Mortgage woes could be 'tip of the iceberg'

According to mortgage brokers, appraisers and regulators, the roots of the problem date to the mid-1990s, when the market for subprime lending began to take off.

Traditionally, regulated lenders like banks used to make loans directly to borrowers. And those bankers — whose employer’s money was at risk — took the time to understand a borrower's income, job status and the value of the home being purchased.

But much bigger share of mortgage origination has shifted to unregulated, non-bank lenders who quickly resell these loans to investors, where they may ultimately end up in pools of loans that are bundled by Wall Street investment banks, chopped up into securities and, for a fee, sold off to insurance companies, pension funds, hedge funds and other institutional investors.

Unlike banks, many of which are supervised by federal regulators, mortgage brokers are regulated state by state. And state rules and licensing procedures vary widely. In about half the states, a single mortgage broker with a license can open an office staffed by an unlicensed sales staff, according Hagar.

Worse, bad mortgage brokers who are banned in one state can move to another relatively easily — without being detected by regulators in their new home state. Though many lenders maintain their own private databases of bad actors, what’s needed is a national database to track the worst offenders, according to Capouano.

“There should be a national regulation on how to get licensed: You must adhere to certain guidelines and take tests and continuing education and be always knowledgeable,” he said. “That will push these SOB brokers out of the market. “

Reviewing the files
Federal regulations do apply to so-called “conforming” loans sold to quasi-government agencies like Freddie Mac and Ginnie Mae. Loans insured by the Federal Housing Administration, the Depression-era agency set up to manage the world's largest mortgage fund, also carry strict guidelines.

But oversight of those loans has been getting looser, according to HUD Inspector General Donohue. Beginning about a year ago, FHA began allowing approved lenders to keep their mortgage application files on site instead of forwarding them to the FHA, which now spot checks about 6 percent of those applications, he said.

“We live by the review,” said Donohue. “It’s at that point — often we get tips and we have a hotline — but it’s at that point that the referrals are made to us. So if you find a red flag in that loan file, it might take you back to a bad lender. You track it backwards.

“Do I think that a 6 percent review of the total universe is acceptable? You can only imagine how much you might be missing in the process,” he said.

FHA officials declined an interview request from MSNBC.com for this story.

Another S&L debacle?
Some have compared the current wave of mortgage fraud to the savings and loan debacle of the late 1980s and early 1990s, when deregulation of the thrift industry opened the door to widespread abusive lending practices among commercial developers and lenders. After years of trying to roll over bad loans — only to see losses continue to mount – the government finally stepped in with the creation the Resolution Trust Corp. to buy up bad loans. The bill to taxpayers eventually came to $124 billion, according to a 2000 review by the Federal Deposit Insurance Corp.

So far, no one is suggesting that the total dollar amount of bad loans in the current wave of mortgage fraud will approach that figure. In the savings and loan collapse, commercial mortgages each worth tens of millions of dollars — or more — went up in smoke. Mortgages to subprime borrowers, at the bottom of the real estate ladder, amount to just a few hundred thousand dollars for each borrower.

But the losers in the savings and crisis were largely professional investors, builders and lenders, many of whom escaped with their personal finances intact. Though taxpayers took a big hit, the impact on individuals was relatively small.

This time around, the failures of the residential mortgage market are hitting individuals the hardest. Many are on the very bottom end of the economic ladder, duped by brokers and lenders who preyed on their aspirations to home ownership.

“Because of these few bad apples it is going to affect us, and it’s going to effect the good honest people who really did need this (subprime) program that was available at a reasonable interest rate," said Capouano. “It’s going to push them out of the housing market. It is going to hurt them. And that’s what so sad about all this and so frustrating about all this.

“The (mortgage) industry was trying to create additional home ownership,” said Donohue. “And that’s very nice, and I think that’s a great thing to allow people home ownership. But at what cost? And to what end does that happen? I think what happened is that people — unscrupulous people — took advantage of that and what they did was go out and solicit prospective buyers.”