Bad lenders, bad loans
Our vision of the evil banker is one who will not lend,
but the real evil mortgage banker is he or she who entices an applicant into signing a note he or she cannot repay, and then exits stage left, clutching origination fees, as revealed in this Boston Globe story:
The state has shut two licensed mortgage brokers in Lawrence and fined one of them $200,000 after regulators documented several cases of brokers inflating the incomes of borrowers on mortgage applications, sometimes doubling or tripling the sums, to help home buyers qualify for loans.
Cries the reader, ‘Inflating the incomes of borrowers’? How can that possibly make sense?
The cease-and-desist orders said regulators found documents showing that Diamond Mortgage repeatedly inflated the income of borrowers on mortgage applications by tens of thousands of dollars from the incomes detailed on applicants’ payroll stubs.
One application, for example, said an unidentified borrower earned $49,200 a year, when the true income was $23,804, according to the orders. Another application said the borrower earned $63,600 a year, when the true income was $18,274.
Welcome to the realm of agency risk. The financial interests of the individual originator are misaligned with those of the borrower family, and with her own company. It goes like this:
- Applicant lacks enough income to repay loan, so unscrupulous originator commits fraud by inflating borrower’s income.
- Borrower now qualifies for a loan.
- When loan closes, originator is paid a closing fee (often, one percent of the loan), and has no further responsibilities.
Got it? Lying about a borrower’s income is worth money for the originator unless somebody catches on.
Flight is always part of the business model
Meanwhile, the poor borrower is stuck with payments he cannot afford:
One borrower, Fausto Nunez of
One of the loan applications said he earned $5,805 a month, when the family’s gross income was really no more than $3,000 in any month, Nunez said. The application also said he had $10,000 in the bank. He actually had only about $2,500.
Nunez secured two loans totaling $289,000 and moved his wife and children into a yellow duplex in one of
Here’s the second element of fraud: mislead or outright deceive the borrower about the payments required. This is easier when the applicant has trouble with English, or with the language of finance:
Nunez, who is not fluent in English, acknowledged he did not closely review the loan documents.
You’ve read all that, right?
By last December, he defaulted on the loan and lost the house. “I didn’t know what they did,” he said. “But I’m paying for it.”
Mr. Nunez has unquestionably been victimized: aside from making high payments for a house he no longer has, he now has hurt his credit record — and he almost certainly signed personally, so he is at risk of personal bankruptcy.
Nor is he the only victim in this one transaction: the bank that actually made the loan is likewise out for whatever it will lose on foreclosure.
“Certainly if people are obtaining loans for which they have no reasonable basis for repaying those loans, there’s a significant risk of foreclosure,” said David Cotney, chief operating officer for the state Division of Banks, which issued the two cease-and-desist orders Friday and notified the Globe yesterday.
“I would certainly call this unfair and deceptive lending,” he said.
Let’s be stronger: call it criminal fraud.
The only large winner is the original property seller … and while the Globe article does not explore this, in other similar fraudulent-lending scams, the property owners or developers are active participants.
As Thomas Crown said in his movie, “You overpaid.”
Nor are the losers confined to these participants; whole communities can lose too:
Specialists have linked the surge at least partly to the marketing of adjustable-rate mortgages to poor Latino residents who are likely to default as interest rates rise. Because of the softening real estate market, many are unable to refinance their loans to lower their payments.
The task is made more difficult because, as mortgage originators are normally one- or two-person offices, outright fraud can go undiscovered until, as happened with Mr. Nunez, the borrower defaults. Lending in difficult areas is no giveaway — that is what banks are supposed to do. Nor is the complexity of the financial product — these too are more often deployed to help borrowers. As a result, originator regulation is a very difficult task:
Cotney said the division issues cease-and-desist orders against mortgage brokers about a half dozen times a year for violations of state lending laws, such as misleading advertising and excessive fees. There are more than 750 licensed mortgage brokers in the state.
It’s often left to a community to police itself — or at least to call the financial police:
Community leaders praised the state crackdown. They said they are concerned that unscrupulous mortgage brokers in
“I’m ecstatic,” said Juan Bonilla, who counsels home buyers at Lawrence CommunityWorks Inc., a nonprofit community development group.
Vultures feast on easy prey, and Lawrence is prime territory:
Back to Mr. Bonilla:
“I’m glad that someone was caught, and, hopefully, this will be an example to those that are taking advantage of the community with these loans. We’ve been trying to educate the public about this issue for a long time,” Bonilla said. “It almost felt like we were alone.”
The wheels of the government grind slowly enough, yet they grind exceeding small:
The Division of Banks issued cease-and-desist orders against Diamond Mortgage Services and Synergy Mortgage Group, both of which have offices in the same building in downtown
Judging from the record, one of these two entities is a real originator, victimized along with everyone else; the other is the perpetrator. Let’s hear from the suspects:
Synergy Mortgage Group.
The shutdown of Synergy (not affiliated with a company of the same name based in
In an Aug. 1 letter to the division,
He said, for example, that he included income from a companion of one borrower, even though that person was not listed in documents as a co-borrower. In another case, he said, he included income from a job for which the borrower had not started getting paid.
Edward J. Hammonds, who opened Synergy Mortgage around Aug. 5, did not return several phone calls seeking comment yesterday.
We needn’t hear from Mr. Hammonds, we can simply quote from the cease-and-desist order:
13. By placing each of the mortgage loan applications into a stated income mortgage loan program, Diamond Mortgage and Edward J. Hammonds, as the Branch Manager of Diamond Mortgage’s Lawrence location, had the opportunity to place the mortgage loan applications with the mortgage lender or financial institution without: (a) verifying the amount of the applicants’ income and (b) without submitting the other documents that were in Diamond Mortgage’s possession at its Lawrence branch location which reported the actual income of the applicants.
[…]
19. Based on the information contained in Sections 1 through 17, the Commissioner has determined that:
(a) Edward J. Hammonds has engaged, or is about to engage in, acts or practices which warrant the belief that he is not operating honestly, fairly, soundly and efficiently in the public interest in violation of standards governing the licensing and conduct of a mortgage broker including, but not limited to, the provisions of Massachusetts General Laws chapter 255E, section 4 and the Division’s regulations at 209 CMR 42.00 et seq.; and
(b) The public interest will be irreparably harmed by delay in issuing an ORDER TO CEASE AND DESIST to Edward J. Hammonds and Synergy Mortgage.
Diamond Mortgage. By contrast, this lender, which has an apparently reputable business in
Diamond Mortgage has agreed to close its
Obviously a significant penalty.
The agreement does not affect Diamond Mortgage’s operations in
In fact, the agreement specifically imposes a compliance obligation on Diamond:
7. Diamond Mortgage shall adopt or revise, as applicable, quality control standards contained in policies and procedures that will ensure that loan originators, and other employees and independent contractors operating on behalf of the Corporations are adequately supervised to ensure compliance with all state and federal laws and regulations applicable to those engaged in the business of a mortgage broker in Massachusetts.
One entity closed, one individual barred; another entity fined, allowed to continue operating, and instructed to improve its quality control.
Steven Newberger, president of Diamond Mortgage, said yesterday that he closed the
“They revealed some things to me that I found appalling,” said Newberger, who declined to be more specific. “I had no choice but to stop it…. A lot of things were done without my knowledge. That is why I severed the relationship. I couldn’t be responsible for somebody who wasn’t going to be responsible to me.”
Angels or demons? You have to look closely.
The Taunton Gazette adds an addendum from Mr. Newberger:
Newberger, who has run his
By the time cease-and-desist orders were issued by the division against his company and Synergy Mortgage Group - both listed with a common
“I closed [the
What stunned Newberger was the news that Edward Hammonds, the man he hired in 2004 to manage his Lawrence branch, had under the Diamond banner apparently condoned and encouraged the inflated-income, application scheme.
“I don’t know what he was doing, but I know he wasn’t doing the right thing,” Newberger said, adding he knew
“Ed urged me to open a branch in
After being contacted by the division on July 10 about the
Finally, a third polyp may have been nipped in the bud:
Regulators also investigated R&R Financial Services Inc. and Reyes Mortgage Co., after observing that the former was advertising mortgage brokerage services online and the latter had a storefront sign trumpeting such services. The state ordered the businesses to stop brokering mortgages without licenses.
The principal of R&R is Fanny Rodriguez, a former employee of Diamond Mortgage whom Newberger said he fired about 18 months ago.
However, Rodriguez said yesterday that she was terminated because Newberger feared she was going to strike out on her own.
“It hurts me that they are using me this way,” she said. “It’s all a lie.”
She runs R&R but denied brokering mortgages there. She said her husband, Cesar Reynoso, brokers mortgages there, acting as a Diamond Mortgage employee.
Who’s making these fraudulent loans? Find the lady!
Let’s ask Mr. Newberger of Diamond:
Newberger denied that Reynoso works for his company.
UPDATE (8/29/06):
After posting the foregoing, I received an email from Steve Newberger, owner of Diamond Mortgage, with the following comments, which he has given me permission to post:
I thought you might find it fascinating that Fausto Nunez, a person who is in foreclosure detailed in your blog as a victim, did not get his defaulted loan from Diamond Mortgage Services.
He did receive his purchase loan through Diamond Mortgage in December 2003. However, he “astutely” applied for another mortgage loan with a different company about 11 months later, closing on 11/2004. This new loan apparently had him borrowing an additional $27,000 over the balance he had when he purchased the property, too much for him to afford. You can find this new cash-out mortgage listed in the North Essex County Registry Book #9197, Page #318.
I have no idea who the company was that arranged this much larger bad loan for Mr. Nunez, but I can only guess what they wrote down for his income.
Please, before you regurgitate the Boston Globe, please check their facts. I would not bother to tell them they messed up on Mr. Nunez, because based on other erroneous items in their article, I don’t believe they even care.
