Brokers still approving bad loans
TEXT OF INTERVIEW
Tess Vigeland: You heard mention in that last story of the FHA’s inability to monitor the thousands of lenders who are apparently still handing out mortgages to people who can’t afford them. That’s led to an astounding number of defaults on new loans. The Washington Post reported this week that in the last two years more than 9,200 FHA loans have gone into default after missing the first payment, or never paying at all. Many of those lenders are mortgage brokers. And this is far from the first time they’ve been on the hot seat. Alyssa Katz is a journalist who’s been investigating the mortgages business for Salon. com. I asked her to remind us how mortgage brokers operated in the recent real estate boom.
Alyssa Katz: During the 2000s, according to their trade group, they sold four out of every five mortgages. Most brokers have relationships with a number of different lenders, and the idea in theory is to have them work with a borrower to find the cheapest loan that’s best suited to their needs. You know, some brokers specialized in subprime. Others worked primarily with prime lenders. But there was usually a menu, and is usually a menu of options that they can offer.
Vigeland: And what do mortgage brokers get out of this transaction?
Katz: Well, they get fees. And those fees can be paid a couple of ways. One way is cash that the borrower has to put up at closing. But increasingly they can also take what’s called a yield spread premium. The borrower can take their compensation by basically arranging to have the borrower pay a higher interest rate than they might otherwise pay. The broker is permitted to take an additional fee for that arrangement, which profits then the broker and the lender. And brokers in the industry more generally defends the practice as a way that a borrower, who can’t put cash upfront for a broker’s fee, can essentially pay it off over time through higher interest rates.
Vigeland: Now, when someone’s bought a house, and they can’t even make the first payment, or perhaps they just make one and then no more, that’s usually a sign of mortgage fraud. Now we know what happens to the family; They go into foreclosure. What, if anything, has happened to the people who wrote those loans?
Katz: I mean, nothing. Brokers have — they basically collect their fees immediately, and then the loan is then out of their hands. And if anything happens to the borrower down the road, that is not immediately the brokers’ responsibility. It’s only if that borrower were to sue, and make the case that they were set up with a loan that is illegally made, then the broker could be held accountable. But that is very unlikely that a borrower going into foreclosure is going to do that because they don’t have the money to pay a lawyer. That’s why they’re going into foreclosure.
Vigeland: Let me ask you this. You know, as the housing market collapsed there was a lot of talk that people who had these bad loans, you know, they were victims. At this point, if people are getting into loans that they shouldn’t be getting into still, how much of that should be really buyer beware? I mean, haven’t we learned our lesson at this point?
Katz: Absolutely. And I think that right now a borrower who wanted to take out a risky loan — let’s say that somebody was intent on being reckless — would have a fairly hard time doing it through a mortgage broker. Brokers are now making just one in six loans. And I think I mentioned earlier, I think the number was something closer to four in five.
Vigeland: Right.
Katz: I think buyers should beware with many of the FHA lenders out there. Many subprime brokers moved into either FHA or into sort of a whole other universe of lending called correspondent lending, which is something in between a broker and a bank, when the subprime industry started running into trouble.
Vigeland: It all just sounds like a big game of whack-a-ball. I mean, you close off one avenue to bad loans and another one just pops up somewhere.
Katz: That’s absolutely right, and I think that the fundamental challenge here is that as a way of getting mortgages to borrowers, these guys can just set up storefronts. Of course, many of them just do business on the Internet. They don’t have a lot of overhead; They don’t have to build a big bank with pillars. We’ve got to move back to something with a more institutional model to help make sure that there’s more accountability and you don’t have kind of rogue actors all over the place trying to just get their fees in and outflank the competition.
Vigeland: Alyssa Katz teaches at NYU. And her upcoming book is “Our Lot: How Real Estate Came To Own Us.” Thanks so much for helping us out.
Katz: Thank you, Tess.
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