Les Jones

Economics > Crooked Dealings in the Mortgage Industry

Via TheHousingBubble.com:

Derek Brown knew Detroit had a problem when a grocery clerk he knew quit his job to become a mortgage loan officer. “Everyone was selling mortgages. There were mortgage offices on every block," said Brown, past president of the Detroit Real Estate Brokers Association. "One day bagging groceries and the next day selling my mother a mortgage? What the hell is that?” Today, many of those sweet deals are turning sour. In August alone, there were 3,900 new foreclosure notices in Detroit.

“There were people who couldn’t read or define a loan application who were selling $300,000 loans," said Emil Izrailov, who started his career selling subprime mortgages and is now chief operations officer of Kaye Financial Corp. in Bloomfield Hills.

On the other side of the table, home buyers were asking for loans that would have seemed outrageous a few years earlier. In Shelby Township, John Karpinki got a $650,000 no-money-down mortgage just 22 months after he was released from prison, where he spent 12 years. The home is now in foreclosure.

"People would come in and tell me what kind of loan they wanted," said Nicole Jackson, who worked in the subprime market in Detroit for years. ‘If I didn’t sell them a loan, the person down the street would.’

In effect, mortgage lenders today act less like banks than like car dealers: Once a mortgage is sold, their interaction with the homeowner is done. Instead of making money on 30 years of interest, lenders make their money on closing fees. As lenders became further separated from the risk of bad loans, their goal changed: Quality didn’t matter; quantity did.

If people are getting paid to approve loans they'll tend to approve loans. The article also notes appraisal inflation. Combine poor loan oversight with giving subprime loans to borrowers with bad credit and using Crazy Eddie loan vehicles like interest-only loans and you wonder why the managers of mortgage companies like Countrywide were put in charge of so much money.