I think we will see many more articles like this as mortage brokers are arrested and arraigned because of shady deals that took place during the subprime debacle. If the broker and the borrower conspired together to defraud a mortgage company it is highly unlikely that the borrower will say anything for fear of going to jail along with the broker. On the other hand if the broker did the paperwork and the borrower did not get a full disclosure the subject may be argued in court. This case is a little different:

A Massachusetts mortgage broker, Nicole Lyder, age 33, was indicted by a Suffolk Grand Jury. Lyder is charged with forgery (6 counts), uttering (6 counts), making or publishing false or exaggerated statements (4 counts), and larceny of credit by false pretenses (5 counts).

In April 2006, Lyder was employed by Lehi Mortgage, Inc. (“Lehi”), at the time of this alleged misconduct. The Attorney General’s Office began an extensive investigation into Lyder’s alleged activities after receiving a complaint about Lyder in September 2006. The investigation focused on four mortgage loans that Lyder assisted homebuyers in securing from Fremont Investment & Loan, Inc.

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It pays to have an attentive lawyer when dealing with Countrywide. In breaking news of January 8 Countrywide admitted to fabricating documents related to the bankruptcy case of a Pennsylvania homeowner. Imagine how many similar cases are never identified. In the Countrywide case it is important to note that when the company invented the “letters” at least one was addressed to an office the homeowner did not have at the time. That was the first clue. The second clue was that the homeowner never received any of the letters.

Gretchen Morgenson of the New York Times tells the details. If you ever received an escrow shortfall notice or went through bankruptcy with a Countrywide mortgage you might want to check your paperwork carefully. In this case Countrywide did not object to the bankruptcy, and said the customer was current on their mortgage. Then Countrywide reversed their position, saying the borrower was $4700 past due.

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In the list of top 10 scams for 2007, Foreclosure rescue scams came in at number 7.

As if people who fell behind on mortgage payments didn’t have enough troubles, an increasing number became victims of foreclosure rescue frauds. In the list of top 10 scams for 2007, Foreclosure rescue scams came in at #7.

According to real estate experts, the scams take different forms:

Owners unknowingly sign over properties. The property owner is led to understand that they will be able to rent the property until they are able to secure financing. The perpetrator of the scam gets control of the property usually with the help of a straw buyer to secure a new mortgage for the current appraised value. The scam artist pockets the stripped equity and does not make payments on the new loan. When the property is foreclosed on the straw buyer, the original owner is evicted. Even after month of paying rent to the scam artist.

Loan restructure “experts” collect fees and do nothing. Many times owners with delinquent mortgages are approached with a “for fee” deal. They are assured that if they pay the company or person approaching them up front, that they will be able to negotiate a better deal with the mortgage company than the homeowner can on their own. The homeowner is instructed to not contact the mortgage lender directly, but to let the negotiator handle the transaction to get the loan restructured. The fees are pocketed with no negotiations taking place on behalf of the homeowner. Neither the homeowner nor the mortgage company are aware the third party (mortgage rescue negotiator) is doing NOTHING except taking the money and skipping, providing zero service for the fees.

Fake refinance brokers inflate property values for personal gain. People have been approached to refinance with loans that require prepayment of fees for the application. The fee is a percentage based on the total of the new mortgage loan. Many people are paying thousands of dollars to fill out an application when there is no guarantee of getting a loan approved and funded, or that the fake broker will even file the application. The fake broker pockets the fees, no application is submitted or loan products offered have more onerous terms and higher payments than the one the homeowner is trying to refinance.

Foreclosure notices are publicly recorded and published in local newspapers. Scammers approach homeowners directly at their doorstep or call them on the telephone. The scammers’ modes of operation are little different than a burglar planning a home invasion based on publications of funeral notices. Homeowners are targeted when they are most vulnerable, in the place they feel most secure, at the time they are most desperate and easily confused..

In some cases, the scams resulted in homeowners losing whatever equity they did have. Or they lost a home that might have been saved with a legitimate refinancing. If you are approached directly in either by someone offering any of these solutions, contact your local advocate. Report the situation and seek counseling.

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The federal agency monitoring the bankruptcy courts has subpoenaed Countrywide Financial, the nation’s largest mortgage lender and loan servicer, to determine whether the company’s conduct in two foreclosures in southern Florida represented abuses of the bankruptcy system. The subpoenas for Countrywide documents were issued in late October by the United States Trustee after the agency announced an effort to move against mortgage servicing companies that file false and inaccurate claims in foreclosure cases. The inquiries into Countrywide by the trustee’s office, a division of the Justice Department, come as foreclosures are increasing across the country.

Countrywide failed to appear at hearings on both borrowers’ objections, and judges ordered the fees stricken from the claims. The United States Trustee took an interest in both matters after Countrywide did not respond to the borrowers’ objections. I don’t know how you look at it but fee packing, which has not been proven in these cases, is simple mortgage fraud in my opinion.

The United States Trustee Program is the component of the Department of Justice responsible for overseeing the administration of bankruptcy cases, and protecting the integrity of the nation’s bankruptcy system. In Ohio three federal judges dismissed 73 foreclosure claims by mortgage lenders.

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An article by Diane Francis appeared in the Financial Post on Saturday, November 17, 2007. Titled “Subprime mess is a crime story” the article outlined key issues. Diane said “At the top were mortgage lenders, then Wall Street and others who exported junk debts to lenders around the world after prettying them up. At the bottom was a corrupt system that handed out mortgage broker licences like driver’s licences, and then handed out mortgages like candy at Halloween. In between were crooked appraisers and organized crime.” (see her article) Why didn’t regulators and the Feds get involved? One answer may surprise you:

After September 11, 2001 the U.S. Government needed to move the economy forward. Lower interest rates helped to stimulate the economy, and mortgages were attractive. Refinances gave homeowners the cash they needed for improvements and debt consolidation, and the money went back into the economy. Lenders were given a free pass. Under the party line of “helping America” the U.S. government looked the other way as new risky mortgages were invented. Lenders and Wall Street were told that they were great Americans, single handedly reviving the economy while making America strong again. An examination of interest-only loans, no-doc loans, and skyrocketing home prices in the Washington DC area and California caused little concern as long as the economy looked good.

Economists openly said that the amount of debt distortion would be relative to the amount of the resulting crash which would undoubtedly take place. That statement was based on historical analysis dating all the way back to the depression and crash of 1929. The Bush administration decided to make the economy look good at all costs. To hell with history. “If you want to know what will happen in the future one must study the past” meant nothing. We see the results today, but many questions remain unanswered, such as:

What did the U.S. government offer lenders and investment banks in return?
What did Alberto Gonzales’ U.S. attorneys really know before they were fired?
Why did ICE and Homeland Security permit new mortgages for illegal aliens subject to deportation?
Why was Ameriquest owner Arnall appointed as ambassador to The Netherlands?
Why was the OCC painted as inept, and why was Julie Williams replaced?
Why did the OCC attempt to block state laws and regulatory efforts?
Why did the Bush administration see the need for new bankruptcy laws?
Why did the Bush administration see the need for tougher class action laws?
Why did Alan Greenspan retire when he did?
Why did William Aldinger and John Bond leave HSBC when they did?
What is the relationship between Wells Fargo, Household International, and the Wells Fargo HSBC Trade Bank?
Why was a London based bank (HSBC) allowed to buy heavily into the U.S. subprime market?
Why was the Bush adminstration receptive to changes in Soldiers and Sailors during time of war?
Why did the SEC change policy on loan syndication in 2005?
Why did the Federal Reserve Board change policy on derivatives and syndication in 2005? (see it)
What was Jack Abramoff lobbying for? (Documents show Abramoff’s team had extensive access to Bush administration officials, meeting with Cheney policy advisers Ron Christie and Stephen Ruhlen, Ashcroft at the Justice Department, White House intergovernmental affairs chief Ruben Barrales, U.S. Trade Representative Robert Zoellick, Deputy Interior Secretary Steven Griles and others.)

There are many questions without answers. The Bush adminstration allowed, or signed into law, many new changes in 2005. By 2007 everything fell apart. Nobody in the world gets something for nothing. Today 200,000 people are without jobs as the mortgage industry fell apart. I personally find it hard to believe that subprime, and subprime alone, caused this problem. Aside from lack of regulation and intervention by the federal government, and with a strong desire to shape the U.S. economy, toughening of bankruptcy and class action laws tell me the government knew that initiatives of 2001-2005 would spiral out of control.

Look at one small fact that tells a big story. A foreclosure results in a 1099C for the foreclosed homeowner, leaving a big tax debt. A 1099C is only overlooked if the homeowner is declared insolvent, otherwise the evicted person owes a big tax debt. How are they going to pay it? Just like many other fiscal tricks, 1099C’s without bankruptcy will look like the federal government has huge receivables on the books. In truth they will be almost worthless, adding insult to injury for those evicted and foreclosed upon.

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Economists in any country in the world – except the United States – should study the “interest only” loan. It is imperative so your economy doesn’t get hurt in the future. Just consider the United States as a training ground. We all saw the ripple effect around the world. If your country’s stock market lost $80 million in one day, or if your country’s central bank pumped billions of dollars into your economy, your economists should study the interest-only scam so you can prevent it.

More specifically one should look at the effect of these loans when they are extended to the general population, including those who cannot afford them. Originally designed for well-qualified borrowers expecting a large dividend or perhaps a salary bonus, interest-only loans made sense. They were designed so one would not be required to touch their assets while repayment was virtually guaranteed.

Consider what happens when traditional banks and loan companies adopt this type of loan. A borrower calls each bank, asking about the amount of a desired loan, interest rate, and payment. Look at it a different way. A person unknown to you calls you one day, says you don’t owe his company any money, but wants you to pay him $275 a month for five years, and at the end of five years you still won’t owe him any money. Stupid, is it not? Yes it is, but in the United States it is the basis of subprime lending. Here is how it works.

Using your home as collateral you get a second mortgage. The amortization period is much longer than the payback period. That means the payment is so low you never pay anything on the principle, and all you ever pay is interest. At the end of the repayment period you owe as much as you borrowed years before. (See footnote 3) If the finance company tells you the truth before you sign the contract it is your decision. If they lie to you, or leave out pertinent facts through acts of omission, they are predatory lenders. HSBC’s Household International is a prime example of predatory lending. (1)(2)(3)

Take the example one step further. In an effort to profit from low interest rates and lax lending standards, mortgage lenders learned from HSBC and Household International. They decided to call the product an interest-only loan. Just pay the interest for a year or two and everything else will be packed on to the back end of the loan. A product for the wealthy is now marketed to the masses. If you use this kind of financing to buy a house, fix it up, and flip the property before a payment is due, the product might work for you. If you use this kind of financing to buy or refinance your primary home you might have a problem unless your huge year-end bonus will pay off the loan. If everyone on earth knows you will not get a year-end bonus somebody will sell you this mortgage product anyway.

Footnotes – (1) Practices with regard to home equity lines of credit: Plaintiffs allege that Defendant extended what was in substance closed-end credit disguised as open-end credit with the intent to avoid making meaningful disclosures concerning the payment terms, such as the existence of large balloon payments. Plaintiffs further allege that Defendant extended what was in substance closed-end credit with APRs in excess of 10% over the US treasury rate for comparable maturities, which Defendant disguised as open-end credit to evade the requirements of the Home Ownership and Equity Protection Act, 15 U.S.C. § 1639.

(2) Loan billing practices relating to simple interest calculations: Plaintiffs allege that Defendant’s practices by which payments were credited to accounts on the basis of the number of days between payments frequently resulted in situations in which scheduled payments were insufficient to pay accrued interest, creating a shortfall in interest (“interest short”), which resulted in excess finance charge costs for borrowers. Such shortfalls could occur even when payments were not late. Defendant further made representations concerning the opportunity to “skip a payment” without informing consumers that doing so would result in “interest short” situations. Defendant failed to provide borrowers with material information necessary to avoid such extra charges.

(3) Balloon payments: Plaintiffs allege that Defendant extended credit to borrowers on terms that would eventually require balloon payments, without disclosing to borrowers the existence or amount of the balloon payments.

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This is our mid-August focus on mortgage blues. Higher interest rates and falling property prices have contributed to rising delinquencies on subprime mortgages, which are offered to less creditworthy borrowers. This, coupled with increased relaxation of underwriting standards, has led to the bankruptcy of more than 50 mortgage lenders, the collapse of hedge funds, increased regulatory scrutiny and ratings downgrades, Marsh, a unit of Marsh & McLennan, said recently. So which group of financiers is rushing to protect themselves?

Executives and board members are checking their insurance policies that protect them against claims. So-called D&O policies protect executives and members of a company’s board from liability in the event of a lawsuit against them claiming wrongdoing in connection with their firm’s business. Mortage companies are checking on mortgage insurance, filing claims wherever possible. Meanwhile insurance companies are trying to say some bad mortgages were fraudulent, thus refusing to pay.

It almost sounds like many cases of Hurricane Katrina claims where insurers and common sense often never met. “Was it rain damage, wind damage, or flood damage?” Only in this case insurers will ask if mortgages were subprime or actual cases of mortgage fraud. Let the backstabbing begin.

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Subprime lending once hurt the elderly in the United States. It only took three more years for subprime to hurt all borrowers and the entire world economy. Back in 2004 subprime was not necessarily predatory lending. Others argued that mortgage fraud became predatory lending, which then evolved into subprime. Regardless of the position you take it is clear that intervention and prevention at the federal level was missing. Here is part of the 2004 FTC testimony:

In 2004 the FTC told the Senate Committee on Aging: “A recent study found that the population of subprime borrowers tends to be older than the population of prime borrowers. More than a quarter of subprime borrowers are 55 years of age or older, compared to only 14% of prime borrowers. Therefore, while older Americans may have benefitted more from the expansion of the subprime market, they also may have suffered more injury from deceptive practices in the market. The Commission (FTC) is not aware of any evidence that subprime lenders are engaging in illegal practices that specifically target the elderly. In our experience, the illegal practices cut across demographic groups. Nevertheless, these illegal practices can be particularly devastating to seniors.”

Editor’s Note: Little known to the general public was that in Florida Madie Bell Wilson, 89, was evicted from her Miami home. She had taken out a $27,000 home-equity loan from Household International, thinking it was a home repair grant that did not have to be paid back. The case piqued Florida officials’ interests and helped lead to the $484 million multi-state predatory lending settlement. Household International ultimately forgave Madie Wilson’s loan but the damage was done. HSBC bought Household International and renamed the company HSBC Finance Corporation. (see more)

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Here is history’s warning: “Every new loan that is larger than the last contributes to increasing over-all economic instability. The outcome of such has historically been a crash corresponding to the magnitude of this debt distortion.” The quote comes from our booklet “The History of Predatory Lending“. Here is a pefect example of debt distortion:

Debt distortion in the form of asset backed securities spans everything from home equity loans, to auto financing, credit card receivables, and student loans. Take the case of HSBC’s HFC and Beneficial Finance. These home equity loans are often amortized over 30 years, but you must pay them back in 10 or 11 years. The payment, calculated on daily interest, cannot pay off the loan in 10 or 11 years. A borrower making the quoted payment will owe HSBC about as much at the end of the 10 or 11 year cycle as they borrowed in the first place. It is not like the old days where you had a payment book and the loan was paid off when the last coupon was mailed.

Does that sound like today’s ‘interest only’ home loan? Remember if you will that subprime is driven by one’s credit score. Alt-A loans are driven by the market. Predatory was once defined as “not driven by market imparatives but simply because the lender found a way to get away with it.” Lenders found ways to get away with many things in recent years, thus the lines between fraud, subprime, and today’s problems are very blurred.

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The FBI sees “foreclosure-rescue” scams as an emerging form of fraud that takes advantage of the growing number of homeowners in default. More states are enacting legislation to protect homeowners against such fraud. Another version of the ‘foreclosure avoidance’ scam can be see at the Settlement Scams website.

“The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This ‘foreclosure rescue’ often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.”

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