The LA Times has this look at the mortgage industry. "Real estate has been a swell deal for just about everyone who owned a home in California during the last few years. For hundreds of Orange County homeowners, it's been even better. Thanks to their mortgage broker, they essentially get paid to borrow money."

"Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique that unscrupulous brokers employ to bilk clients. Gallagher's innovation was to cut his customers in on the action, giving them a share of the premium he earns for placing loans with high interest rates. The case opens a window on a bigger issue: In a mortgage system that is loosely regulated but increasingly complicated, who is responsible for ensuring its integrity?"

"'In boom times, all sorts of crazy things happen,' said James Croft, executive director of the Mortgage Asset Research Institute near Washington. 'New programs are invented that have no history. You say, 'This is going to work,' and then you find out three years later it wasn't such a great idea.'"

"With the housing market cooling off, the evaluation period Croft is talking about seems set to begin. The mortgage industry, and some mortgage holders, may be in for an extensive period of second thoughts."

"One way lenders make money is by making loans at high interest. They are so eager for these loans that they pay brokers a bounty for them. In California, the bounties must be noted on the closing papers of the loan. But many brokers don't talk much about them, consumer advocates say, and therefore few home buyers are fully informed. In the worst cases, a high premium can tempt a broker to put unwitting clients into expensive loans. Such fraud occurs regularly, according to authorities."'

"Most of Park Place's loans in 2004 and early 2005 were provided by National City Mortgage, a division of National City Corp. in Cleveland. National City became Park Place's favorite mortgage supplier because it paid the richest rebate: as much as 5% of the loans. Like most lenders, National City doesn't keep all the loans it makes. The loans were sold to Freddie Mac. Freddie didn't keep the loans either. It repackaged them into investment pools."

"And here is where it all fell apart. One investor, Gallagher said he was told, bought an investment pool with an unusually large number of Park Place loans in it. This investor apparently thought he was going to get nice, fat interest payments for at least a couple of years, courtesy of a bunch of foolish Southern California homeowners who were inexplicably paying more than they should have."

"Instead, the investor got a surprise. The homeowners refinanced, and the investor's rich yield disappeared almost instantly. He complained, which started a chain of accusations and recriminations. An executive with National City Mortgage, interviewed before it was sued by Park Place, said the lender was victimized by an unprincipled broker trying to pump up volume."

"Paying people to refinance, said John Gellhausen, 'created a lot of additional new business without finding new customers.' National City said it would no longer do business with Park Place."

"Said a Freddie Mac spokeswoman: 'We are the real victim here.' Calling National City 'an extraordinarily valued customer,' Freddie put the blame on Park Place. At the end of January, Freddie put Park Place on its exclusionary list, meaning that it will no longer buy the broker's loans."

"Gallagher's silence until now enabled National City and Freddie Mac to portray him as an anonymous rogue running a scheme just this side of fraud. 'National City encouraged us,' he said. 'Now they're demonizing us. We want to do as much business as we can, as often as we can, and make as much money as we can,' Gallagher said. 'But we play according to the rules. If a lender says, 'You can do this loan, get this high rebate, and 120 days from now redo it,' why would we not want to do that?'"

"To prevent brokers from churning loans, lenders have restrictions on how quickly they will refinance. It's unclear how many brokers use techniques similar to those of Park Place, but Freddie warned its lenders in September to be on the lookout for 'inappropriate refinancing arrangements.'"

"John Marcell Jr., president of the California Assn. of Mortgage Brokers, said the refinancings wouldn't have worked unless everyone benefited. 'The customer got money, the broker and National City increased their volume,' he said. 'Freddie had their head up their hind end. Everybody along the line was happy as a lark.'"

"Gallagher still thinks he had a great idea. So do his customers. It's almost like being paid to live in Orange County. David Eulberg's last refinance on his Fountain Valley house raised his payments $176 a month but gave him a $3,596 rebate. 'It costs me nothing,' he said. 'That's the beauty of the deal.'"

"But he does have misgivings. Not about the refinancing but what he spent his rebate on. 'My wife talked me into going to Montana to see my sister-in-law,' he said. 'We drove 3,600 miles with the price of gas above $3.'"