I was on CNN the other day and the host, Gerri Willis, asked me if mortgage brokers should be more heavily regulated out of Washington, especially since some big shot from Wells Fargo said so earlier on her show. They said that mortgage brokers need to be regulated more, implying I guess that everything's the fault of mortgage brokers.
For purposes of disclosure, I am not a mortgage broker.
I responded that "I've never been a big fan of more regulation out of Washington for anything and that's not the problem."
But that question immediately brought to mind a few more interesting tidbits in this still-brewing mortgage-mess.
Wells Fargo, a fine institution, also had their hand in the subprime cookie jar. Wells Fargo also has a huge wholesale division that caters to mortgage brokers. Wells Fargo has interest only loans, payment option ARMs and so on.
I don't mean to pick on Wells Fargo, any major (or minor for that matter) bank or mortgage company offered the very same programs. It's just that Wells Fargo brought up the point about how all these mortgage brokers need a tighter rein from Washington, D.C.
Let's step back for just a moment and imagine that you're a lender and mortgage loan production is down and your very own loan officers and your bevy of mortgage brokers are clamoring for some new loan program that they could market.
So you sit around this big fancy table and after a few hours of discussion (if it took that long) you come up with a loan that requires:
- No Down Payment
- Credit Scores as Low as 580
- No Verification of Income
- No Verification of Assets
- Debt Ratios Not Calculated
- Negative Amortization Possible
Now look closely and raise your hands if you think this fancy new loan has "trouble" written all over it? Did mortgage brokers invent this new loan? No. Lenders did. Big lenders who usually have their hat on straight. But not this time.
Okay, part two. If there are loopholes in a loan and if someone can't qualify for a mortgage "the old fashioned way" with pay stubs and tax returns, then will borrowers be tempted to fudge their income? Will loan officers be tempted to inflate assets in order to qualify their client? Of course. We all know about fraud. It happens all the time somewhere, but this is like handing someone a loaded gun.
I have seen this happen. I couldn't do a loan and the borrowers went somewhere else and got approved. Not because I didn't have the experience to close a loan. I wouldn't do the loan because the only way the client could get a mortgage was by lying.
Anyway, back to CNN. I said that mortgage brokers are already regulated and licensed by their state agencies when I was interrupted with, "Aw, come on David. It's not like they're stockbrokers who have to go through more rigorous standards."
I shot back that stock brokers have had their fair share of scandals and there is certainly enough corporate corruption out there in industries that are also heavily regulated.
You can't regulate bad people. Bad people ignore laws and bend rules. Regardless of additional regulation.
I think mortgage brokers are getting too much of a bad rap on this and if it were me I'd be holding the mortgage banks' feet to the fire instead. Lenders came up with these goofy programs and don't tell me they would have been just fine if mortgage brokers hadn't messed everything up.
Inventing reckless mortgage programs is nothing short of irresponsible. Instead of pointing fingers, someone needs to look into the mirror.
