‘Almost Like Being Paid To Live In Orange County’
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.’”
Thanks to Stanley Johnson for sending this in. I realize this is a mania and OC is crazier than mosy. But do people there really think money can be created out of nothing?
From the story:
‘The process works like this: A Park Place agent might explain to a homeowner that he qualifies for a 6% mortgage. “Why don’t we make it 7%?” the agent will ask. “Sure, you’ll pay a little more each month, but we’ll give you more than enough cash to make up for it.”
For the Urells, the math was simple: Their monthly house payment rose to $2,022, about $250 more than they would have paid with the prevailing interest rate. Over four months, therefore, they pay $1,000 more than they could have. But that deficit is outweighed by a $3,000 check per refinancing, the Urells’ share of the lender’s bounty. Park Place pays all the fees too. This lucrative transaction can be repeated every four months.’
‘A generation ago, a homeowner could live in his house for many years and never refinance. For Park Place customers like the Urells, however, it’s a routine event, somewhere between mowing the lawn and changing the oil in the car.’
Ben,
This proves yet again what some of us have long suspected: Yes, money does grow on trees…
Instead of blackballing him, Freddie Mac ought to hire Mark Gallagher.
And the taxpayers should execute him.
After exchanging some emails and talking with appraisers, I ask, what are the chances these mortgage brokers were able to also get these loans at higher and higher amounts? Any appraisers have an opinion?
These tactics remind me of Armond (”sweeteners that closed the deal”) Hammer.
“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.’”
A short vacation that will take 30 years to pay for. I hope it was a nice trip.
Very surprised that these loans didnt have pre-payment penalty clause on the note .
The broker takes care of it with his part of the bounty
Thirty years is too long to pay off a trip to Tahiti, but you sister-in-law in Montana? Ouch!
the saying was “what do you do with a 104?, make it a 101″. that scam has been going on for a decade. lenders usually clamped down hard on brokers that played that game. the difference over the last few years is that all parties to this scam needed to feed the “volume monster”, so a blind eye was turned in order for the branch, region and company to make its numbers. the end investor was the one who got screwed, money doesn’t come out of thin air (except in housing of course).
Boy I’m speechless regarding this article . Im sure the kickback was not disclosed on the loan papers .
Shouldn’t this be illegal?
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.
In other words, I thought I was going to make a bundle of money off a bunch of suckers but it turned out I was the sucker.
Thirty years ago, you couldn’t have found a more anal-retentive business than mortgage lending. Now it’s more speculative and infested with shady characters than the penny stock exchange.
I bet the borrowers refinanced out of the 7% loan after the agent was stopped .Didnt anyone notice that these borrowers kept getting refiances every 4 months or so ?
no prepayment penalties (fannie/freddie) and no the left isn’t looking at what the right hand is doing. back in 1993 when rates dropped source one mortgage offered brokers a “streamlined” refinance program, whereby the borrowers wouldn’t have to requalify, the broker rewrote the note down to current rates and make another two points on the same loan that they had originated the previous year. source one died an ugly death 18 months later.
I thought stuff like this was illegal??? What is going on in this country? It seems like So Cal is loaded with sucker idiots. Look at the Enron thing! They did the same thing and laughed about the California idiots. I hope this housing thing busts big and all these idiot turds lose everything!! They deserve to be on the street! I know me and my husband just scored a really nice deal on a late model German luxury car from a guy in San Diego who just bought a million dollar house last year. He had to sell the car. I wonder if his adjustable payments are going up?? It is at times like this that I am really glad we are renting!
I just saw a funny spot on KVIE (Sacramento area PBS affiliate). It poked fun at how it takes only 144 hours to become a licensed real estate agent in California. It went on to explain that it took 1500 hours to be a hair stylist… To cap it all off, it continues “What’s the only certification that requires less time? … A home inspector at only 110 hours of training!” I don’t know who was behind this video but somebody needs to find a clip of it and put it on this site!!!
Anybody can be a mortgage loan officer because it requires no certification.
I’ve been both a realtor and loan officer, and the mortgage loan business is more corrupted by greed than the real estate business. Mortgage brokers often make more money than realtors, yet the average realtor works much harder for their commission than the loan officer does. They sit in an office (or in their “home office”) and have their low-paid assistants do most of the work. They don’t have to travel around showing 10 listings to a buyer before making the sale (and sometimes the buyer is playing multiple agents, so the realtor may not even get the sale after all their leg work).
Most brokers won’t even return phone calls if the purchase loan is less than $100K (that was back in 2000; now they probably won’t return calls unless it’s at least $200K). And mortgage brokers take advantage of the fact that most people know little about finances, and have a hard time understanding the charges listed on the settlement sheet. They don’t have to share rate sheets with you that disclose the commissions they’re being paid on the back end, and they have no regulations restricting the junk fees they tack on.
I have a question. Wouldn’t it be cheaper for the borrowers in this article to take a extremely short term ARM [that adjusts month-to-month] than pull this scam? I think the end result is the same and ARM would have saved the need to refinance every four months.
Good question. The answer is the premiums on a short term ARM aren’t as high as a long term fixed. Example, today a 6 mo ARM at 7.00% pays the broker 2.37%, a 30 year fixed rate pays the broker 3.51%. Typically, the lender doesn’t expect to keep an ARM on their books for very long (the loan will be paid off or refied), therefore when they go to sell the servicing rights, the seller will receive less money for an ARM than they will for a fixed rate mortgage. As a broker, when I look at a rate sheet, the price I see is a combination of the price premium + the service release premium. On a fixed rate mortgage, the SRP will be higher than it would for the ARM. If too many of these loans pay off too quickly, the servicing rights buyer can take a bath or will have pre-payment protection written into their contract and then go back on the seller. After reading this story, it’s easy to see this is what happened. Whomever bought the servicing rights on these loans lost a big chunk of that investment because the revenue they expected for the next 5-10 years is no more. They are either out that money they put up or will be refunded their money for early pre-payment. If there was a middle man, then they would have to refund the servicing rights purchaser. This is not a win-win game for everybody.
How can the customers refinance every 4 months unless rates are dropping?
Do they simply agree to a higher and higher rate on every refinance in order to get the cash rebate? So they will go from 7% to 8% to 9% to 10%?
Eventually they will reach a point where they can’t refinance again because it’s simply not financially possible to refinance over and over unless rates are dropping or you are trading in equity or taking on a bigger loan.
At that point they will have spent all their rebates and be stuck for the long term with a higher payment nad less equity. Basically they are borrowing those “rebates”. They are not free money. In the end they will pay it all back or go bankrupt.
They will go back to New Orleans where they came from!!!
100% agree. the comment “It costs me nothing” is ludicris. The person must be ignorant to the fact that in less than three years the $3500 is payed back because of the higher payments and he is stuck paying higher mortgage payments forever. Moreover, it costs $3k to $5k in fees, etc everytime you refinance. I don’t see how this deals works.
Back when I used to listen to AM radio more often (now podcasts are all I really listen to), Park Place funding was running commercials CONSTANTLY. If I am remembering them right, they had the “If you’re in the process of a refi right now, call us and if we can’t beat your broker’s price, we’ll give you $5,000.” I guess they were able to back that promise by being “just this side of fraud.”
“‘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.’”
Some of these ideas were popular in the past (I/O loans in the 1920s) but for some reason have long fallen out of favor…
The only absolute winner in this scam is the broker. MBS investors are at risk, and so is the homeowner involved in this scheme. There is no guarantee that he can refinance in favorable terms in 4 months, and very likely will be trapped with the higher interest rate. He is taking a lot of risk for the benefit of the brokers. Home sales may be location dependent, but the financing of RE is not. The funding for this RE bubble has been securitized and standardized, and is traded daily on the bonds/derivative markets. Just like stocks, a lot of things can happen in those markets in 4 months, the easy money flowing into this kind of junk lending can disappear over night, not to mention the possibility of a decline in home prices, just like the possibility that gravity exist. This is truly futile.
You summed it up . Bunch of gamblers
When those loans go to GINNIE MAE they are federally insured so the loss is limited to the interest not the principal ie; FDIC
MBS investors are at risk
I think you hit the nail on the head — MBS investors are the greater fools. Chasing yield with their eyes closed. Hedge funds that have run out of “strategies” like the convertible-bond-short game and will do anything for returns. What the hell — it’s OPM. I’m sure that many bagholders don’t even know they’re holding the bag on all this junk paper.
My jaw is on the floor. This is awful. You would think that someone who had been married to two car salesmen that I would be used to this crap. I’m speechless!!!
This is unbelievable, that someone would even fall for that crap. The real “hot potato” and ‘greater foo l’ theory. I will give you $3500 and you pay $250 per mo for 30 yrs. And after a couple of time, the payment will become so high that they won’t do it. And be stuck until foreclosed upon. And to think that I actually have worked hard at a real job for my money. I could have been making money out of thin air.
Mark Galligher should be prosecuted and imprisoned as the worst kind of thief that he is. I hope his company goes down with huge losses, and he had everything banked on his stock, like Bernie Ebbers. They should be cell buddies, and have fun seeing who can screw the other the hardest. (insert where Ebbers, any other corporate criminal (Lay, etc).