by Dan Krell © 2007
The daily media reports of abuse, fraud, and other problems in the sub-prime mortgage industry attempt to make sense of a real estate industry in turmoil. It appears that the problems in the real estate industry are similar to those in Big Business. Like many of the recent business scandals, schemes and wrongdoing are carried out because the financial rewards seem greater then the risk. Those who are caught usually point their finger at their boss claiming that they were told to do so in fear of losing their job.
The present mortgage crisis is similar to some extent. Sensationalized media accounts of what went wrong and who is to blame seem to be in the daily headlines. The blame of the present crisis was first placed on the lenders and investors, who with their lenient underwriting guidelines, allowed many to borrow beyond their means. The new focus in the crisis is on inflated appraisals and how appraisers are “forced” to provide these appraisals in order to maintain business. Additionally, there has been some discussion about the loan officers who originated the loans, without regard to the consequences to the borrower.
The story of inflated appraisals on the mortgage industry is about how some appraisers are “forced” to provide appraisals with an inflated price or they will lose business. For a real estate appraiser, the pressures of complying with lenders’ requests to inflate appraisals are inherent to the business, but not necessary. To demonstrate the extent of the problem, the Baltimore Sun reported (April 10, 2007) that appraiser groups are asking regulators to crack down on the lenders who pressure appraisers for inflated appraisals.
On the other hand, not enough has been said about the loan officers who originate these loans. Many loan officers who originate sub-prime mortgages are mortgage brokers and are paid on commission; they only get paid if the loan closes. Most mortgage originators act ethically in the borrower’s best interest. However, some will say or do just about anything to get the loan to close, including making unrealistic promises to the borrower as well as pressuring others to ensure loan closure. Unless there is blatant fraud, loan originators are not usually held responsible for a “bad loan.”
There are reports of possible federal investigations of mortgage misrepresentation and non-disclosure of loan terms. A recent MSNBC article (April 10, 2007) reports that many sub-prime borrowers who were deceived by mortgage brokers and loan officers are filing law suits for violations of the Federal Truth in Lending Act. These borrowers include those who were misled to believe the terms of their mortgage, as well as others who were misguided to obtain a high interest rate mortgage when they qualified for a more favorable loan. Under the law, the full terms and conditions of loans must be disclosed to consumers. Additionally, some have interpreted that any misrepresentation, written or verbal, is a violation of this law.
Although most real estate professionals are reputable and act within the guidelines of the law and the ethics code of their profession, unfortunately some do not. Like Big Business, it appears that some of the problems in the real estate industry exist not just because of a lack of ethical behavior, but a lack of character as well.
This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 23, 2007. Copyright © 2007 Dan Krell.