs eternal. . .
For this part, brokers and mortgage lenders will always smile and wink their way through the disclosures, making clear that they really see them as something the government makes them read but that they don’t regard as a serious danger. The implication will be: I have to tell you this, but don’t believe it for one second.
There is, however, one very good way to stop unscrupulous brokers from arranging these shaky loans: hold brokers and lenders alike responsible for any defaults by recapturing the fees and commissions they made off the deal.
The federal and state governments should create strict standards for responsible behavior and hold both lenders and brokers to them. If a reasonable lender would not have made the loan, for instance, the legislation should require the broker and lender to repay the borrower the commissions and fees they earned in the transaction. If the borrower has to go to court to enforce his rights, he should be entitled to triple damages for his pains, and his attorney fees should be included in any judgment rendered against the broker or the lender. If the broker or lender doesn’t pay up following a judgment, it should cost him his state license or federal charter.
Federal and state regulatory authorities should be empowered and required to review the records of these proceedings to recapture mortgage commissions and fees and take note of individuals or companies that are repeated offenders. They should then have to take action against them for revocation of their licenses or charters.
These measures would make brokers and lenders think three times before agreeing to a loan. If the borrower defaulted, they would know that it would bring them under scrutiny for recapture of the fees they made and could possibly lead to a loss of their licenses.
Why should we let brokers make an average commission of almost $2,000 and lenders charge up to 5 percent of the face value of the mortgage as fees when the loans should never have been made in the first place? Only if we subject them to a penalty will they refrain from making loans that they shouldn’t. As long as they can keep their fees and commissions, why would they care if the loan goes south? They’re no longer on the hook, and the risk is absorbed into the vast, amorphous mortgage-backed securities market.
There is ample precedent for this kind of recapture of past benefits. When taxpayers use tax shelters that turn out to be bogus, they’re held liable for the past taxes they have avoided paying over the previous years. We should use recapture as a way to discipline those who have obviously disregarded normal principles of sound-lending and sought to inveigle gullible borrowers into committing to mortgages they can’t afford.
As we write this, not one lawmaker has raised this obvious disincentive in Congress or included it in a new legislative proposal. It’s not on the radar screen. We hope this book helps to put it there.
The chairman of the House Financial Services Committee, Barney Frank (D-Mass.), has introduced a bill that, according to The New York Times, “would for the first time let homeowners sue Wall Street firms for relief from mortgages that the borrowers never had a realistic chance of repaying.”
Frank’s bill would “require any mortgage lender to verify that the borrower has a “reasonable ability to repay” based on documented income, credit history, and debt level.” The criterion it sets is whether the monthly payments on the mortgage, taxes, and fees amount to more than half the borrower’s income.
The Times explains that, under Frank’s bill, “people who can show that they never had a reasonable ability to repay the loans would still have to pay for their homes, but would have new statutory power to demand better deals from the lenders. They could demand that their original mortgage lender offer a better loan. Or they could demand relief from the Wall Street firm that bought the mortgage and resold it to investors.”
Frank has criticized the “people who package mortgages and sell them into the secondary market,” calling them “a major cause of the single biggest world financial crisis since the Asian crisis” of 1997-1998. He said, “it’s unthinkable that we would leave that undisturbed.”
Again, Frank’s bill doesn’t go as far as it should. The ones who should be responsible for the shady and unpayable mortgages are not only the Wall Street people who packaged the mortgages and sold shares in them on the securities market but also the brokers and the lenders who conned homeowners into taking the loan in the first place. But it’s a clear step in the right direction.
So write Barney Frank and Senator Christopher Dodd, his Senate counterpart, and tell them how you feel. Tell them you support Frank’s mortgage lawsuit bill—and that next they should go after the brokers and lenders themselves. Here’s how to reach them:
Representative Barney Frank
2252 Rayburn House Office Building
Washington, DC 20515-2104
Phone: (202) 225-5931
Senator Christopher Dodd
P.O. Box 51882
Washington, DC 20091
Phone: (202) 737-DODD (D.C.); (860) 244-2008 (Conn.)”
(EVEN THOUGH THIS EXCERPT MENTIONS CONTACTING SENATOR DODD AND REP BARNEY FRANK, THEY ARE BOTH OUT OF OFFICE AT THIS TIME, SEPTEMBER , 2015. SINCE YOU CAN’T CONTACT THEM, YOU SHOULD CONTACT PEOPLE LIKE DEMOCRAT SEN CHUCK SCHUMER, WHO IS STILL IN OFFICE, ABOUT TAXING THE HEDGE FUNDS AND PRIVATE EQUITY. BY RAISING THE TAX RATE ON CARRIED INTEREST FROM 15 PERCENT UP TO 39.6 PERCENT.
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran