MORTGAGE REFORM: ADDRESSING THE LARGER ISSUES OF MORTGAGE FRAUD AND MORTGAGE FORECLOSURES - Part I

These are my prepared comments to Florida Legislature and the Florida Supreme Court

I applaud the efforts of the Florida Legislature to address a major state problem of mortgage fraud and mortgage foreclosures. This crisis is part of a larger national problem, an international problem. Finding solutions to the crisis will obviously help return business to an effective and efficient system; however, the underlying problem that caused the financial fiasco needs to be addressed at both a macro and a micro level. The solutions will help provide for more stable personal lives for many Floridians whose lives have been disrupted.

No matter how many times you try and shake them off, some problems still rear their ugly heads. In fact, the same issues are continuing to arise in the mortgage industry. They may be hidden now, but they have not gone away. Unfortunately, the problems and causes of the mortgage meltdown are not necessarily being fixed. Many of the same mortgage un-professionals (lenders, Wall Street bankers, mortgage brokers, appraisers, etc.) are still leeches involved in the industry either working or, even worse, making mortgage decisions. The following will explore the areas that are still of the gravest concerns. If not seriously addressed, they create a ripe recipe for more mortgage misfortunes.

ELIMINATING THE “BAD ORANGES”

Unfortunately, mortgage fraud has become pandemic and not just epidemic. It is, sadly, pervasive in our society to the point that it has become the “hot topic” as lead articles in newspapers and magazines. The city, state and federal governments have begun devoting tremendous resources to fight mortgage fraud. It has brought down top businesses and banks in America. According to FDIC.gov there were 150 bank failures from October 2007 to November 2009 of which 14 were in Florida. Florida has 9% of the total national failures and our population represents only 6% of the nation’s population. In past history only 27 banks failed from January 2000 to October 2007.

The crisis has changed the way that people act and think for the next generation. With the growing cases of fraud, the government is seriously and aggressively pursuing guilty parties. Thankfully, with the passage of the Fraud Enforcement and Recovery Act of 2009, $522 million is being provided to the FBI, the Attorney General, the Department of Justice and other governmental agencies over the next two years in order to work towards tracking down fraud and punishing the guilty parties. As part of the law, Senator Bob Graham, an alumnus of both the Florida House and the Florida Senate, is a member of the Financial Crisis Inquiry Commission. The commission was established by Congress to examine the global and domestic causes of the financial crisis. The Commission will provide their findings and conclusions to Congress on December 15, 2010.

To our dismay, many appraisers, title agents, mortgage brokers, processors, underwriters, bankers and real estate agents that were dishonest are still in place. In order to fix this injustice, many individuals need to be removed from their positions; some may need to be retrained to fully understand their obligations and some may need prison time.

The removal of many un-professionals will reduce the hyper-competition among the remaining professionals, which will foster a more ethical professional industry. Many of the un-professionals that created the exotic products are still holding positions with major mortgage lenders. They created and touted products that made no financial, economic or mortgage sense; other than to provide tremendous incomes and bonuses for these un-professionals. These lender’s companies need to be cleaned of these dangerous people. They need to be permanently expelled from the mortgage industry. They are not mortgage leaders, they are mortgage leaches.

SIMPLIFYING MORTGAGE PRODUCTS AND DISCLOSURES

The mortgage process is too complicated. Former Secretary of HUD Mel Martinez stated that his home purchase was complicated even for him. We do not need to return to the days of hundreds of mortgage products. We need enough mortgage products to satisfy Main Street, not Wall Street. The products must be simple enough for the average consumer to understand and make a prudent decision on which mortgage product to choose.

The disclosures are voluminous. Many do not truly explain anything. The main purpose of the numerous disclosures has evolved into simply creating defenses for foreclosures. Most borrowers simply sign the documents and never completely read them, even though they have a three day right of rescission. Understandably, the documents must protect the lender’s interest; however, many documents can be eliminated or combined. The remaining documents can be written in simple English and in short paragraphs.

FIXING A FLAWED SYSTEM

The mortgage system, as it is now, creates the opportunity for fraud. Ultimately, the lender usually has no contact with the borrower and may not even see the loan until after it closes and funds. The ultimate lender’s underwriting decision has been delegated to a mortgage company that processes and underwrites the loan or the loan processing may be done by a mortgage broker. The group of people responsible for making sure the documents are complete, correct and valid are the same individuals who are paid a commission only if the loan closes.

A person who earns a commission from a loan should never be allowed to handle the processing of a loan, the ordering of a real estate appraisal or title policy. The pressure is too great to do what is best financially for the un-professional than what is honest and ethical. The ultimate lender should ultimately be responsible for the integrity of the loan by directly supervising the processing and underwriting of the loan.

Also, the mortgage industry is currently filled with complex mortgage buy-back agreements. Under certain circumstances, the ultimate lender may require a downstream lender to buy back a mortgage. A downstream lender may require a mortgage broker to buy back the loan. The ultimate lender has the deep pocket; no one down stream usually has the money to buy back a loan much less a portfolio of loans. Making the lender responsible will eliminate this false sense of financial security.