Mortgage Crisis Examined

June 07, 2009

This article today discussing how the FHA is finally cracking down on some mortgage brokers coincides quite nicely with the letter I received today from the Florida Department of Financial Services. The letter was notifying me that I had until August 31st to renew my mortgage brokers license. What, you might say? Hard to imagine me as a mortgage broker? Yeah, well really I wasn't. I have a small financial advisory business and at one time a few years back (before the housing bubble burst), I decided it would be worth it to sit for a weekend (yes, imagine that - it only takes a few days to get a mortgage license) and maybe have a side mortgage business to complement the advisory practice. To make a long story short, after completely the course (about $400) and getting the state mortgage license, I was appalled at what I saw and never "hung my license", as they call it, with a mortgage shop or did a single loan origination.

Having come from an industry where every move is scrutinized by the state insurance board and/or the SEC/NASD (now known as FINRA), it appeared to me that the mortgage world was a virtual playground for fraud and greed with almost NO oversight.

For starters, I remember asking my instructor several times in disbelief about how it could be that her office had never (in 12 years) been visited by any officials to have her files looked over - and further why she never did any internal reviews. Her answer was that she did not need to do internal reviews because Tallahassee was just too busy - there were too many mortgage offices opening up all over the place and they didn't have time to keep up with checking in on existing offices. As a financial advisor, I know that the state financial department or FINRA can walk into my office at any given moment and demand to see all of the last seven years of my records. And I better have them, or I'm facing some stiff fines and censureship. To prepare for such a day, I have an annual internal compliance review to make sure everything is in place. By the way, these audits DO actually happen in the investment world.

What was almost as equally disturbing to me was the seemingly endless talk of the brokers there (many were there for a refresher course or had been "in-house" previously at a large shop like Washington Mutual and therefore did not need a license yet) of "YSP". For those not in the mortgage world, YSP stands for Yield-Spread-Percentage. This is the back-end, undisclosed money paid to the mortgage broker by the lender for giving you a higher rate. Yep...remember when you got that last-minute phone call from your mortgage broker right before closing telling you that he was sorry, he wouldn't be able to get you that extra quarter-point interest rate reduction after all? Yeah, that was so he could make an extra $500 from the lender on the back-end. Deceitful at worst and unethical at best.

The last straw for me was overhearing a few conversations over a period of two weeks between the "honest" mortgage broker - who had been in business for 20+ years - next door and his "in-my-back-pocket" appraisal guy. Basically, the conversations all seemed to go like this (in short-form):

Steve the Broker: Hey Joe, I've got this property over on Redwood Street with a contract on it for $230,000.
Joe the Appraiser: Oh, really...now you know about Redwood don't you - not the best neighborhood over there.
Steve the Broker: Yeah, I know but you can work your magic, can't you? You know we can play with the comps and make it comp out at whatever price we need it to be.
Joe the Appraiser: Yeah, I'll get right on it.

So, that it brings us back to the letter I received in the mail today. Having never used my Florida mortgage license even once, I threw the renewal notice away without thinking twice about it. By the way, Steve the Broker shut down shop about a year ago. No word on what happened to Joe the Appraiser. Hopefully some really smart government people from the FHA will soon get around to cracking down on the appraisal business as well.

And the housing crash continues...