Clearly, it is this disproportionate effect that gives rise to the question, ''Who’s to blame?'' The answer, in my opinion, is ''We (the collective mortgage/banking industry) are!''
Why? Well, for a number of reasons. For one, we gave the borrowing public only limited access to sound financial counseling. What’s more, there was a lack of alternative products, and frankly, a lack of will on the part of the industry to do anything about any of the problems. Many of the people who are going into default are sitting on property that has more money owed on it than it’s currently worth. These people are faced with making decisions about how to put enough food on their tables, which doctor bills or prescriptions to pay for, and all of this in competition with whether to pay the mortgage each month.
It’s been said that the hardest sale for a salesman is that of collecting on a debt outstanding. If that is true, the industry needs to do a better job at it or be prepared to become expert landlords and property managers, which is not a very pleasant scenario. Those of us, myself included, who are involved daily in the community most directly impacted know all too well how troubling the trend is and could become if left unchecked. It can take an entire generation for a homeowner to recover from a foreclosure and to buy another home.
This process may take even longer in minority communities because minorities have a strong bias against and lack of information about banks and the real estate industries in general. If these trends continue, this segment of our society will be removed from the benefits of homeownership just at the moment in history when they were finally starting to make gains. As an industry and as a nation, is this what we want? Is this good for our country? I think not.
If the industry wants to provide proactive relief and reforms in the way business is transacted, it should direct it towards the neighborhoods and homeowners with the most at risk. The denizens of Wall Street hedged their collective bets, so to speak, and sold off most of the risk. They will survive no matter what happens. It’s the homeowners who stand to lose everything, and that is simply wrong, if for no other reason than that they were unsuspecting pawns in a huge, accidental Ponzi scheme. This is true across socioeconomic boundaries but even more so in minority neighborhoods. Vacant homes hurt everyone’s property values, but in minority communities they can quickly lead to a death spiral of sorts: crime becomes rampant, which precipitates further flight from the neighborhood, which begets even more community decline. Remember: inner cities have been most affected by the subprime meltdown, and this is because of the predatory conduct of mortgage brokers who targeted these communities and their working class inhabitants with impunity.
So what can we do? For one thing, eliminate faceless virtual mortgage brokers from the loan-origination process. It is clear that a fraud has been perpetrated upon the general public by banks and lenders who unleashed, as one recent Wall Street Journal article put it, a ''low cost sales force that made it possible for lenders to quickly ramp up production without hiring employees.'' This sales force took advantage of the borrowing public’s naiveté about the mortgage loan process. However, it is the industry and its leaders who are the ones who are truly naive, and they are quite possibly civilly and even criminally liable as well. Today’s mortgage brokerage industry was rightfully characterized by New York Senator Charles Schumer when he described it ''as the wild West of mortgage finance.'' Just look at the results of allowing individuals to be ''correspondents'' for major banking entities without even a modicum of training or screening by the institution. Frankly, it is a disgrace to all the hardworking, honest brokers who built the industry over the last 20 years by earning and openly disclosing their fees.
Further, we need to license and test mortgage brokers uniformly on a Federal level across the board and require ongoing continuing education requirements for brokers, and the industry must push for this reform until it becomes law. To do otherwise would be lunacy.
Another step in the right direction, in my opinion, would be to cap originator compensation. In other words, establish loan origination fees by statute on a Federal or state level. We should put ''teeth'' in truth-in-lending laws. Require simple, one-page, plain English loan disclosure documentation and codify strict adherence to the disclosure protocol.
It’s high time the Federal government defined ''unfair and deceptive practices.'' Additionally, we have existing laws on the books that are not being enforced. The Home Ownership and Equity Act gives the Federal Reserve the power to set standards for all lenders, not just banks. Yet we continue to see inaction at that level as well. The Fed should, by rule, outlaw loans that exceed debt-to-income ratios of 50 percent after taxes and insurance.
The Federal government and its government-supported corporate cousins, including the FHA, need to develop more creative products geared towards replacing the private sector induced ''sub-prime liar loans.'' These institutions have failed to serve these markets in the past and helped nurture the advent of the high cost subprime loan industry. Congress needs to debate and then take action. Freddie Mac and FannieMae need to get back to basics and serve the low and moderate income market they were originally developed for.
The industry must eliminate ''stated income'' (so-called ''liar loan'') programs. Full ''doc'' loans with verified income and assets must be the norm, not the exception. True underwriting must be utilized on every single loan. Appraisals should all be submitted to a two-tier review process. Recently, just about anyone with a FICO score, an appraisal, and a heartbeat could get a 100 percent LTV mortgage, with an abhorrently low introductory rate. This was and is a recipe for disaster.
Finally, the industry (and the industry alone) must develop a rescue plan for the hundreds of thousands of borrowers who can demonstrate hardship, fraud, misrepresentation, or other malfeasance in the loan-origination and closing process. Loan workout analysis needs to become the industry mantra. Far too often in my day-to-day work, the ''foreclosure factory mentality'' comes out from the loss mitigation departments, and frankly, this mentality, which seems to be nurtured at an institutional level, needs to be shut down and replaced with an understanding, sympathetic, resolution-oriented one. Otherwise, the industry as a whole will become the reluctant absentee landlord of many of these foreclosed properties.
And why should anyone care what I think? I’ll tell you why. I was recently released from a New York State prison after having served three years of a four-year sentence for securities fraud relating to the sale of mortgages. I know firsthand how vulnerable institutional lenders are to fraud, and I know the consequences fraudulent conduct has at every level.
What we are seeing now is the tip of the proverbial iceberg. Since my release I have been employed as the chief investigator for the law firm of Glinn Somera & Silva, based in Deerfield Beach, Florida. One of the firm’s specialties is real estate fraud. Florida appears to be ''ground zero'' for mortgage fraud in the United States. Consequently, I am exposed to an assortment of material to review from people of all walks of life, and the problem has reached epidemic proportions here in Florida, with foreclosure rates having skyrocketed in the first seven months of this year. The real estate market in general has suffered substantially because of it. The sad truth of it all is that the consequences of the subprime meltdown will continue to reverberate through the Florida markets, and others, for some time to come. And worst of all, the bottom is nowhere in site.
About the Author
Michael Sichenzia is the chief operating officer of Deerfield Beach, Florida-based Dynamic Consulting Enterprises, LLC, a firm specializing in identifying fraud and financial misconduct. He is also chief investigator for the law firm of Glinn, Somera, & Silva. Dynamic Consulting Enterprises, LLC offers clients due diligence analysis, loan restructuring, workout and turnaround consulting, and business consulting. Sichenzia implements ethics and fraud avoidance programs for banks and financial institutions, and is currently working on establishing policies that will help them identify fraudulent practices in the lending process. He also restructures loans on behalf of individuals.
For more information on Dynamic Consulting Enterprises, LLC, call 954-596-0337 or write to Michael@servingthepeople.com.
